We all know we should save for the future. But it’s easy to choose immediate gratification, such as a dinner out, over long-term goals such as saving for retirement. Money biases often cause us to behave irrationally, undermining our financial health, says Gary Belsky, coauthor of Why Smart People Make Big Money Mistakes and How to Correct Them.
Here are a few of our subconscious biases about money—and how to get them under control.
The problem: The negative emotional impact of losing money is twice as powerful as the positive emotional impact of gaining an equal amount of money.
The result: An overly cautious investment attitude.
“Even when you don’t need the money for 20 years, you can get very conservative with investments,” Belsky says.
The strategy: Put a few rules in place to prevent yourself from acting out of fear. Perhaps you should give yourself a cooling-off period before selling any stock, or limit your portfolio reviews to once a quarter.
The problem: We tend to overestimate our skills and underestimate our weaknesses, in money and other areas.
“If you asked me or Kobe Bryant to predict how many free throws out of 100 we could make, both of us might guess too high,” says Belsky. “People have a hard time recognizing their own weaknesses.”
The strategy: Include your partner or a trusted financial advisor in discussions of money.
The problem: Anchor prices create our expectations for what certain things should cost. A real estate agent might create a subconscious anchor by showing you an expensive house first, with the expectation that houses you see later in the day will seem like bargains in comparison. Restaurants also use anchors in their wine lists: A moderately priced wine seems more affordable when it’s placed next to an expensive vintage.
The strategy: Research is in order. That first house might be overpriced, and a moderately priced wine might be carrying an unusually high markup.
The problem: Spending money to repair a car or appliance can create an irrational attachment to that item.
The result: Often you’ll end up throwing good money after bad.
The strategy: “Ask yourself, ‘Am I holding onto the past too much and not looking to the future enough?’” says Belsky. “It doesn’t matter how much you paid for something. What matters is its value today, and what the value will be tomorrow.” If the anticipated repairs cost more than the value of the item, it may be time for a replacement.
Remember, we can’t completely eradicate our financial biases. But by being aware of them, we can make smarter decisions—both today and for the long term.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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