Get your mind on your money in 2019 – don’t let these four biases hold you back
We all like to believe we’re in control and make rational decisions but science has proven that this is not always the case.
We often use mental shortcuts to form our decisions – most of the time we’re not even aware it’s happening – and when it comes to money, these shortcuts (or biases) can cause us to overspend on our budget, not save for retirement, make poor investment decisions and pay too much for things.
In 2019, make better money choices by watching out for these four biases:
The anchoring effect
Be aware of this bias as it may be giving you a nudge to make you buy something you don’t really need. After Christmas, the sales begin so this can be the first undoing of your new year’s resolutions around money. How genuine are the discounts? If you see something with a price tag stating the item usually sells for $500 but it’s marked down to $250, the excited feeling you get at the prospect of getting a bargain is the anchoring effect at play. To avoid falling for fake discounts, do some research online before you hit the shops.
Status quo bias
Sometimes we can incorrectly perceive a change from the status quo as a loss and this can restrict us from making necessary changes to our investments and suppliers. We tend to weigh the potential losses of switching from the status quo more heavily than the potential gains and therefore often decide not to switch at all. This can mean we get stuck with our utility suppliers, insurance companies and even our superannuation fund simply because we unrealistically fear a potential loss if we change things up. What this actually does is prevent us from saving money. Doing lots of research and looking at the fine print will provide reassurance that sometimes, change is for the best!
At the point of potential purchase, we often project that we’ll always love something, therefore justifying the decision. The truth is, tastes and preferences can change quickly and it’s rarely the case that we love something forever – and whether we actually need it can also be questioned. This can also affect our financial planning because we assume the way our situation is now will simply continue into the future. While we don’t have a crystal ball to know for sure, forward-planning and spending some time anticipating the needs of our future selves can be useful and prevent us from choosing financial products that may be unsuitable or strategies that could tie up money we may need to access in the foreseeable future.
We give more importance to rewards that are closer to the present than we do to rewards that will be received in the future – and this often works against us with money. Saving money or making long-term investments results in benefits that we usually see further into the future, sometimes making them less appealing to our minds. Meanwhile, choosing to spend money on takeaway or buying new clothes gives immediate perceived benefits. It takes time to overcome present bias but remind yourself constantly of the REAL rewards – the ones that aren’t instantly felt and take a little dedication and patience but are well worth the wait.
Ted Richards is Director of Business Development at online investment service Six Park and host of investment podcast The Richards Report. Six Park is one of Australia’s leading providers of automated investment management using ASX-listed ETFs. www.sixpark.com.au