We like to believe we’re rational, especially about money (you’re here, after all). But our brains are hardwired to make decisions that don’t always add up. The truth is financial mistakes aren’t just inevitable – they’re often predictable. 

Enter Richard Thaler, a 2017 Nobel Prize laureate in economics and co-author of the New York Times bestseller Nudge: Improving Decisions about Health, Wealth, and Happiness. A pioneer in behavioural economics and “choice architecture”, his ground-breaking work reveals why we make financial missteps. Understanding these common cognitive traps could be your secret weapon to thriving in 2025, so add the following insights to your arsenal.

The Endowment Effect: Why we overvalue what we own

Have you ever held onto something you never use, convinced it’s worth more than it really is? That’s the “Endowment Effect” in action. We tend to overvalue items simply because we own them, whether it’s that collection of ’95 Springboks bobbleheads or a stock that’s consistently underperforming.

The fix? Take a step back and remind yourself that an item’s worth is the same whether you own it or plan to buy it. If you wouldn’t pay the same price for it today, it might be time to let it go.

The Sunk Cost Fallacy: When “I’ve already paid for it” leads to regret

We’ve all been there: forcing ourselves to endure a meal we’re not enjoying, sit through a cringeworthy stand-up comedy set, or use that three-year gym membership we never wanted – all because we’ve already paid for it. This is the “Sunk Cost Fallacy”, the irrational belief that we must follow through on something simply because we’ve invested time or money.

The fix? Recognise that the money (and time and emotional energy) has already been spent and can’t be recovered. Instead of clinging to past decisions, focus on what makes sense for you now.

Transactional Utility: The allure of a “good deal”

Who doesn’t love a bargain? There’s something undeniably satisfying about spotting that “SALE” sticker on the set of Cleveland golf clubs you passed while shopping for compression socks. Sometimes, the money you “saved” is an even bigger brag than the branded item you now own. But here’s the catch: a good deal isn’t always a good decision.

“Transactional Utility” refers to the joy we experience when feeling like we’ve scored a discount, even if the purchase itself isn’t worthwhile.

The fix? Before you buy, ask yourself: Would I still want this if it wasn’t on sale? Will owning these clubs magically turn me into a regular at the driving range, or will they just gather dust after the second Saturday? Prioritise the value the product brings to your life, not just the thrill of saving money.

Mental Accounting: Why we treat money differently

Do you have a “fun” budget that you spend freely while your savings feel untouchable? What if a crisp R200 note fell from the heavens into your lap? Would you take it to the ATM to deposit or reward yourself with a dozen pasteis de nata, because hey, “free money”, right? This is “Mental Accounting”, the tendency to treat money differently based on where it comes from or how we plan to spend it. While it might feel logical, it can lead to irrational decisions, like overspending on luxuries while ignoring debt.

The fix? Treat all money equally. Whether it’s a bonus, a gift, or your monthly salary, it’s all part of the same pot. Your mindset creates the rules. Why not rewrite them to work in your favour?

The takeaway? Smarter choices start with self-awareness

Financial faux pas are part of being human, but they don’t have to define your relationship with money. By understanding the cognitive biases that trip us up, we can make more intentional investment decisions – and avoid the pitfalls that keep us from reaching our goals.

So, as you endeavour to stick to those New Year’s resolutions, remember this: the key to financial success isn’t just earning more or spending less. It’s about recognising the hidden gremlins that shape your decisions – and reminding them who’s boss!

Want to learn more? Give Thaler’s Misbehaving: The Making of Behavioural Economics a read.

The views and opinions shared are for informational purposes only. They are not intended to serve as investment advice and do not represent the views or opinions of Standard Bank. This information should be used as a starting point for generating investment ideas, and should not be relied upon as the basis for making investment decisions. The Standard Bank of South Africa Limited will not be responsible for the results of any investment decisions made based on the views provided.