Chris MihosGood decisions about money rarely come from willpower; they usually come from arrangements that were set up in a calm moment and don’t ask much of you in a frightening one.
The psychology of money is the gap between how capital ought to behave on paper and how people actually behave with it, and that gap is large enough to measure. Over the ten years to the end of 2025, the average dollar in US stock funds earned about 8.7% a year while the funds themselves returned about 9.9%, according to Morningstar, with the difference explained by when people bought and sold. That isn’t evidence that people are foolish. It’s evidence that most arrangements leave every decision open at exactly the moment when fear or excitement is strongest. Family offices tend to do better partly because they design that problem away, deciding their risk, liquidity and access in advance so that the hard moments ask very little of anyone.
The gap between the fund and the person holding it
Morningstar has measured this gap every year for more than a decade, and it never disappears. In its 2026 edition it estimated that people holding US mutual funds and ETFs had missed out on roughly 12% of the funds’ total returns over ten years, simply because of the timing and size of the money they moved in and out. It also found that the gap was widest in the most volatile funds, which is where the urge to act is strongest. DALBAR, which runs a similar study, found that the average equity fund holder trailed the S&P 500 by about 8.5 percentage points in 2024, a year in which the index rose 25%, although the gap narrowed to under one point in the calmer conditions of 2025.
The behaviour behind these numbers is familiar to anyone who has watched a market fall. Losses hurt roughly twice as much as equivalent gains feel good, which is the finding that underpins the work of Daniel Kahneman and Amos Tversky on loss aversion, so a sharp decline creates intense pressure to do something, and the something is usually selling. When the recovery comes, as it often does quickly, the person who sold has to decide when to come back in, which is a second difficult decision made under a different kind of pressure.
If you’ve done this yourself, it isn’t a personal failing. It’s a reasonable response to an arrangement that hands you the full weight of every decision at the moment you’re least equipped to carry it.
Risk: the drawdown you can actually sit through
Most risk questionnaires ask how much you’d be prepared to lose, and most people answer that question in a calm moment on a good day. The number that matters is different: it’s the loss you can watch happen, perhaps over a few weeks, without changing your mind at the bottom. SpaceX shares listed at $135 this year, rose as high as $226 and were trading at around $127 within a month, and anyone holding most of their wealth in the stock had to live through a fall of more than 40% from the peak. The arithmetic of that experience is very different from the emotion of it.
Structural risk has a psychological side as well. When Binance lost about $6.3 billion from its hot wallets on 29 October 2026 and stopped customers moving assets off the exchange for three days, the fear for most people wasn’t about market prices at all. It was about whether their assets were still there. Uncertainty about structure produces the most acute anxiety of all, because there’s nothing to analyse and nothing you can do, which is exactly why being able to verify custody for yourself matters as much for peace of mind as it does for safety of capital.
Family offices handle this by choosing their trading risk deliberately and in writing, usually in a written policy for the family’s capital agreed when nothing is happening, and by making sure the structure is something they can check rather than something they have to trust.
Liquidity: most bad decisions are forced ones
A great many of the worst financial decisions aren’t really decisions at all. They’re forced sales, made because someone needed cash at the wrong moment and had to take whatever the market offered. Liquidity that’s matched to your actual needs, as we describe in Liquidity is a match, not a feature, is therefore as much a psychological tool as a financial one, because it means a bad quarter never forces your hand.
Liquidity also has a crowd dynamic that’s worth understanding. When the SEC reformed money market funds in 2023, it removed the ability of funds to suspend redemptions partly because it found that, in March 2020, the mere possibility of a gate had encouraged people to redeem before it could be imposed. The same pattern appeared in semi-liquid private credit this year, where queues of redemption requests fed on themselves and many of the people asking to leave were simply asking again because the last request hadn’t been filled. Once people believe the exit might narrow, they head for it, and that belief can matter as much as the underlying assets.
The calmest position in a queue is not to be in it, which comes from knowing in advance which part of your capital you’ll need and when, and keeping that part somewhere that will be there for you.
