Behavioral science helps us understand what obstacles interfere with our ability to make sound decisions that align with our best interests and long-term goals. There are a number of learned behavioral biases that can affect this decision making process, especially when we face uncertainty or adversity.
Some common biases that can derail our decisions include:
Hindsight bias: Past events seem obvious after the fact and we wonder why we didn’t see them coming. We are led into thinking that the future is easy to predict.
Regret avoidance: Once bitten, twice shy. We have a tendency to avoid circumstances where we have previously experienced negative outcomes.
Self-attribution bias: We tend to take credit for our successes and blame external factors or things beyond our control when things don’t go as planned.
Extrapolation: The feeling that the most recent events will continue indefinitely, whether good or bad; resulting in an inappropriate level of overconfidence or unwarranted fear.
There are many situations where our instincts prove to be valuable in avoiding danger, triggering our “fight or flight” response. However, when dealing with the economy and the markets, this response, coupled with our behavioral biases, can cause us to make decisions that can be counterproductive to our long-term financial success.
Our recent economic environment has created fertile ground for emotions to run amok. To make matters worse, the media and some in the financial services industry prey on these biases to get your attention in order to serve their own needs.
Strategies for success
Here are a few ways to change your course and make the journey more manageable:
Sharpen your focus. The first important step is to concentrate your actions on the issues that you can control.
Prioritize and plan. Have a clear and accurate understanding of your current financial situation and a detailed plan that guides future financial decisions. This will allow you to make necessary adjustments and have confidence that you are taking the essential steps to assure a secure future.
Don’t be a news addict. Keeping up with current events is important, but too much doom and gloom from the media can affect your health. Information is not a substitute for wisdom.
Talk to your family about finances. Frequent communication about financial issues can help everyone to feel more secure, participate in positive actions and reduce family tensions about money
Do what you can, then move on. Some of the most stressful situations are those in which you have no control. You cannot individually control the state of the economy, and even your own personal finances will take time to change.
Think positive. Your thoughts are powerful and impact the way you behave and feel. Focus on positive ideas and outcomes to decrease your stress level with an improved outlook. Center on your strengths rather than the difficulties, on possibilities rather than fears.
Becoming aware of these biases and taking steps to overcome them will put you on the path to making better daily decisions that support your financial goals and protect your financial future.