Can money buy you happiness? For many people, the everyday decisions about what we do with our money, are often made under an illusion of competent decision making. The reality is, our brain has formulated a number of biases that will impact the decisions we make about what we do with our money… and those decisions will in one way or another impact our overall life satisfaction and well-being. Here are just five brain biases that impact your financial decisions:
1.Time Perspective: While we all have the same amount of time, our time perspective can bias our decisions about what we do with our money. Do you tend to be the type of person who wants and therefore buys NOW using credit you will have to work hard to pay back, or are you the type of person who can and practices delaying your gratification and purchasing what you want only when you can afford it? There is a large volume of scientific research that validates the benefits of delayed gratification to our overall well-being and life satisfaction.
2. Justification Bias: Whatever purchasing decisions we make, a range of research shows that as humans we tend to be experts at finding ways to justify our decisions by ‘talking up’ the positives and playing down the negatives of any of our purchases. The main reason we find it so easy to justify our purchasing decisions is that the alternative is to admit that maybe we went into this purchasing decision without really weighing up the realities of the longer term impact the purchase would really have on our life satisfaction.
3. Expert Delusion: For most of us, the reality is when it comes to financial decisions, we are not the experts… whether that is looking at expertise from the economic realities of how we spend/save/invest, or looking at expertise from the life satisfaction aspect of how we spend/save/invest. Most of us know someone close to us who also thinks they’re an expert and more than ready to share their ‘advice’ on what we should do with our money. While many of us are comfortable and don’t hesitate to pay for advice for our health, or for servicing our car, sadly, many people are not prepared to pay for expert advice on how to better manage and be held accountable for their financial decisions.
4. Procrastination: It’s so easy to make a decision not to make a decision… especially when it comes to managing our finances. There’s an old ditty that I heard many years ago that goes something like “Procrastination is my sin, it fills me with such sorrow. I know I shouldn’t practice it… perhaps I will start tomorrow.”
5. Self-Trust: This is a biggie that most of us won’t readily accept, however, the reality is, when it comes to managing our finances, there is always an element of self-trust involved. Your future-self needs your present-self to be trustworthy. While it’s easy to quickly delude ourselves that we can certainly trust ourselves, for many of us, we don’t have to look too far to discover times and situations where we have let ourselves down by not managing our financial decisions as best as we could have. The problem is, we can often delude ourselves into thinking we can of course trust ourselves to make wise buying, saving and investing decisions, because of our other brain biases kicking in to muddy the waters.
Let me leave you with this question… to what extent can you really claim to know where every dollar you’re spending is going? It’s an interesting exercise to track your spending over a week, and then to ask yourself, where could you have made better, more informed and less brain-biased financial decisions.