Effective Financial Planning in the Presence of Judgmental Heuristics

Moisand, Dan
April 2000
Journal of Financial Planning;Apr2000, Vol. 13 Issue 4, p130
Academic Journal
We often take shortcuts to save time. A judgmental heuristic is a mental shortcut. Heuristics enable the mind to process complex information quickly and help us formulate our conclusions more rapidly. Unfortunately, this often results in faulty conclusions. Even worse, we are prone to believe we have achieved a level of knowledge that we do not possess by viewing these faulty conclusions as correct. This article discusses two common issues in the daily lives of clients and practitioners: mental accounting and confirmation bias. It also highlights some of the signals that indicate that one may be using a heuristic to formulate an opinion or make a decision. Further, it outlines when the use of heuristics can benefit both client and practitioner. Finally, suggestions are offered to practitioners that may help reduce or eliminate the improper use of heuristics.


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