Pitfalls of perception that makes you pay more and buy unnecessary
Get Rich Forming / / December 19, 2019
If financial management consisted only to count the money and plan, we would deal with it very well. To control the finances difficult for us not because of mathematics, but because psychology. Our brain often works against us when it comes to financial decisions, but if you are aware of your biases, you can overcome it.
Error sunk costs
If you have ever been unfortunate relationship that lasted too long, you have encountered an error sunk costs. You invest in something, even if in the end things are going badly, you do not stop, because otherwise it turns out that all your efforts were in vain.
Here are a few examples of life.
- You go to the art shop, which is very far from home, hoping to buy a good smartphone out there. But this what you wanted, is not there. To justify the long journey, you buy another smartphone that you do not like. And after a few weeks of use, you buy another, because this does not suit you.
- You half an hour looking for the right thing on the website of a large online store, but did not find anything suitable. You do not like it, but you spent so much time searching for that feeling that just have to buy something.
- You do not buy the paint for the bathroom, but instead of having to buy another and repaint, you buy more wrong paint and paint over it the other room too.
Maybe you go to a university that hate to get the specialty on which will never work? Maybe you have a loss-making business, which sucks the money and do not bring anything, but you continue to feed him?
All this is a long-term financial mistakes. But you can cope with them. Firstly, you need to define triggers - the conditions under which you think and act biased. Then calculate how much more you pay, if you keep properly invest their money.
For example, you can track at such a thought-trigger: "I'm so far gone that could have (insert here any bad decision)."
When you come this idea, realize that you run the risk of making a mistake sunk costs. Then ask yourself, "How much do I pay, if I continue to do it?" Of course, the calculations are approximate, but it will give you the chance to sensibly assess the possible losses.
For example, if you buy more unsuitable paint, you figure out how much money will have to spend, to repaint the room again - because this paint you do not like and sooner or later you do it You acknowledge.
Recognize your triggers - the best way to avoid irrational behavior.
Support your choice
buyer's remorse always starts with denial, also known as post-purchase rationalization, or support of your choice. This disregard for other points of view in an attempt to protect the decision you have already made.
For example, you decide to buy the latest model of iPhone, you just fell in love with it and decided that it should be you. To justify the purchase of the smartphone, which is worth two of your paycheck, you begin to convince yourself that this is the right choice.
You tell yourself that you are buying it for long, because the smart phone and high-quality, in contrast to the "kitayfonov" last longer year, convince yourself that all successful people have iPhone, and it can be said, an investment in a bright future and so Further.
It is the buyer's Stockholm syndrome, and this is how it is explained in one of the sites for marketing:
Andrew Nicholson (Andrew Nicholson)
This often happens when you take the tough decisions, and decisions about purchases often are complex.
Remedy for this one - is not confined to the decision, think broadly. Of course, easier said than done, especially given the fact that we think is much longer than we think. You just need to take other people's points of view and to consider them, and not cast immediately because it is contrary to your decision.
It is also helpful to have someone nearby that can help you maintain sanity. For example, you tell the wife about the decision to buy something expensive, and his surprise and rejection of your solutions can help you time to think again.
And, if you start with fervor to defend his point of view, it can be a trigger bias towards buying. If you recognize the trigger, it will be easier to recognize bias and eliminate unnecessary spending.
binding effect
You may have heard about the effect of binding in the trade. This is when you rely too much on the first information we received about the product, and allow this information to manage your subsequent decisions.
For example, you see a cheeseburger for 300 rubles in the restaurant menu and thinking: "300 rubles for a cheeseburger? No way! "And then buy a cheeseburger for 250 rubles from the same menu and you find it perfectly acceptable alternative.
binding effect applies during negotiations. For example, you pass the interview and say that you are willing to work for a salary of 30 000 rubles, which is actually much less than what you expect. It becomes your reference, and instead set a high bar, you drop it, and as a result agree to lower wages.
Use the binding effect to gain an advantage during negotiations.
In this way the binding effect can influence not only on how much you spend, but also on how much you earn. Rather than just recognize this effect, you can deal with them, having its own research prices.
For example, you buy a car and the dealer calls you crazy price - he is trying to influence the binding effect you. But it does not matter, because you have already found out how much is this machine, and you know what the price should be expected really.
The same goes for your paycheck. Find out how many people are in your field of activity on your post, in the company in which you want to get. So you will have realistic expectations, which do not depend on the number, which you will be called for an interview.
The effect of herd
You take credit for the car and a few years overpay large sum. In this case, you do not have an urgent need for a car, and you can safely accumulate the required amount, then to buy a car without credit.
But you still ASSUME car on credit, because "everyone is doing it" and do not you think credit bondage with a large overpayment. This herd effect in action.
Rather than make an informed and considered decision, which will bring you more benefits, you agree to unfavorable terms, which are the norm in society.
Herd instinct causes us to ignore the pension savings, thinking something like: "None of my friends does not put off retirement, why should I do it? "Your friend does not apply to your pension, but the herd instinct makes you relate these facts and rely on result.
Follow the crowd is not always bad. If you really need a car, for example, to work, to take the credit - the only option available, and it will pay off.
To overcome the effect of herd - does not mean to always do not like most. This means to independently analyze the options and choose the best decision for yourself.
When you need to make a financial decision, calculated everything, consider different scenarios, and then select the one that works for you.
Status quo
Bias due to the status quo - this is when you give preference to solutions that will change your life. And it can work against you when it comes to finances.
Here are a few examples.
- Your monthly expenses more than income, but you can not live without cable TV, restaurants or expensive coffee breaks.
- Instead of investing your money, you continue to keep them on savings account with the meager income for many years.
- You can connect a cheaper data plan, but you prefer to stay on the old tariff plan, which is using for several years, although it is twice the price of a new one.
We prefer the status quo because it is comfortable. It is difficult to show strength of will and change your life. But if you start to change gradually, you can trick your mind and overcome the influence of this effect.
For example, if you want to change your lifestyle and stop spending more than you earn, start small, eliminating on one area at a time costs: a one-month stop to go to the restaurants in the other - to buy expensive gadgets, and so Further.
Yet the bias is not always a bad thing. Let's say you have some savings, and here comes the crazy investor and wants you to have removed all the money from the account and invested in its new fund.
Bias due to the status quo or because of the support of your choice will save you from impulsive and costly changes which will not bring you anything. In such a situation it is better to listen to the investor, and then consider his idea from different angles based on their own knowledge.
However, in most cases we are not even aware of their bias in financial decision-making. And while this is a blind spot affects your choice of him more harm than good.
Have you noticed in his biased attitude towards spending? How do you deal with it?