Equity Compensation and Human Biases: How to Avoid Costly Mistakes
Managing your finances should be simple. Spend less than you earn, save and invest the difference, and avoid doing anything dumb, you’ll be fine. Easy, right?
It’s like living a healthy lifestyle. Eat well, exercise, get enough sleep. Simple in theory, harder in practice.
Two things make both harder:
Life happens. As Forrest Gump says, “Shit happens.” Jobs change, markets drop, unexpected expenses show up.
You’re human. You’re not a spreadsheet, a robot, or an AI program that flawlessly executes decisions. You have emotions and biases.
And when it comes to equity compensation, those human biases can really complicate things. Let’s look at three of the most common ones.
Recency Bias
Humans struggle to remember what life was like before recent changes. After my wife and I adopted our cat, Penguin, I could barely remember what our home felt like before her.
With investing, the same thing happens: if your company stock has been going up, it’s easy to believe it will keep going up. But past performance doesn’t predict future performance. Instead of betting your future on what the stock might do, focus on how it fits into your broader financial plan.
Overconfidence Bias
Smart, driven professionals often believe they can handle their finances themselves and that their company stock will keep performing. That combination of overconfidence and recency bias can be dangerous.
The reality: no one has a crystal ball. I often encourage clients to plan for their company stock to perform poorly. That way, if it does well, it’s a bonus, not the foundation to the financial plan. And when it comes to managing every aspect of life and money, even the smartest people do best when they outsource some decisions to experts.
Status Quo Bias
“If it ain’t broke, don’t fix it.” That mindset works fine, until it doesn’t.
If you’ve been with your company long enough, your equity can quietly become a huge piece of your net worth. While that can be exciting, it also creates concentrated risk. Left unmanaged, it could mean that goals like buying a home, taking a sabbatical, or retiring early slip out of reach.
The real danger is not making a decision. Doing nothing with your equity is still a decision, it’s choosing to let risk build up. My goal with clients is to make sure they can still achieve their life goals even if their equity doesn’t work out as they’d hoped. For the clients where it does work out? That’s just upside.
Final Thought
Equity compensation isn’t just numbers on a spreadsheet, it’s human behavior, emotions, and biases. By recognizing these biases, you can make more intentional choices and build a financial plan that works in real life, not just in theory.