Have you ever made a purchase that you regretted when you made your way home after shopping? Maybe you have made some changes in your investment portfolio based on a feeling or because you felt walking away with something was better than nothing. Irrationality follows us around where ever we go. For this post we will try to tackle the financial part of this cognitive process. To beat it we need to understand it a little better first. Before even understanding irrationality we have to make one thing clear. Money isn’t intrinsically good or bad, it doesn’t have feelings – it’s a tool. Ok now that’s out of the way..
With us we carry all our values, interests and stresses. In a non financial/economic way you could argue that those things define us. As we navigate through all the decisions that come at us every day, we approach them trying to make the optimal choices for maximizing a personal utility or efficiency. As decision makers we run into problems when we have to make decisions that don’t easily match up to those values or interest.(Called cognitive dissidence) Our choices are based on the summation of our experiences and when we commit to a course of action its hopefully the best allocation of our resources.
We are making decisions based on what we think is best and also what we think will be the best utilization of our scarce resources. This is where we start to tackle making irrational decisions with our money. We work for it, we save it, we invest it. We talk about it, we live off it, and we are emotionally connected to it. I don’t think I have to further illustrate how personal our finances can be. Now how do we keep money from getting the best of us.
In the media and in practice we are coached into always getting the deal or never missing out on a savings. Here are some tips on not letting the psychology of sale get the best of you resulting in an irrational and impulsive decision.
Branch out: Take a look at your spending. What might some comparable substitutes be? Brand loyalty can be a powerful thing so make sure that if prices start to change that you aren’t just blindly following them.
Avoid the “free” effect: Think about how many sales offer something free or are sold as a bundle. Make sure that if you are springing for a bundle that everything in the bundle is worth it. Just because it’s free doesn’t mean that it’s good.
Rationalization: When you are setting your spending plans, budgets, or are just going out for groceries – know the difference between wants and needs. Especially with big ticket items. It’s easy to let the stress of a high pressure situation cause enough cognitive dissidence to convince yourself that you need something. Investment portfolios are victim to this all the time. You can beat rationalizing by having just a little bit of a plan and reassuring yourself of the larger goals you have set for yourself. Keeping your planning incentives in easy reach will help stifle those self-conversations.
The moral of the story here is to always have your thumb on your financial pulse. The less connected you are to your spending and your financial situation the easier it is to spend yourself into trouble. I understand that not everyone plans, budgets, and keeps track of their situations the same way. I’m not going to give you some vague plan for it. What I am going to do is tell you to WAKE UP! It’s important to define the things that you want. It’s important to understand the benefits and dangers of credit and spending. It’s absolutely crucial to objectively look at how you spend from a behavioral stand point. Once you can nail down the how’s and why’s of your spending you can start to better save and plan. This way you can maintain your lifestyle but save yourself the headache and ache in your purse strings from acting irrationally.
Nunzio Bruno is the owner of Financially Digital, a Springfield based business consulting firm as well as producing http://www.financiallydigital.com. FinanciallyDigital.com is a resource offering information on relevant financial issues, personal finance, the latest in tech and social media.