6 Ways Our Thinking Is Impaired (and How to Combat That Thinking)

Behavioral Economic research shows that our financial decisions are greatly impacted by our psychological thinking and emotions. This area of study can help us understand why we make some of the decisions we do, and why they might not always be the most optimal conclusions. Have you ever made a decision to wear an outfit only to realize after the fact that you did not like it as much as you thought you were going to? What was your reaction? Did you choose to wear the same outfit again at a later date? Or did you make a conscious decision to make a change about that outfit?  [have you ever worn an outfit to an event and either been extremely overdressed or embarrassedly underdressed? What was your reaction and attitude toward the next event you attend to after the fact? Did you pay a little more attention to the dress code? Perhaps you asked someone what the dress code might be, so that you didn’t make the same mistake as you previously had?] It is hard to make changes when we are not aware of the consequences of those choices until long after the fact, if at all. However, if we are armed with the information before hand about what might potentially hinder our desired outcome, we can be better prepared to make the right decisions.
Behavioral Economics studies show that there are six main behavioral obstacles that present themselves to us making our financial decisions harder or traumatic. If we are able to recognize these hurdles as they present themselves, and identify a method to combat them, all of our financial, and emotional decisions will be much clearer and appropriate.

The first obstacle is known as Cognitive Overload, in which we have so many items on our mind that it affects our decision-making processes. Our judgment system can only handle so much activity at once. If you are known to be an individual who is constantly on the move, juggling multiple activities or thoughts at once, this is not the optimal time to be making financial decisions. When your decision-making system is overwhelmed, you are more prone to making less than optimal choices. To combat this, work to recognize when you are in this busy state. It may be helpful to set automatic reminders to pay bills or check on investments. You can also choose to set aside time to sit down and focus one task at a time, such as choosing investment options or setting your budget, when you are not focusing on a hundred other items.

 

The second hurdle to overcome is the Empathy Gap. This is most widely seen with impulse purchases. The concept of the Empathy Gap is that you disregard feelings that you will feel after a purchase or financial decision. For example, you may feel excited and thrilled to buy a new car today, but how are you going to feel in a month when the $500/month payment is due. Will you still feel like this purchase was the right decision? The feelings you experience at the point of decision are conflicting with those you will feel in the future.

In order to combat falling victim to the Empathy Gap, take a step back from the present when you are making big purchases or decisions. While we can’t foresee the future, we can take a moment to think about how we might feel about the same purchase or decision at a later date. You can also ask the advice of someone you trust. Do they think you are making a rational decision?

 

Satisfaction On Demand is similar to the concept of Empathy Gap. This is the notion that aiming for instant satisfaction can lead to unnecessary expenses or purchases. If you are seeking instant gratification, you are failing to consider future consequences, which can be detrimental to savings plans that you have. To limit the need for instant satisfaction, try using the one- month rule. If you are looking to make a purchase, take a picture of it and wait one month. If after one month, you still want to purchase the item, then do so. By using this method, you may find that you like to make purchases for things in the moment but later realize that you don’t need that particular item.

 

Confidence is what we want all women to possess when making financial decisions. However, Overconfidence can be a dangerous characteristic to invest when it comes to your finances. If you have unrealistic views about the outcomes of certain decisions, or are overly optimistic, you may not be prepared for any changes in the situations or results. This is a fine line to teeter on as you don’t want to be overly negative nor do you want to be overly positive. The key is to be realistic in all decisions and thoughts about possible outcomes. One key is to remain practical with your expectations. You may even run your ideas and rationale by someone you trust to be sure that you are being realistic.

Bad Habits are the fifth obstacle to get over. We all know that certain habits can be harmful to our health, such as smoking, or_________. The same holds true with our financial health. We must realize if we are on auto-pilot for some of our actions involving money. Do we always buy a coffee every morning? When we don’t think about each and every purchase we make, we don’t see it as a loss to our overall financial health. To find if you are on auto-pilot for any expenses, try tracking each dollar you spend for a week. Do you see a pattern? Or maybe you found purchases you didn’t even realize you were making so often.

The desire to Keep Up with the Joneses is extremely detrimental to our financial health. We are pressured by social norms every day to spend money on items we might not necessarily need. Think about fashion and electronics. There is a trend to buy the most recent versions of tech and newest fashion trends as soon as they are available, no matter the cost. The problem with most social norms is that they are publicly visible. Other norms, such as contributing to a retirement account are not publicly advertised, and thus these actions appear less attractive to individuals. How do we combat this pressure? We can start by trying to be less materialistic, but that may not come easily or quickly. You can also create a budget in which you lay out exactly what you are allowed to spend your money on and how much you are allowed to allocate to certain items. You may know that you don’t need a new cell phone, but if the urge strikes you when you are out and about to purchase one, having a budget and plan already in place might help weaken that urge.

These six behavioral obstacles are indeed present in most financial decisions we make, big or small. The key to overcoming these hurdles, resulting in the best possible outcome for you is to be able to recognize when you enter these stages. If we know what we are up against, it is much easier to redirect our strategies toward success!

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