Money: The Brain Factor

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You work hard and yet you are financially poor. Why?

You’ve made a decision to live within your means, save more, and increase your earnings. But you’re not seeing any changes. In fact, you’re pretty much where you started, and sometimes when you make progress, you seem to take a few steps back, and it just is the same cycle over and over again. What exactly is happening? The problem might be in your brain. You might be suffering from biases that are liable to hold you back or lead you to make bad decisions. Do you suffer from any of the following?

The Ambiguity Effect

This is a bias that leads you to make decisions based on what you know. It can affect how you make decisions, on how to invest your money, for example. You’ll stick with the safe option, even though the other option can earn you more money. It is human nature to be wary of the unknown. It is what makes change so hard for most of us. I mean, how long have you been staying at the job you don’t like, because you’re too scared to venture out into something else, something you secretly have a passion for, but since you don’t know what the experience will be like, you choose to stick to your current job and be miserable. This bias can prevent you from embracing new opportunities that can grow you (and your money).

Delay Discounting

Would you rather wait some time for a bigger reward, or would you rather have the reward now, even though it would be smaller? Does the reward lose its value, for you, if you’re told to wait five years? Does the reward gain more value, for you, if you’re to have it immediately? In delay discounting, one tends to go for smaller rewards that don’t require wait periods, rather than big rewards that require you to wait. This can lead you to avoid investments that pay off big returns in future. It doesn’t just affect the financial aspects in our lives. It can lead to impulse buying, because if you can have it now, why wait for the price to drop? It doesn’t help that we live in fast-paced times that you may say encourages instant gratification.This tendency has been linked to issues such as obesity, gambling and addiction. Delay discounting is also a tendency to discount far-off consequences. When I tell you if you don’t stop smoking now you may not live to see 70, and you’re in your 30s, the consequence doesn’t seem so threatening, because 70 seems too far off.One of the ways you can tackle this, moneywise at least, is imagining the future.

The Bandwagon Effect

Consider the case of Mercy: a luxury beauty product has been launched. Everyone, including most of her friends, are touting its goodness. “It’s really, really good,” they say. Mercy thinks it’s absurd to spend so much money on a product that will only last a few months. Not that she can afford it anyway. It’s worth the price of her rent. But everyone says it’s really good, so Mercy hopes on the bandwagon and buys it anyway because if everyone says it is good then it must be. The bandwagon effect, is a tendency to do something, simply because everyone else is doing it. It is one of the main reasons why trends happen.Ever found yourself trying a fad diet, against your better judgement, because everyone else is raving about it? Well, welcome aboard. It can see money quickly leave your wallet, sometimes for products that aren’t of good quality, especially since marketers may use it to their advantage, just because everyone else is talking about it. It may lead you to invest in a scheme that isn’t in your best interests, because everyone from your mother to your neighbour is on it. How do you go about it? Don’t just jump on the bandwagon. Think about it. Have you weighed your options, done your research and figured if the current craze is best for you? If so, have a nice ride.

Overconfidence Bias

You have a business meeting on Mombasa road. You don’t worry about being late because you use the road daily and know when there’s likely to be traffic. You know that at 11 am, the time the meeting is set to start, there is usually a lull in traffic, and therefore you’ll be right on time, since you’re leaving the central business district 30 minutes before that time. What could possibly go wrong? Overconfidence, a bloated confidence in the accuracy of our judgements or beliefs, can lead you to make poor decisions. It can even be dangerous in certain situations. Imagine having an overconfident doctor! It is one of the reasons why some of us set unrealistic goals. It is also the reason why some of us may lose money. Sometimes when investing, you may overestimate your knowledge on the subject or underestimate your lack of knowledge, and both situations are not necessarily good for you. Experts point out that there is nothing wrong with being confident. In fact, confidence is necessary if you’re to pass that job interview, for example. But they warn against overconfidence, especially if you can’t afford to face the consequences that are surely waiting for you on the other side.

Status Quo Bias

Change is hard, and it may be compounded by the status quo bias where you prefer to rely on the current state of affairs. It makes sense, right? I mean, if you encounter a problem, why not use the solution that worked before, even if it’s slower and was much more effective in the last decade? In a workplace scenario, it can be a disadvantage, sometimes, when you stick to age-old methods to accomplish tasks and solve problems. If you have an innovative colleague who is always finding better and faster ways of doing things, guess who will be retained should a lay-off situation arise? One way to overcome it, is by thinking about the consequences of staying with the familiar against those of doing something different.

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