Psychological Biases Impacting Gen Z & Millennials

Warning: 70% of Millennials and Gen Z Are at Risk of Financial Instability Due to Psychological Biases

Did you know that a staggering 70% of Millennials and Gen Z could face financial instability due to psychological biases affecting their financial decisions? The urgency is real. These biases can trap young individuals in a cycle of poor financial habits, jeopardizing their future stability and prosperity.

A recent Deloitte Global Gen Z and Millennial Survey from May 2025 highlights this growing concern, revealing that nearly half of Gen Z (48%) and Millennials (46%) do not feel financially secure, a notable increase from the previous year. This rising insecurity underscores the critical need for understanding and addressing behavioral finance.

Why It Matters: The Modern Financial Landscape

Financial security is a cornerstone of well-being and long-term happiness. Yet, Millennials and Gen Z are navigating a complex financial landscape filled with unprecedented challenges:

Student Debt Crisis: The average student loan debt per borrower increased by 107.6% from $18,230 in 2007 to $37,850 in 2024. This debt strongly correlates with a drop in homeownership rates, making it harder for younger generations to build wealth. A Forbes Advisor survey from August 2024 found that 70% of Millennials and 68% of Gen Z carry $10,000 or more in student loan debt, impacting major life decisions like buying a home or starting a family.
Rising Living Costs: Persistent inflation and high-interest rates make consistent saving a challenge, with the personal savings rate hitting a low of 3.6% in 2024.
Uncertain Job Markets: The gig economy, while offering flexibility, can lack the stability of traditional employment, contributing to financial instability.

Understanding and overcoming psychological biases is critical to forming healthy financial habits that will ensure a stable future. Without addressing these biases, young individuals risk making repeated financial mistakes that could lead to chronic stress and diminished quality of life. As financial expert Dave Ramsey famously states, “Personal finance is only 20% head knowledge. It’s 80% behavior.”

3 Psychological Biases and How to Overcome Them

Behavioral finance, a field that combines psychology and economics, helps explain why individuals often make irrational financial decisions. Here are three common biases affecting young adults:

1. Present Bias

Problem: Present bias is the tendency to prioritize immediate rewards over long-term goals. This bias can lead to impulsive spending and neglect of savings, often resulting in consumers spending too much, borrowing too much, and saving less. For instance, a 2025 study on financial behaviors among Indians found that 8.2% of respondents exhibited present bias, leading to less saving and more borrowing. This preference for instant gratification is a significant hurdle to financial stability.

Solution: To counteract present bias, Millennials and Gen Z must employ strategies like setting up automated savings. By automatically transferring a portion of each paycheck into a savings account, they can prioritize long-term goals without constantly battling the urge to spend impulsively. This aligns with the advice to “Do not save what is left after spending, but spend what is left after saving,” a principle often attributed to Warren Buffett.

Consider these actionable steps:

Automate your savings: Set up recurring transfers from your checking to your savings account immediately after you get paid. Even small amounts accumulate over time.
Use separate accounts for goals: Create distinct savings accounts for different goals (e.g., emergency fund, down payment, vacation) to make long-term objectives feel more tangible.
Implement a “delay gratification” rule: Before making a non-essential purchase, impose a waiting period (e.g., 24-48 hours). This allows time for rational thought to override impulsive urges.

2. Anchoring Bias

Problem: Anchoring bias occurs when individuals rely too heavily on the first piece of information encountered (the “anchor”) when making decisions. For instance, a high-priced item initially seen can set an unrealistic standard for spending behavior, making subsequent, slightly lower prices seem like a “good deal” even if they are still overpriced. This bias affects consumer spending habits and can lead to irrational purchases. In real estate, the initial listing price can powerfully anchor buyer perceptions, influencing the final sale price regardless of market value.

Solution: Conduct thorough research before making significant purchases. Compare prices, read reviews, and consult multiple sources to ensure decisions aren’t based on a single, potentially misleading anchor. This approach helps in making more balanced financial decisions. Price comparison tools can be particularly effective in mitigating the effects of anchoring.

Practical ways to overcome anchoring bias:

Always compare: Never settle for the first price you see. Use online comparison sites for everything from insurance to electronics.
Establish your own value: Before looking at prices, determine what you believe a product or service is worth to you. This internal anchor can help you resist external influences.
Beware of “original price” traps: Marketers often display a high “original price” to make a discounted price seem more attractive. Focus on the actual value and your budget, not the perceived discount.

3. Overconfidence Bias

Problem: Overconfidence bias leads individuals to overestimate their knowledge or ability, often resulting in risky financial decisions, such as high-stakes investments without adequate research. Young investors, particularly those with low income and portfolio levels, are more prone to overconfidence. This can manifest as excessive trading, undervaluing investment risks, and failing to diversify portfolios, leading to suboptimal profits. A 2024 study noted that overconfidence bias is difficult to change as it relates to one’s perception of their abilities and knowledge.

