As the old saying goes, personal finance is ‘mostly personal and a little bit financial.' Long-term growth and success rely more on our habits and behaviors than on complex knowledge.
Each of us carries a collection of cognitive biases, irrational beliefs, and behavioral quirks. When we make decisions about our money, this can, unfortunately, lead us down the wrong path.
Understanding each of the money psychology concepts here we will help you approach your finances more rationally and avoid some of those poor decisions that stem from cognitive bias.
In terms of money, optimism bias can lead to reckless decisions and insufficient planning. That can include: 1. Investing heavily in risky products 2. Carrying insufficient insurance
Pessimism bias, (also known as negativity bias), draws our attention away from positive circumstances and causes us to weigh negative stimuli more heavily.
Due to hedonic adaptation, many spend most of their adult lives buying bigger, fancier, and nicer things. As a result, they end up on the ‘hedonic treadmill,' chasing fulfillment that always stays just out of reach.
The sunk cost fallacy describes the human tendency to keep doing something we have started, even if it isn't working out. In particular, once we have committed time or money to something, we will likely stick with it.
Humans are social creatures, and we love social proof. So if you are considering a new microwave, it can be helpful and affirming to know that your neighbor has used the same one for years and loves it.