You would have heard of behavioral economics or the psychology of what drives our financial decisions.
Ever thought of why some people choose to pay on credit even if they end up paying much more? Or why some people sell off their stocks just before the share prices go up? Or why others keep holding on to falling stocks?
Or even why some entrepreneurs keep spending heaps of money on products/services that are causing them to lose money?If we pay attention or take the time to think and analyze, we will discover that there are underlying subtle reasons that contribute to the choices we make.
In this article, I attempt to present to you 5 ways out of the myriad of ways that you can use to prevent yourself from making bad money decisions.
These are my own summaries of some of the ideas I took from the book ‘Why Smart People Make Big Money Mistakes and How to Correct Them’.
1) Have Fewer Choices To Select From
Studies have shown that when people are presented with a lot of good choices, they are less likely to make a decision, they might just put off the decision-making or they might not be happy with their decision after they make one.
Somehow, when you have fewer choices, after you have decided on one, you would have lesser reasons to think that any of the other choices could have been better.
But imagine if you had a wide range of choices and you decided on one? Your mind will now more likely wander and think about what if the other choices were better than what you had chosen, right?
In order to avoid this dilemma, you can get a trusted source to help you screen the choices and just offer you with, maybe, 3 choices to choose from. This way, you will end up happier and more satisfied with your eventual choice.
2) Remember That Remaining Undecided Is Also A Decision
Then there are those who get so overwhelmed with information that they decide to remain passive and not decide.
In this instance, we must keep in mind that whatever we choose to do, even if it were not deciding, there are still consequences to it.
Either you may lose money by sticking to your present choice or you might lose potential earnings by not making a better decision. But of course, there is also a possibility that not deciding might also be the best decision.
What’s important is that instead of remaining undecided as a form of passive resistance, we make some effort to understand the consequences of not making a decision and make an informed decision not to decide.
3) Change Your Frame Of Reference
A good way to make better decisions is to start from a neutral point of view, as if you are starting from scratch instead of weighing the pros and cons from where you are currently at.
This type of approach would help eliminate the fear of loss by making a particular decision as compared to not making any decision and help you properly weigh the possible long-term benefits if there are any.
The truth is that, between making a decision that causes us to regret later and not making a decision, which also causes us to regret later, we’d beat ourselves more if it were the former!
Somehow, not making a decision and that leading to regret is less painful than making a decision that leads to regret.
4) Don’t Be Impressed By Short-Term Success
When it comes to investments, do not make your decisions based on just a few years of success. It does not in any way reflect or guarantee future success.
Of course, you may argue that in that case, several years of success is a good indicator. Yes, several years of success could most likely be due to skill rather than luck.
But in this case, we also need to consider the fact that the people who were behind the several years of success may have left or changed.
That would be a more logical consideration to look into.
5) Ask 3 Good Questions
In order to overcome the possibility of making rash decisions fueled by over-confidence, we need to get into the habit of thinking a little deeper.
We may be tempted to skip this if it’s a long tedious process.
To tackle that, we can just ask ourselves 3 good questions starting from “why” in order to assess our decision. The book adapted this idea from the “Five Whys” approach of business quality control theories.
Some examples of questions we can ask are, “why this investment?”, “on what basis?” etc.
These questions can help us re-evaluate our decisions and keep over-confidence in check.
[featured image credits: www ibtimes com]