How Do We Subconsciously Manage Money
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| Source: Christopher Zacharow |
Let me get this point straight, we are NOT rational with money, that includes you and me (sure there are some folks out there like Buffett who are supercomputers and chasing pennies for everything, but pretty much the rest of us, no).
Don't believe me? Here are some examples:
1) You just bought a resale 800-square-feet flat for your family. Your friend asked you for how much you bought it, then proceeds to ask how much would a 1076-square-feet resale flat cost to buy in the same building. Would you make an estimate by adding a little more to what you paid even when you have not researched about flats of the larger sizes?
That is called Anchoring. It refers to being bias to a specific reference to a new problem you don't know.
2) You recently blew a lot of money on a vacation and subjected yourself to a lunch budget of $4 a day. You queue at your favourite fish soup store at the market. Only to realise
You dropped the $4 from your wallet just now
You bought the $4 fish soup, as you are walking, you slipped and dropped the bowl of fish soup on the oily floor
In either scenario, assuming you have sufficient cash, you would buy another plate. Yet, you feel that you wasted more money somehow in the second scenario and might consider to buy something cheaper, like a $2 chicken rice, compared to the first scenario.
3) You just finished your graduation for your university, your student interest free loan would start charging from the end of this year. You had saved a thousand plus from part time work and parent's allowances, for the future. Yet you decided to go on a graduation trip, instead of paying off the loan first to reduce the debt you had from finishing the degree.
4) Say your company has a $400 flexible benefits scheme a year, you rather use it to pay for a holiday instead of your personal insurance annual premium, because it is a waste to pay for insurance using that money. Even when the amount claimed is the same.
Examples 2-4 are called Mental Accounting. Money is interchangeable, but people tend to separate them in their heads.
5) Have you been pressured to buying something you don't really need whether directly and indirectly because everyone is buying or have already bought it? Smartphones? Cars? Ring any bells?
This is known as Herd Behavior. This refers to us "following the crowd". Example 5 is a good one. It happens often during GSS or any fairs etc. Because everyone is grabbing it, we feel obliged to go for it too. (Kiasu :p)
6) You know that
This is known as Gambler's Fallacy. It is where we believe that a certain random event is less likely to happen following an event or a series of events, when past events does not affect the probability that certain future events will occur.
7) Imagine you gamble in Poker during CNY, and win $100, only lose $50 later. Now compare it to you just winning $50. The overall gain is the same, but the first event feels more terrible than the latter.
This is known as Prospect Theory. It is where we tend to hate our losses more than we love our wins.
8) Have you seen your friend playing this random game and kept losing at it (which seemed simple), then calling him a noob thinking you can do better at someone who probably spent hours at it. And you ended up doing worse (Neopets lol) ^^"
9) Another good example is where many people who say damn steady that they are gonna get the best deal from the travel fair. They proceed to the first booth and got sold on a package immediately to realise later that they got one of the lousier deals out there. ^^"
Examples 8 and 9 are known as Overconfidence. As it says, overestimating your abilities.
10) Recently, there's many news on aircraft issues (MH370 and more) and made worse by reports of minor events (which happens often, just not in the spotlight). Chances are, you might avoid flying for a couple of months, even though the probability is the same, but after those few months, you regain enthusiasm to fly again and deem it more "safe".
That is Overreaction and Availability Bias. It is where we overreact or place more emphasis on recent events or trends.
11) On the newspaper, you see an old man scammed for his whole life savings. When in his shoes, we might have done the same (discounting actual stupidity).
That is Hindsight Bias. It is we assume we are able to predict something based on what we thought as "obvious" in the past.
12) Have you ever wanted something so badly, that you only see the good side of things? Despite warnings from friends or research where although it shows certain red flags, but you ignored them and when on ahead with it.
That is Confirmation Bias. It is what we call, "selective" hearing/reading "confirm" by only seeing whatever we wanna see that justifies for it and ignore everything else, even if it raises multiple warning signs.
Ok I think you all glazed over liao, I'm almost done =x
But there's something I must point out after this. It is OK not to be rational.
I am personally guilty of at least one of these in the past and even now.
What is important is to recognise these flaws and setup processes to account for them. Realisation and action/implementation are the key steps to improvements.
I used to buy things on a whim. Now I implemented a rule that I have to wait 24 hours, to allow myself to cool down and really ask myself. Do I really need it?
I also used to think that I must always follow the crowd because the "in" thing is cool. Better to be wrong together than right and alone right? But having being burnt a couple of times, I realised that this is not the way to go. I would disconnect myself and question myself, am I doing this because I want? Or because everyone else wants?
Hope this week's post gives you some ideas and more insights. =)
Ok, enough le hor? Sorry too long winded, I promise to make next week one shorter! >__<
EDITED (30/05/2015): After some feedback on how to make it clearer.
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