15 Cognitive Biases That Mess With Your Money
On the surface, money seems straightforward. What could be more black and white than numbers?
But in fact, money is complicated. Nothing makes this clearer than looking at the ways in which we're subject to cognitive biases — the way our brains sneakily convince us to make decisions that often work against our best interests.
Cognitive biases may convince us to spend more, save less, and feel more confident in our decisions than perhaps we should. And the scary thing is, for the most part, we're powerless against them.
Here's a look at some of the most common ones.
This is a familiar concept to anyone who has ever chosen to spring for a weekend at the lake today, rather than saving that money for a more comfortable retirement later.
Time discounting fights against delayed gratification, making us more likely to value immediate rewards over ones to be had in the future.
Also called the relativity trap, anchoring explains why you'll pay $25 for an hour of parking after seeing $30 at a lot down the street.
The first number you see, whether that's a price or a salary that comes up in negotiation, colors any that come after it. A high anchor influences you to spend more than you normally would.
You hate to break a $50, but have no problem dissolving four tens, a five, and a handful of change.
It's not just you. Studies have shown that people are less likely to spend higher-denomination bills. Once you break that $50, however, you may be in trouble.
When an ostrich is scared, the bird buries its head in the sand to stay ignorant of the approaching threat. When it comes to investing, humans do the same thing (figuratively, of course).
When news isn't good, we're more likely to steer clear of everything from financial news to our bank balances. When we're all doing it as a group, our actions can even affect the behavior of financial markets.
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