The Psychology of Money: How to Navigate Biases and Opportunity Cost

By Tammy Trenta, CFP, Author of Wisdom to Be Wealthy

Meet Scott.

Scott was part of the 1%. A successful business owner, financially independent, and highly intelligent. But even with all that going for him, emotional biases still found their way into his decision-making.

Scott had been in a thriving 50/50 partnership in a beauty product business. After a falling out with his partner, he spent a significant amount of capital to buy him out. Following that, his passion for the business faded.

Bored and restless, Scott found a new outlet: real estate investing, specifically short-term rentals on the South Carolina coast.

To fund this venture, he secured a securities-based line of credit. Despite the risks, Scott was excited. He used the funds to buy, renovate, and furnish multiple properties. He even hired a virtual assistant to manage bookings on various platforms.

Then reality hit.

Interest rates skyrocketed. A hurricane struck. Rental income dried up.

Suddenly, Scott was scrambling. Selling properties, battling with insurance, and using his already-leveraged investment account just to stay afloat. 

Eventually, out of desperation, he sold half of his beauty business to a marketing firm, chasing their promises of massive growth that, sadly, didn’t materialize.

Watching Scott’s journey was difficult. From the outside, it looked like a string of unrelated decisions. But beneath it all was a cascade of emotional and cognitive biases driving him off course.

And he’s not alone.

Behavioral Finance: How Psychology Shapes Our Financial Choices

Behavioral finance is the study of how psychological influences affect financial decisions.

Whether you realize it or not, your relationship with money was shaped long before you earned your first paycheck.

Our beliefs and behaviors around money are heavily influenced by lived experiences, social and family dynamics, and personal narratives.

For example:

• A child raised in a family that diligently saves and invests may naturally lean toward financial prudence.
• A child who witnesses chronic financial stress may grow up with deep-seated scarcity fears.
• Some families brace for financial ruin constantly, avoiding risk at all costs.
• Others swing for the fences, risking everything in pursuit of a big win.

These mental patterns, many of them unexamined, shape how we earn, save, invest, and spend throughout our lifespan.

Meet Dana

While Scott’s biases led him to chase too many opportunities, Dana’s story reflects the opposite: a strong attachment to the familiar, even when it no longer served her.

Dana owned a boutique fitness studio in a high-rent urban area. She had opened it nearly a decade earlier, pouring her heart, energy, and hard-earned savings into building a loyal client base. Having grown up below the poverty line, the successful studio was her (and her family’s) pride and joy.

But the pandemic changed everything. Virtual fitness took off. Foot traffic dwindled. Rent skyrocketed. Despite her best efforts to adapt, monthly losses became routine.

Still, Dana couldn’t walk away.

Even when her accountant showed her that she could exit the lease, sell off equipment, and relaunch her brand online with significantly lower overhead, she resisted. To her, the physical space was a symbol of her independence and grit.

So, she kept going, sinking over $250,000 of her personal savings into keeping the studio afloat. Her rationale? “It’ll bounce back. It always has.”

But the bounce-back never came. And now, she’s working double time, teaching virtual classes by day and picking up consulting gigs at night, to try and rebuild the nest egg she spent keeping the studio’s lights on.

From a purely financial standpoint, Dana’s decision defied logic. But emotionally, it made perfect sense: she was driven by nostalgia, loss aversion, and fear of perceived failure.

Dana’s story shows that even the most disciplined people can get stuck when emotion clouds judgment.

The Financial Biases I See Most Often

Whether you’re like Scott, Dana, or somewhere in between, here are the 11 most common financial biases I see in my practice:

Overoptimism Bias

You overestimate how easily you can manage multiple income streams or business ventures, while underestimating the complexity and risk. Scott was sure his rental empire would run itself.

Confirmation Bias

You seek out information that supports what you already believe and ignore red flags that challenge your thinking. Both Scott and Dana struggled with this: choosing to focus only on what reinforced their existing narratives.

Anchoring Bias

You cling to the first number you hear, like a home’s asking price or a projected rental income, even when the market reality changes.

Herd Mentality

You follow the crowd into trendy investments without doing your own due diligence. Scott saw others succeeding in short-term rentals and jumped in headfirst.

