Why We Make Bad Financial Decisions

Stress in ufficio segretaria
Stress in ufficio segretaria

It took me years to be able to talk about money or even negotiate my salary.

It wasn’t that I didn’t want to, it was just that I couldn’t, somehow it felt very wrong to talk about money.

Whenever the topic of money came up, I always asked for less than I deserved just so I could get the topic out the way.

I’d ignore my bills and my bank statements and even convinced myself that I was too enlightened to earn money.

When I did eventually go business school and forced myself to talk about money – I developed health issues.

I started suffering from a tail bone pain that made sitting unbearable, I got eczema and suffered from constant acid reflux.

How Did I Feel About Earning Money?

I’d shiver violently and have to fight off panic attacks whenever I had to go to the bank or talk about money.

I just gave away most of my money (that I needed to live) to good causes or friends (including ex-boyfriends) and chose to starve instead (after all I didn’t need money and was too good to make money).

I had no clue I was giving away my money or that I had these limiting beliefs.

I managed to convince myself I was bad with money until my life coach made me keep track of every penny I spent for a month.

Keeping track of my expenses taught me that at I was starving and broke because I was giving away my money, not spending it recklessly!

This was like a light bulb and it instantly helped me change my behaviour.

Change Behavior
Change Behavior

If you want to change your financial decisions, you have to change the way you think about money

The root cause of our behaviour is our thoughts and underlying beliefs.

If you believe that money is bad then you’ll spend your life avoiding it or running from it because that’s what we do when we think that something’s bad.

Psychological theories on emotions tend to differ on the order in which emotions and behaviour occur during or following an event.

Do we first think a thought, then feel an emotion and then take action?

Do we think yay I have money to burn, feel excited and then use our credit cards?

Or do we first take an action, feel an emotion and then think a thought?

Do we use our credit cards, feel excited about spending and then tell ourselves we have money to burn?

Whatever the case, most psychological theories agree: there’s a link between mind, body/behavior and emotion.

The psychology of money

Economists define money as a measure of value. The first thing that all Economics students learn is that money has no value except the value that we give it.

Neoclassical Economists have always believed that people make rational economic decisions, this assumption works well in theory, but it doesn’t hold up in the real world as can be seen by the economic booms and busts that characterize the global economy.

 

The underlying cause of bad financial decisions

 

We live in a world of quick fixes and credit cards; we’re not encouraged to explore the underlying causes or to look at the mind-body connection or the external-internal connection behind our financial behaviours.

Dawney & Shah claim that when it comes to decision making there are 7 factors that affect financial behaviour:

 

1. Other people

People will behave in a way that wins the approval of others by making themselves look good, like spending money they don’t have to win their friends’ approval.

 

2. Daily habits

People’s behaviour is based on past experiences and is preconditioned.

So even if you know that using your credit card to buy clothes will only land you in debt, you’ll go ahead and swipe your credit card because it’s habitual.

 

3. People want to do the right thing

People will often make irrational decisions with their finances if they perceive their actions to be morally correct. Like donating your last penny to save the Amazon or Rhinos

 

4. Self-expectations

People will behave in a way that aligns with their view of themselves. If you believe you’re bad with money, you’ll behave in a way that aligns with this view of yourself by mismanaging money

 

5. Risk averse

People don’t feel comfortable taking risks with their property, which affects investment behavior

 

6. People are bad at computation

People worry too much about how problems are presented and have a hard time thinking long term. This affects savings in the long term because we tend to focus on financial problems as they arise in this moment and forget about tomorrow

 

7. People need to feel involved in decision making

Even if there’s enough of a financial incentive to do something, people won’t be satisfied with the end result unless they’re involved in the decision making process.

 

How to make good financial decisions

 

You’re most likely to engage in negative financial behaviour, when you don’t feel well emotionally.

For example: when you feel depressed, you want to feel better so you go out shopping, which leads to increased credit card debt.

You can change your financial behaviour by making the conscious decision to change the way you think and feel about your life at any moment.

To change your thinking, you have to change your focus, which changes your emotional set point, which in turn changes what you attract into your life:

To quote Abraham Hicks, “By paying attention to the signals of your emotions, you can understand, with absolute precision, everything you are now living or have ever lived. And, with a precision and ease that you may have never before experienced, you can use this new understanding of your emotions to orchestrate a future experience that will please you in every way.”

What do you think leads to bad financial decisions?

Let me know in the comments section below.