How clients actually make financial decisions: loss aversion, present bias, mental accounting, defaults and choice overload, and what that means for advice.
Financial advice construction·1 min read·3 sections
✓Checked against: ASIC Financial adviser exam: Exam preparation guidance v6.0 (Sept 2026), Financial advice construction curriculum and reading list (Pompian 2012; Kahneman 2012); ASIC and Dutch AFM REP 632 (Oct 2019).. Independent prep, not endorsed by ASIC.
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Must-know for the exam
✓Loss aversion: losses feel stronger than equivalent gains; the disposition effect is selling winners too early and holding losers too long.
✓Present bias: overweighting the present, which can delay saving for retirement.
✓Mental accounting: treating money differently by its source or intended use.
✓Defaults strongly shape choices because many people do not actively choose.
✓The house money effect: taking more risk with gains or windfalls.
✓More disclosure does not reliably improve decisions (REP 632).
▸On this page · 3 sections
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Traps that cost marks
→Her purchase price also acts as an anchor, but the behaviour of refusing to realise a loss is loss aversion.
→Inertia may also play a part, but the separate labels on money point to mental accounting.
→Doing nothing is still a choice, shaped by the default.
→He agrees with the advice; the problem is acting on it, which is the mark of present bias.
→More information is not always more helpful; it can paralyse decisions.
→Clear instructions given under stress still need testing against the client's circumstances.
→A client's 'yes' is the least reliable sign of understanding.
→A good story about a company is not evidence about its probability of success.
Using it in advice
•Frame choices neutrally and show both gains and losses.
•Use commitment devices and defaults that work in the client's favour.
•Check understanding rather than relying on disclosure.
Common traps
Trap: Overconfident investors trade more, not less.
Trap: Status quo bias favours keeping current arrangements.
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