Our financial decisions are heavily influenced by personal biases, emotions, and how to think more logically and make better financial judgments.
Every decision you make is greatly influenced by your actions. No matter how small or how big, psychological or emotional. Your actions immediately affect your financial situation. How? Well…
Here are 3 most common emotional behavioral biases that affect finances.
Being greedy :
when asked if you are greedy? Our natural and instant reaction is, obviously not! We never accept decisions made out of greed and instead blame them on bad luck. Be afraid and modest. Try to appreciate the moment instead of constantly desiring more and more try to enjoy the present and when you’re scared of losing everything you have, you won’t be happy to risk it all for potential gains.
Example – Jesse Lauriston Livermore (July 26, 1877 – November 28, 1940) was an American stock trader. He is considered a pioneer of day trading. Livermore was one of the richest people in the world. Until he lost everything he’s earned by placing all the wrong trades that he made out of greed. The problem was that his success made him want more. This loss made him commit suicide as he had liabilities greater than his assets.
Being envious :
In order to be successful, there are a few things we need to keep in mind and learn to control when it comes to money and investing in general. The emotional component is one of the most important areas one needs to focus on if you wish to reach financial freedom. Instead of focusing on the other person you know or have heard about who has more wealth, think about yourself and your needs when choosing which trades to make and how to evaluate your assets. Each person’s journey will be unique. Therefore, there is no need to envy them or to contrast yourself with them.
Example:- Rajat Kumar Gupta, an Indian-American businessman born on December 2 1948, earned a net worth of 100 million between 1994 and 2003 while serving as the former CEO of the consultancy firm McKinsey & Company. Because of his continued envy of Warren Buffett’s billionaire status, he committed insider trading and was accused with receiving a significant prison sentence for it. And obligated to pay a penalty of $5 million.
Early Experiences :
Every person grows differently. Even though something seems common to you, it could be uncommon to someone else. Can the financial market of today be compared to that of a person born in 1960? Obviously not! There will still be a generational gap. Some may have seen a strong market, while others may have seen the 2008 market crash. It has been shown that individuals invest in accordance with how the economy was when they were young adults.
Example: – A person who is 50 years old cannot still operate in the same way that they did in their 20s or 30s. Every financial decision must always be backed up by careful research, accurate information, and a mind open to a fresh viewpoint. Even when it goes against your personal beliefs, constructive criticism can help you overcome your fear of new ideas.
Independence from emotional behavioral biases can result in great sense of control and precision over your finances and decisions can be made rationally and with an open mind to gain the most out of your investments. Consider your biases this year and work to overcome them in order to live a prosperous life and with superior judgment. So by the 76th anniversary of independence you will be free from emotional behavioral biases