Last month, I discussed a new field called Socionomics, which tracks movements in response to social mood, both euphoria and discouragement, optimism and pessimism. Your clients emotionally respond to these seismic financial changes. I further detailed two traps your seniors may find themselves in without the benefit of your financial guidance and counsel: Status Quo Bias and Sunk Cost Fallacy.

Here are three more traps senior clients may be vulnerable to.

Mistake No. 1: “I am going to keep my money in the market. It is moving up and I want to recover my losses.”

This stupid investment mistake is called Confirmation Bias. There is a great tendency for seniors to look for information that confirms their beliefs, rather than data that falsifies it.

Cornell marketing professor Ed Russo did a project with students evaluating restaurants. They rated restaurants on a 1-10 scale, 10 being the most positive. The ratings were based on menus and photos. But when the differences were mentioned one at time with photos of problem areas like rips in the booths and dirty kitchens, the students stayed with the initial ratings. They discounted information that didn’t fit with their first impressions.

The fix: Tell them about Confirmation Bias and talk about information that refutes their views. But then produce stories about other clients who came to you with the wrong ideas and succeeded as a result of following your advice.

Mistake No. 2: “I don’t like totally safe investments right now. I am getting back in. Look at how much the market has gained!”

This stupid investment mistake is called Short-term Memory Syndrome. We soon forget what happened last quarter in favor of what happened last week. The stock market lost 42 percent over the last six months and came back 25 percent in the last six weeks. The downturn must be over and boom times are here again. The stock market is based on earnings and GDP expansion. Everything else is sensitive to emotion and subject to volatility. This is also called “chasing returns.” There is a strong tendency for your prospects and clients to respond to news reports that tout something that happened today or this week while ignoring a longer-term perspective.

The fix: Talk to your seniors about the rule of 100. Discuss the level of volatility over the last two recessions if they had been fully invested without regard to their retirement horizon. Tell stories about seniors you have helped to weather the last few storms.

Mistake No. 3: “Losses are only paper, it’ll eventually be fine. I don’t really care about losses right now.”

This stupid investment mistake is called Mental Accounting. The notion is that my earned income is worth more than the money I make or lose from investing. This is where the idea of “found money” came from.

The fix: Take out a $10 bill and give it to your prospect. Let them keep it long enough to feel like they own it. Then ask for $10 out of their wallet and tear it up. Ask which $10 was a gift and which was earned. Your point will soon be made (though you might want to give them another $10).

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