If you read four of the eight reasons we humans, especially poorer and less genetically-blessed ones, make poor financial decisions yesterday here is the other half of the list.
As stated the full story from with much more detail that can be found here (The Guardian)
There are of course many more than eight reasons including our various cognitive biases, patchy state of financial fluency and occasional gullibility. You can be very clever, very rich and very confident and we see all the time still come a cropper with reckless and irrational financial decisions.
Hopefully this list will give us an insight into our mistakes even if it can’t always prevent them.
5. You are no good at maths
Money matters are complex and a good understanding of maths is linked to better financial literacy but we can’t hold all of it in our heads at one time. “Our solution is to divide our finances and deal with each aspect separately,” says The Guardian.
"It is a rational response to handling complexity, but because our finances are so interconnected, breaking them down leads to irrational choices.”
It’s one reason people will borrow on a credit card at high interest rates and not use existing savings despite the efficiency. It may defy logic but a very human way of thinking.
6. You don’t know when you are going to die
This month home affordability and pensions policy have been in the news. While housing prices arouse general ire the retirement incomes issues are more focused on older Australians and naturally you might think.
As we are more encouraged to manage our own financial affairs after retirement the information gap emerges as to how long the money will last. We don’t individually know how long we will live even thought the collective data makes it plain on a population level.
Research in the UK says the average worker nearing 65 underestimates their life expectancy by 5-10 years. Younger workers also underestimate how much they need to save to fund that retirement. To get a clearer picture of how long you have left check out Death Clock at death-clock.org. There are plenty of other tools on the net to tell you how much you’ll need to retire but it’s no surprise many avoid them.
What we do know for sure is that the average savings and super at retirement is rarely sufficient to assure a long, laid back and luxurious lifestyle.
7. You can’t cope with choice and complexity
The more overwhelmed we are by choice, be it pots of jam or credit card deals, we are more likely to make snap decisions or make no decision and repeat what we did last time because we at least knew what it was.
Having too many options is a good way to engender what’s called confuse-opoly— at term from the telcos who specialise in such mazes of offers which are hard to compare.
Risk is a particularly brought area with notions of risk tolerance made not by absolute calculations of overall probability but relative assessment of the options which are presented. Click on the link above for more on this one.
8. You do what everyone else is doing
If you need to make a financial decision and have no clue or experience the temptation is to see what others might be doing. In fact data of what our peers do/spend/want/have is increasingly common and often of merit
But when it comes to money such behaviour can be damaging. Research says people looking to invest tend to see what others are up to instead of assessing the options independently.
The example given is everyone you know spends big on their credit cards rather than putting extra funds into their super, even though your adviser might have strongly recommended this strategy, you may be more likely to follow your peers’ example rather than your planner’s guidance.
So there’s eight reasons to consider. What others have you witnessed, been guilty of, see emerging or retreating?
By Christopher Zinn, Communications & Campaigns Director, Adviser Ratings