Access: more isn’t always better
It’s tempting to assume that more access is always an improvement, and in many ways it is, but constant access also means constant temptation. A portfolio you can check at any moment, with prices moving every second and alerts arriving through the night, invites exactly the kind of frequent, emotionally driven activity that the behaviour gap measures. The leverage built into many trading accounts makes this worse: in the hours after the Binance hack, more than $1.6 billion of leveraged positions were liquidated as prices fell.
Good access is designed for calm as well as convenience. It means being able to see everything about your capital, including where it sits and where each number comes from, while making consequential actions deliberate rather than instant. A second signature, for example, isn’t only a protection against theft. It’s also a pause between an impulse and an action, and a chance for someone you trust to ask whether this is really what you want to do.
What AI can do, for better or worse
AI could make the psychology of money worse. An always-on assistant that reports every price movement, an agent that acts the moment you give it an instruction, and a feed that turns market noise into personalised alerts would all amplify the impulses that already cost people so much.
It could also make it much better. An AI that explains what has happened in plain language, reminds you of the plan you agreed when markets were quiet, shows you that your liquidity needs are covered for the next twelve months, and confirms that your assets are exactly where they should be, would do for an individual what a good family office does for a family. Agents could even help, provided they act only on rules you set in advance, which is the modern version of an old idea: deciding what you’ll do in a storm while the weather is still calm.
The difference between those two futures lies in the design choices, not the technology.
How MakeBanc approaches it
MakeBanc is built so that the important choices are made deliberately and in advance rather than under pressure. You can see a strategy’s liquidity terms and costs before you allocate, and every number shows where it came from, so you aren’t left guessing in a difficult moment. Your assets sit with an institutional custodian in a vault you sign for, and you can verify that on a public ledger whenever you want reassurance. You can require two or three named signers before anything changes, which builds a pause into every consequential action.
MakeBanc doesn’t tell you what to do with your capital or try to keep you watching it. The aim is an arrangement you can leave alone with confidence, because the decisions that matter were made when you were thinking clearly.
Frequently asked questions
What is the psychology of money? It’s the study of how emotions and habits shape financial decisions, and of the gap between how capital should perform and how people actually do with it. Loss aversion, the tendency to feel losses roughly twice as strongly as gains, leads many people to sell after falls and buy after rises, which reduces their returns.
What is the behaviour gap? The behaviour gap is the difference between a fund’s return and the return earned by the average dollar held in it, caused by the timing of purchases and sales. Morningstar found that over the ten years to 2025, US stock funds returned about 9.9% a year while the average dollar in them earned about 8.7%.
How do family offices avoid emotional decisions? They decide risk, liquidity and access in advance, usually in a written policy agreed in calm conditions. They keep enough liquidity that they’re never forced to sell, require several people to approve major changes, and use structures they can verify rather than trust.
Can AI help with the psychology of money? It can, if it’s designed to explain rather than alarm, to remind people of decisions they made in calm conditions, and to act only on rules set in advance. Designed as a constant stream of alerts or as an agent that acts on every impulse, it would make the problem worse.
Sources
- Morningstar, Mind the Gap US 2025
- WealthManagement.com, Morningstar: investors miss out on 12% of fund returns over decade, 2026
- Kitces, Weekend reading for financial planners, 8–9 August 2026
- DALBAR, 2026 QAIB report press release, April 2026
- PlanAdviser, Investors’ bad behavior led to sharp underperformance in 2024
- Wikipedia, Loss aversion
- Harvard Law School Forum on Corporate Governance, The SEC’s money market fund reforms, August 2023
- Stocktwits, Binance hack sparks bitcoin sell-off, $1.6B in liquidations, October 2026
- Wikipedia, 2026 Binance hack
- WealthManagement.com, Wealth firms urge patience on Anthropic IPO (SpaceX share price), October 2026
MakeBanc is a technology platform that connects investors with independent asset managers. MakeBanc does not provide investment advice, custody services or banking services. Past performance is not indicative of future results. Nothing here is an offer or invitation to allocate to any strategy.