Ruedi: How human behavior can impact your financial future | Company
As many of us know, bad spending and saving habits can often be notoriously hard to break.
Even when we want to save more for retirement or stop splurging on credit cards, our best intentions can be overtaken by impulses and old routines.
All of this comes as no surprise to behavioral finance experts, who have made it their mission to study how psychology informs many of our less-than-rational financial decisions.
What are some common ways human behavior can sabotage personal finances?
One is a bias to overweight the present and the near future over the distant future, which leads us not to save enough for retirement or to take on too much debt.
A second bias is being overly optimistic, which minimizes the extent to which bad things will happen. Sure, some people are overly pessimistic, but among the general population, if there is a lean, it’s in the direction of overly optimistic.
This bias can lead people to think that they don’t need things like life insurance or that they’re not at risk from a stock market downturn.
There is also confirmation bias – a tendency to turn off the hearing aid when someone tells you something you don’t want to hear and you find it embarrassing to change. If someone says you shouldn’t have such a high balance on a credit card, but you’ve done it for years and don’t think it was harmful, you’re fine, you will not embrace change.
Finally, there is loss aversion—the tendency to experience a loss more acutely than a gain of the same magnitude. It means that when good things happen, we celebrate, but what really matters to us are the events that went wrong.
In fact, the average person experiences a loss two to three times more acute than a gain of comparable magnitude. And that leads us to be reluctant to take risks when it comes to money.
Changing behavior is not an easy task. However, when it comes to dealing with financial issues, it can make a difference in how we spend our retirement years.
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John Ruedi is a regional marketer at Savant Wealth Management in Bloomington.