We Are All Fools—It’s Called Being Human

It’s that time of year again—April 1, April Fools' Day. A day dedicated to tricks, laughter, and harmless deception, only to be left behind on April 2.

But when it comes to how our brains operate, every day is April Fools’ Day. Our minds constantly trick us, leading us to act in ways that may seem illogical but are, in fact, deeply human. The danger lies in failing to recognize these mental tricks and allowing them to dictate our decisions—sometimes with suboptimal, even catastrophic, results.

So, what are these tricks, and how do we avoid them in our financial lives?

The Power of Loss Aversion

The most influential of these behavioral biases is loss aversion, a bias that forms the foundation of others like regret aversion, herd mentality, and anchoring.

Loss aversion is the biological reality that people feel the pain of loss twice as intensely as they experience the joy of an equivalent gain. This imbalance means that, even when faced with opportunities that have a high probability of success, people will avoid taking action simply because of the possibility of loss.

Loss Aversion in Investing

One of the most glaring places loss aversion shows up is in investing. We all know the fundamental rule: buy low, sell high. Yet, when markets decline, many investors—rather than seeing a buying opportunity—succumb to fear and sell, locking in their losses.

Loss aversion also skews investment choices. Most investors, fearing potential loss, invest too conservatively, choosing the comfort of a seemingly safer path at the expense of a higher potential return. The result? A less secure financial future, all because the emotional fear of loss overpowers rational decision-making.

The Trap of Regret Aversion

Closely related to loss aversion is regret aversion, which stems from the fear of making a decision that could lead to loss—and, worse, the pain of knowing that the loss was caused by our own choice.

Regret Aversion in Investing

Regret aversion often leads to inaction. The fear of making the wrong choice prevents investors from making any choice at all. This bias frequently manifests in excessively conservative investment strategies, as people prefer the comfort of avoiding loss rather than embracing opportunities that could lead to long-term financial growth. The irony? By trying to avoid loss, they risk missing out on the life they could have had—a life of greater security, experiences, and impact. But because the brain perceives tangible financial loss more intensely than the abstract loss of opportunity, it prioritizes the wrong thing.

The Pull of the Herd

The final bias—herd behavior—is fueled by both loss aversion and regret aversion. When people anticipate the pain of loss and the regret of making a wrong choice, their brains offer a simple solution: just do what everyone else is doing.

Herd Behavior in Investing

History is riddled with examples of investors following the crowd—with disastrous results. The Wall Street Crash of 1929, Black Monday, the Dot-Com Bubble, the 2008 Financial Crisis, and the 2010 Flash Crash all share a common thread: masses of investors bought high and sold low, chasing momentum and reacting to fear rather than logic.

The fear of missing out (FOMO) drives people to jump into overinflated markets. Then, when fear sets in, they panic and sell at the worst possible time. The result? A self-inflicted financial wound.

So, What’s the Solution?

On April Fools’ Day, we laugh at the tricks played on us. But when it comes to the tricks our brains play every day, the consequences are no joke.

A common but naive piece of advice is "just don’t let emotions influence your decisions." But that’s unrealistic. These biases are hardwired into us—they are as much a part of being human as eating, breathing, and sleeping.

A more practical solution? Get help.

The right advisor can act as:

• A biographer – Someone who understands what truly matters to you and ensures your financial plan aligns with your purpose, rather than making money the purpose itself.
• An analyst – Someone who can run the numbers and show you the true cost of giving in to emotional impulses—helping you avoid costly mistakes.
• A coach – Someone who acknowledges your emotions, empathizes with your fears, and provides clarity so that you stay the course even when the market (or your mind) tempts you to act irrationally.

Final Thoughts

We cannot control how we feel, and when acting alone, we rarely control how we act. But with the right guidance, we can prevent these biases from undermining our financial future.

Now, enjoy your April Fools’ Day—and if you see any toilet seats wrapped in plastic, consider yourself warned.