Navigating life often gets increasingly more difficult as time goes on. With new technology, services, and ethical considerations, the weight of these choices can become overwhelming. So what do we do as social creatures? We look for ways to get support and provide support to others... we look for community so facing the unknown feels less daunting.
But what does that mean for financial choices? Money decisions can touch every aspect of our lives from what we eat for breakfast to the type of access we have to education, so the costs of bad advice can be high, whether you're the giver or the receiver of that advice.
The Risks of Taking Financial Advice
From big corporations to social media influencers to family and friends, everyone has an opinion when it comes to how you should spend or save your money. It may be easy to see through the motivations of big corporations or even small businesses, but it can be more difficult to identify those motivations with influencers and sometimes even impossible with family and friends.
Social Media Influencers
Social media influencers may or may not have the qualifications to provide financial advice, but it's important to realize that even if they have the qualifications, generalized statements about how you should spend or save your hard-earned dollars does not consider your unique priorities or circumstances.
No credible financial professional will offer financial advice or guidance without a thorough picture of your individual financial situation, and hopefully a heavy consideration of your personal values and financial risk tolerance.
Today, the FTC has regulations for how social media influencers in the US are required to disclose when they have a financial, employment, personal, or family relationship with a brand. Not all social media influencers follow this guidance, however. Disclosures 101 for Social Media Influencers (FTC, 2019) is available for anyone who wants to know what to look for when assessing if an influencer is complying with the law.
This disclosure and awareness can combat the power of parasocial relationships (Dictionary.com, 2021). When someone we feel that we know and trust makes a statement, we often value it more highly than what we see with typical marketing messages. This over-valuation of a social media influencer's statements can make both marketing and misinformation more powerful.
Meme Stocks
A meme stock is a stock that has gained popularity thanks to internet trends and influencer content. There are several examples of the power influencers can have over investing decisions. Gamestop (GME) is widely recognized as the first "meme stock". We discussed the short-selling phenomenon that occured around Gamestop on episode 14 of Making Cents of Money which you can listen to below, on our blog, or on Spotify, Apple Podcasts or YouTube Music.
Crypto Assets Promoted on Social Media
The US Securities & Exchange Commission (SEC) fined Kim Kardashian for content promoting a cryptocurrency asset in 2022. Because some cryptocurrencies are treated as securities, not only did the FTC guidance apply to the posts made about EthereumMax, so did additional regulations related to the promotion of securities.
Anyone who is paid to promote a security must disclose it when promoting that security whether it's through social media or another marketing channel.
Social media can also be used to fabricate false hype around any type of security, not just digital assets. The U.S. Securities & Exchange Commission created the HoweyTrade Investment Program to teach investors how to spot the red flags of fraud when it comes to investments which could save you time, energy, and significant loss.
Family & Friends
Another source of potentially ill-informed advice can come from family and friends. Your experience is unique, and just because someone you know had a similar financial decision or struggle, it doesn't mean the outcomes or options will be the same for you.
Financial Socialization
There are many contributors to the attitudes and beliefs we develop around money. These contributors are often called "agents" of financial socialization. Our families, and specifically parents, are often the most influential agents of early financial socialization. As a result, we may highly value parental input around financial decisions or choices, but that input could rely on outdated or incorrect financial knowledge.
Even though financial literacy often improves as we get older and gain more experience, many adults across all ages score poorly on financial literacy tests. Between 2017-2028, the average score on a 28-question financial literacy quiz called the P-Fin Index "has consistently hovered around the 50% mark" each year (Yakaboski et al., 2024, p. 3).
The P-Fin Index questions test knowledge of 8 functional personal finance areas including borrowing, saving, consuming, earning, go-to info sources, investing, insuring, and comprehending risk. The average scores across these categories ranged from 39-61% in 2024, providing insights into how little many of us really understand about personal finance.
Understanding Cognitive Biases in Financial Decision-Making
Cognitive bias has been defined as mental models or heuristics that a person uses to categorize their experiences and make sense of the world. The Cognitive Bias Codex names over 180 biases humans tend to have into roughly 20 categories (Benson, 2016). These mental short-cuts help us simplify our decisions, but sometimes they come at a cost. According to the Common Cents Lab, a few of these mental short-cuts that can be costly include:
- Anchoring Bias: our judgments can be influenced by the first piece of relevant information we learned about a topic.
- Availability Bias: the easier something comes to mind (e.g., vivid memories or recent events), the more weight we give to it.
- Decision Paralysis: if we have too many options, the default choice (do nothing) is often what we go with.
- Disposition Effect: humans have the tendency of maintaining bad investments too long and selling good ones too soon.
- Endowment Effect: we tend to overvalue the things that we own (which can make selling our stuff challenging).
- Herding: it's often easier to do what everyone else is doing rather than forging our own paths.
- Hyperbolic Discounting: we don't tend to value the future as highly as we do the present.
- Loss Aversion: it can feel more painful to experience loss than it feels exciting to make gains, so we try harder to avoid loss.
- Mental Accounting: we conflate dollar amounts with buying power, assigning different values based on how money is used.
