Hello! This is John, and today I’d like to talk about something that’s not often addressed: the mind games that your brain plays with your money. We’re going to delve into some common psychological tricks our minds play on us and how these influence our financial decisions.
Instant Gratification vs Long Term Goals
Ever found yourself buying that extra pair of shoes or the latest tech gadget, even when you know you should be saving for a long-term goal like a house or retirement? This is your brain preferring instant gratification over long-term rewards – a mental trap known as present bias.
To overcome this, make saving more immediate and rewarding. For example, visualize your long-term goals vividly – imagine the house you’re saving for, down to the last detail. This can make the future reward feel more tangible and immediate, helping to combat present bias.
The Fear-Greed Cycle
The stock market is a roller coaster ride that often sends our emotions into a frenzy. Fear and greed can cause us to make irrational decisions, like selling stocks during a market dip out of panic (fear), or investing in a hyped, risky venture for quick returns (greed).
Understanding this fear-greed cycle is the first step to avoiding these pitfalls. Adopt a disciplined approach to investing, stick to your financial plan and don’t let market fluctuations sway you off course.
The Lifestyle Creep
Ever noticed how as your income increases, your expenses seem to increase just as fast, or even faster? This is known as lifestyle inflation, or ‘lifestyle creep’. Our brains naturally desire more comfort and luxury as our income grows, often leading us to spend more than we should.
The trick to combating this is to consciously save and invest the extra income you start earning. Instead of upgrading your car or moving to a more expensive apartment, consider putting that money into a retirement account or investment portfolio.
The Sunk Cost Fallacy
Imagine you’ve bought a concert ticket, but on the day of the concert, you fall ill. Despite feeling terrible, you decide to go, thinking about the money you spent on the ticket. This is an example of the sunk cost fallacy – the misconception that you need to continue with something because of the money or time you’ve already invested.
To avoid this, it’s important to remember that money spent cannot be recovered by simply continuing a poor investment or decision. Make future financial decisions based on their potential return, not what you’ve already spent.
The Anchoring Effect
This is a cognitive bias where we rely too heavily on the first piece of information we hear (the “anchor”) when making decisions. For example, you might still be willing to buy a product if it’s on sale, even if the sale price is still more than you’d usually be willing to pay.
Being aware of the anchoring effect can help us make more rational decisions. Always consider multiple perspectives and get as much information as possible before making financial decisions.
To sum up, our brains often play tricks on us that can influence our financial decisions in surprising ways. However, by recognizing these mental traps, we can outsmart our own brains, make better financial choices, and secure a healthier financial future.
Thanks for reading! Feel free to leave your thoughts and experiences in the comments section.
Best, John
