Why Do We Take Financial Decisions, That Are Bad For Us?
We continuously hear about how people make unwise financial decisions, and how we rely too much on our emotions. We tend to think“this will not happen to me, I am a smart and educated person”. A documentary I saw yesterday demonstrated the exact opposite. Below, I would like to take the opportunity to recap two scenarios of yesterday ’s documentary, and the results.
5 Euros now, or 40 Euros in six weeks
Different random people on the streets were offered a 5 Euro bill on the spot, or they had the option to receive 40 Euros in six weeks. Nearly all people chose the 5 Euro bill option. However, taking the 5 Euro bill option is the most unwise decision; 5 Euros is much less than 40 Euros. Even if people would have been offered 5 Euros per week for the next six weeks, the total would be only 30 Euros.
We humans are greedy people, which is largely programmed in our genes. First, shopping or becoming money makes us feel good; yes, our bodies produce endorphine, having a very positive impact on our mood. However, from a survival perspective we also have to take the opportunity when it comes by immediately, as this opportunity might not be available tomorrow. Although we cognitively know, that taking the 5 Euro note now is not the best decision, emotionally it is still the best thing to do.
Absolute vs. comparative amounts
It is very difficult to look at money from an abstract point of view; how much is 10 Dollars worth? For someone earning 4 Dollars per hour it is worth much more than for someone earning ten times as much. And what is 10 Dollars worth in China, or India, or South Africa?
Random people on the street were asked to take a pick from two possible scenarios:
- You are offered an annual salary of 100,000 Dollars per year whereas everyone else earns 50,000 per year.
- You are offered an annual salary of 200,000 Dollars per year whereas everyone else earns 300,000 per year.
Although a 200,000 Dollar salary is clearly higher than a 100,000 Dollar salary, most people still chose the 100,000 Dollar salary. The main motivation of the people asked was that it makes them feel good to earn more than everyone else… people were simply comparing themselves to others, in stead of making an objective decision and go for the higher amount.
The human mind is truly astonishing, and it takes some will and effort to truly make objective decisions, which are best for you. Still, humans are emotional, and probably it will never be entirely possible to turn them off.
On his personal finance blog Moneywise24 Personal Finance, Aleks writes about personal finance topics and personal financial optimization. Article Source:http://www.articlesbase.com/personal-finance-articles/why-do-we-take-financial-decisions-that-are-bad-for-us-1590063.html
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