- Opportunity Cost Neglect: when we make choices, we don't always consider what we gave up from the choice we didn't make.
- Planning Fallacy: we often underestimate the resources we need to accomplish a goal, be it time, commitment, or money.
The Decision Lab has an extensive list of biases and heuristics that guide all kinds of behavioral decisions.
Tax Advice and Individual Circumstances
We often hear during tax-filing season that students with similar jobs are comparing tax-filing outcomes and are confused why their friend with the same job got a larger tax refund than they did. There are many reasons for this because every person's tax-filing situation is different, even if they make the same amount of money. So it's important to do your own research or find a financial professional that can give you guidance to comply with laws and regulation and provide the best financial outcome for your particular set of needs.
Viral Misinformation
Confirmation bias can feed our likelihood to both believe and share viral misinformation. There are multiple types of confirmation bias, but it is generally recognized as an individual’s tendency to look for information that confirms beliefs they already hold rather than change a pre-existing belief based on new information that challenges that “hypothesis” (Klayman, 1995).
If we believe something to be true (or should be true), anything that confirms our existing belief will be more easily accepted than information that challenges those beliefs.
Red Flags: Warning Signs of Poor Financial Advice
Before accepting financial advice, watch out for these warning signs:
- Person lacks relevant credentials or refuses to share qualifications
- No questions asked about your specific financial situation
- Undisclosed financial relationships with product or services vendors
- Pressure to act quickly or "limited time" offers
- Promises that sound too good to be true
- Advice contradicts information from multiple credible sources
Tips to Avoid Taking or Giving Ill-Informed Financial Advice
Take a Pause
Before sharing information you think may be helpful to others, research its accuracy, especially if its on social media. Misinformation frequently goes viral because it confirms our existing biases or gives us hope. It can cause real, long-term harm to share unfounded financial information with others, so it's important to take a pause and check the credibility of sources before sharing.
Be Skeptical
If something sounds too good to be true, it probably is. Always do your own research and be critical of sources and how they are funded. A business is in the market to make some type of profit, so any marketing material they share is likely to be focused on making their product or services look enticing.
Practice Empathy
Your situation may be very different from someone else's. When sharing your own knowledge, be sure to acknowledge that your reasons for handling a situation a certain way may be different from someone else's motivations for making a choice.
Avoid Assumptions
Asking questions can help you be better informed when making financial decisions on your own or when trying to help a friend or family member work through a financial decision. This gives you more information on the background behind a service, product, or marketing ploy, but it also can give you more insights into how a friend or family member prioritizes their own values when it comes to financial decisions.
The Bottom Line
Financial decisions are deeply personal and complex. While seeking advice and community support is natural, protecting yourself from costly misinformation requires developing critical thinking skills, understanding your own biases, and always verifying information from multiple credible sources.
Remember: Qualified financial professionals should want to genuinely understand your unique situation before providing guidance, and they'll be transparent about their credentials and any potential conflicts of interest. We have general information on what to look for when choosing a financial professional as:
For licensed financial professionals, like brokers and investment advisors, you can look them up on the Illinois Department of Financial & Professional Regulation or through resources on Investor.gov.
For help with tax-filing, you can also us the IRS' resource for choosing a tax preparer.
References
- Center for Advanced Hindsight. (n.d.). Resources. Retrieved June 13, 2025.
- Cranford, C. (2025, March 30). Fact check: Can you 'erase' your student debt because DOGE accessed federal loan databases? PBS NewsHour.
- Dictionary.com. (n.d.). Parasocial relationship. In Dictionary.com. Retrieved March 23, 2025.
- Federal Trade Commission. (n.d.). Disclosures 101 for social media influencers. Retrieved June 13, 2025.
- Klayman, J. (1995). Varieties of confirmation bias. Psychology of learning and motivation, 32, 385-418.
- National Association of Student Financial Aid Administrators. (2025, April 8). Sorry, your student loan debt isn't erased because DOGE accessed it. NASFAA.
- Pellegrini, A., & Giancola-Shanks, N. (Hosts). (n.d.). Short-selling [Audio podcast episode]. In Making Cents of Money. University of Illinois. Retrieved June 13, 2025.
- Pilat, D., & Sekoul, K. (2021). Confirmation bias. The Decision Lab. Retrieved June 13, 2025.
- Pucket, J. (2025, March 26). Fact check: No, your student loans aren't forgiven because of FERPA violation. WBTV.
- Securities and Exchange Commission. (2022, October 3). SEC charges Kim Kardashian for unlawfully touting crypto security [Press release].
- Securities and Exchange Commission. (n.d.). HoweyTrade. Investor.gov. Retrieved March 23, 2025.
- The Decision Lab. (n.d.). Cognitive biases: A list of the most relevant biases in behavioral economics. Retrieved June 13, 2025.
- Yakoboski, P. J., Lusardi, A., & Sticha, A. (2024). The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index). Global Financial Literacy Excellence Center (GFLEC).
- Ziv, S. (2025, February 18). No, filing a privacy complaint won't cancel your student loans. Forbes.