Solution: Adopt a mindset of continuous learning. Engage with financial education resources, seek advice from financial professionals, and regularly reassess financial strategies. Acknowledging the limits of one’s knowledge can prevent costly mistakes. As Benjamin Graham, often called the “father of value investing,” said, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Strategies to curb overconfidence:

Seek diverse opinions: Actively solicit advice from financial experts and trusted sources, especially those with different perspectives than your own.
Document your decisions: Keep a log of your financial decisions and the rationale behind them. Regularly review these to identify patterns of success and failure, fostering a more realistic self-assessment.
Focus on process, not just outcomes: Even if an investment performs well, analyze why. Was it skill or luck? This prevents attributing random successes to superior knowledge.
Prioritize financial literacy: While Millennials and Gen Z have relatively high financial literacy rates (74.82% and 70.19% respectively, according to a 2024 survey by Indonesia’s Financial Services Authority), a 2025 US report indicates lower general financial literacy, with Gen Z answering only 37% of index questions correctly. Continuous learning is crucial.

Action Plan: Take Control of Your Financial Future

By understanding and addressing these psychological biases, Millennials and Gen Z can take critical steps toward financial stability and security. The time to act is now, as the choices made today will profoundly impact tomorrow’s financial landscape.

Step 1: Set up automatic transfers to savings accounts to combat present bias. A 2024 Voya Financial survey found that 78% of Gen Z and 75% of Millennials who changed their savings rate in Q1 2024 increased it, demonstrating a willingness to save.
Step 2: Develop a habit of researching before any major financial decision to avoid anchoring bias. This includes comparing prices for consumer goods and services, and thoroughly evaluating investment opportunities.
Step 3: Regularly engage with financial literacy materials and consult professionals to curb overconfidence bias. Despite high financial literacy rates among some young adults, many still feel less confident about their financial security and desire more financial education from employers.
Step 4: Monitor your financial decisions and reflect on past choices to identify and correct biases. This self-assessment is key to continuous improvement in financial behavior.

Next Steps for Enhanced Financial Well-being

Commit to regular financial check-ins: Assess your goals, budgets, and spending habits at least monthly. Financial guru Suze Orman emphasizes that financial freedom comes from managing worry about “what-ifs,” which saving can alleviate.
Engage with financial communities online: Share experiences and gather insights from peers and experts. Social media can be a valuable tool for financial education, with YouTube and Instagram being popular platforms for young adults seeking financial information.
Experiment with budgeting apps: Tools that provide alerts and insights into spending patterns can be invaluable. Many apps leverage behavioral science principles to help users stick to their financial goals.
Prioritize debt repayment: A significant portion of Millennials (47%) and Gen Z (43%) are saving primarily to pay off debt, reflecting the substantial impact of student loans and other financial burdens. Addressing debt aggressively can free up funds for other financial goals.

Remember, financial security is not just about the money you earn but also about how you manage it. Addressing psychological biases is a must-know strategy for anyone looking to secure their financial future. As Nobel laureate Daniel Kahneman, a pioneer in behavioral economics, demonstrated, understanding these biases is the first step toward making more rational decisions.

Frequently Asked Questions (FAQ)

Q1: What are psychological biases in financial decision-making? A1: Psychological biases are systematic errors in thinking that affect an individual’s financial judgments and decisions, leading to irrational actions and suboptimal outcomes. They are a core concept in behavioral finance, which recognizes that people are often “normal” rather than perfectly “rational” in their financial behavior.

Q2: How prevalent is financial instability among Millennials and Gen Z? A2: According to the 2025 Deloitte Global Gen Z and Millennial Survey, nearly half of Gen Z (48%) and Millennials (46%) report not feeling financially secure, indicating a rising trend of financial insecurity among these generations.

Q3: Can financial education truly overcome these biases? A3: While financial education is crucial for providing the knowledge and skills needed for sound financial decisions, it’s not a complete solution on its own. Behavioral finance experts like Dave Ramsey suggest that personal finance is 80% behavior, meaning consistent action and self-control are equally vital. Education helps individuals recognize biases, but active strategies and discipline are needed to counteract them.

Q4: What is the “present bias” and how does it affect young adults? A4: Present bias is the tendency to favor immediate gratification over future rewards. For young adults, this often translates into impulsive spending, less saving, and increased borrowing, hindering their ability to build long-term wealth and achieve financial goals like retirement savings or homeownership.

Q5: How does “anchoring bias” impact purchasing decisions? A5: Anchoring bias causes individuals to rely too heavily on the first piece of information they receive (the “anchor”) when making decisions. In purchasing, an initial high price seen for an item can make subsequent, slightly lower prices seem like a bargain, even if they are still above the item’s true value. This can lead to overspending and suboptimal purchasing choices.

Q6: What are the risks of “overconfidence bias” in investing? A6: Overconfidence bias leads investors to overestimate their knowledge or abilities, resulting in risky decisions such as excessive trading, undervaluing risks, and insufficient portfolio diversification. This can lead to significant financial losses and suboptimal investment performance.

Q7: What is the single most important step Millennials and Gen Z can take to improve their financial future? A7: While multiple steps are important, consistently automating savings is arguably the most impactful. This strategy directly addresses present bias, ensures regular contributions to long-term goals, and builds a solid foundation for financial security by making saving a default behavior rather than a discretionary choice.