Action Bias

You feel the need to “do something” constantly, even when it’s not helpful. Scott’s quick-fix decisions when things got tough made matters worse.

Recency Bias

You put too much weight on what’s happening right now, ignoring long-term patterns and historical context. 

Status Quo Bias

You stick with outdated financial products or strategies just because they’re familiar. Dana held onto her space, even when breaking the lease would have created more stability.

Mental Accounting

You treat money differently based on where it came from. Scott treated his line-of-credit funds like "opportunity money," leading to riskier choices than he’d normally make.

Self-Control Bias

You make short-term decisions that don’t align with your long-term goals. Dana prioritized emotional comfort over long-term financial health.

Overconfidence Bias

You place too much faith in your own ideas or instincts, often without enough objective analysis. Scott’s entrepreneurial confidence led him into risky territory.

Loss Aversion Bias

You hold onto underperforming investments because you fear locking in a loss, even when selling would actually improve your situation. Dana struggled here.

The Psychology of Money Quiz

Curious where you might be falling into these same traps?

Here’s a short quiz I created to help clients uncover hidden patterns. Answer these questions honestly to get a better idea of the biases you might carry.

What does money represent to you?

• A means to an end
• Freedom to enjoy life on your terms
• A whole new set of problems

What emotions does the word “money” evoke?

• Freedom
• Success
• Peace of mind
• Anxiety
• Uncertainty

What are your top three goals in the next five years?

• Buy a house
• Start a family
• Sell a business
• Remodel a house
• Restructure a business
• Start a new company
• Train for a triathlon/marathon
• Move next to the grandkids

What are your top three lifetime goals?

• Raise responsible children
• Build a real estate empire
• Travel the world
• Create a legacy
• Give back to your community
• Make a difference globally

What’s your biggest fear about money?

• Running out or losing it
• Sharp market declines
• Family conflict over money
• Not knowing how to make it work for me
• Government overreach or digital tracking

How do you feel about taxes?

• I hate paying them
• I want to support infrastructure
• I want more choice in where my taxes go
• I want to minimize and avoid unnecessary taxes

What do you believe is the most effective way to build wealth?

• Multiple passive income streams
• Doubling my money every five years
• Market-timed investing
• Real estate for tax advantages
• Preserving as much as growing
• Starting multiple businesses

Your answers will start to paint a picture of your unique money psychology, and where you may be most vulnerable to biases like Scott or Dana.

Opportunity Cost: The True Cost of Bias

One of the most overlooked consequences of letting emotional biases drive your decisions is opportunity cost. It’s the invisible price tag attached to every emotionally driven decision:

• The business you didn’t scale because you were distracted
• The investments you didn’t make because fear held you back
• The legacy wealth you didn’t preserve because emotion clouded your judgment

For Scott, the opportunity cost was clear. 

By pouring capital and attention into his real estate experiment, and later scrambling to fix the fallout, he diverted focus from the one thing that had consistently built his wealth: his beauty business. Had he stayed engaged in that business, nurtured it through its next growth phase, or reinvested profits strategically, his long-term financial picture might look very different today.

For Dana, the opportunity cost was generational.

Her emotional attachment to her studio space prevented her from making wealth-preserving moves that could have protected her savings. Instead of reducing overhead costs, she remained trapped in a cycle of loss and mounting financial risk.

Acting on your biases doesn’t just affect what you lose, it affects what you never give yourself the chance to gain.

How to Stay Objective and Make Better Financial Decisions

Here’s my best advice for keeping your biases in check:

• Be self-aware. Know your emotional triggers and money patterns.
• Understand your opportunity costs. Every decision means giving up something else.
• Stick to a long-term, diversified plan.
• Work with advisors who understand both the math and the mindset of money.
• Learn from others. Let history, and others’ mistakes, be your teacher.

At the end of the day, wealth isn’t just about numbers. It’s about psychology.

If Scott and Dana’s stories resonate, or if you’re wondering where your own blind spots might be, my team and I would love to help you map out your personal money psychology profile. You can get in touch with us here. Or, read more in my book, Wisdom to be Wealthy.

The first step toward bias-free wealth building? Self-awareness.

You’ve got this!

— Tammy