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Avoiding emotional bias in financial decision making

Avoiding emotional bias in financial decision making

Our emotions colour every aspect of our lives including our financial lives. Recognising how emotions can influence your financial decision-making puts your rational side back in the driver’s seat and can help you to achieve positive outcomes in business and your personal finances.

So where do our feelings about our finances come from? We are the products of our upbringing, learning from and either emulating or rejecting our parents’ attitudes to money – but we are also products of our environment. Money equates to success in our society and your financial position strongly influences how people treat you, as well as how you perceive yourself, so it’s no wonder that financial matters tend to stir up strong emotions.

While we experience plenty of powerful positive emotions around money – think about how exuberant you feel when you receive an unexpected windfall or win a lucrative contract – it’s the negative emotions we feel about financial matters that really have the potential to impact our decision making.

Let’s look at the most prevalent and powerful feelings associated with money and how to ensure that they don’t adversely impact your financial position.

Fight the fear

One of the most common negative emotions around money is fear. While it’s prudent to be conscious of risk in your approach to financial matters, fear can take the form of avoidance and cause you to miss opportunities. The most successful business people and investors know how to take calculated risks and as we know, risk and reward tend to go hand in hand. The key is to be mindful of your fears but not let them unduly influence your decision-making.

The flip side of fear is hope and that’s a powerful motivator that can be channeled into building a successful business or saving for retirement.

Greed is not always good

Greed is another common emotion that can sabotage prudent financial planning. Greed fuels get-rich-quick thinking, making you vulnerable to those that exploit the unwary. Greed can also make it harder to maintain a disciplined, long-term investment plan and makes you prone to risk-taking or knee-jerk reactions when the market is volatile.

Greed is not always bad either. It can drive you to chase ambitious goals, but the trick is in knowing when you’ve got enough or reached that goal. Greed makes us raise those goal posts. That’s where having defined plans and measurable benchmarks come in.

Guilty as charged

Even more dangerous than fear and greed, is guilt. While fear and greed are largely fueled by external factors like the performance of the stock market or your SMSF or super fund, guilt is your internal conscience speaking to you and it can be insidious. People feel financial guilt about nearly everything. Spending too much… or too little, not earning enough or saving enough, or even having more than others – if it has a dollar value, we feel guilty about it. Feeling guilty can be a key factor holding you back from achieving (and enjoying!) business or personal success.

The best way to combat money guilt is to know your triggers, foster a good understanding of where you stand financially and ensure that your fiscal management reflects your values.

Overcoming envy

It’s hard not to compare your financial situation with others. There is an innate tendency to maintain a ‘keeping up with the Joneses’ kind of awareness of the holidays your friends are having or the cars they are buying.

In business, you must keep a regular eye on your competitors. It can be disheartening to see that someone is doing much better than you. However, there is always going to be someone more successful. By all means, aspire to more, but it’s important not to let envy drive your decisions.

Emotions aren’t intrinsically bad; it’s how we channel and manage them that has either a positive or negative effect on our finances. Developing an awareness of what emotions drive you and what holds you back will help you achieve your version of a prosperous and successful life.

Centaur Financial Services

Centaur Financial Services work as your partner, helping you navigate through the financial ups and downs life throws at you. First, it starts with your goals. Then it’s a lifelong commitment to achieving short, medium and long term objectives through a range of financial strategies and structures.

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