Introducing our new series, Wealth Psychology. Professor Dilip Soman and the team at Rotman School of Management explain some of the ways time, context and the psychology of money itself can influence our financial decisions, and share ideas on how to use them to your advantage.
Have you ever found yourself spending your tax refund differently than you would your regular paycheck? Both are your money. How many times have you said yes to doing something in the future, and damn when it came time to actually do it? That's because we know that humans like you and me behave differently from what models of traditional economics say we should. It's from an area of study known as behavioral economics. And it can help explain a lot about how we make decisions with our money.
BE, as Behavioral Economics is called, is a broader vision of economics that assumes that people don't always act rationally. And while it can be used to explain many aspects of human nature, it may also help us make better decisions with our money. BE suggests that three key factors drive our financial decision making-- time, context, and the psychology of money itself.
We make financial decisions based on time. As humans, we are not very good at considering ourselves in the future. We tend to live in the moment and discount the importance of our future needs. We make decisions based on context, or what else is happening around us. Believe it or not, we may make investment decisions based on things that seem completely unrelated to our money, like whether we just got married, or even if it's a sunny day.
And we make financial decisions based on the psychology of money itself. We often spend our paychecks differently than we do our annual bonuses. We spend cash differently than when we use debit or credit. And $1 a day somehow sounds much more affordable than $365 a year.
Knowing how and why we make the decisions we do with our money can help us develop ways to ensure we are spending, saving, and investing our money more mindfully. We're going to show you some more ways our brains are wired for certain financial blind spots, and how you and your advisor may be able to help address that.