How Could I be So Stupid

I have said this and so have you.  We have all made a lot of financial mistakes!mistakes

You may have sold your soul to the company store to bring in the hoped for “motherlode”.  You may have gotten a stock tip on the chairlift from a Wall Street guru that started out hot, but quickly fizzled.  You may have contributed to a charitable organization that you felt was going to use your money prudently, only to be severely disappointed.  You may have made a big ticket purchase you didn’t need to impress people you didn’t like, with money you didn’t have and got that gnawing sense in your belly that it was a mistake.

People around us have failed and we have felt the impact.  Maybe it was a boss who lost the business and put you out of work.  A salesperson that sold you the “sure thing” that wasn’t.  A family member’s decision negatively affected you.  A spouse made some purchases you didn’t discuss and it has caused consternation between you.

There is a lot of guilt and shame around finances and it can keep us stuck in unhealthy patterns. In order to move forward with creating a healthy financial life, we need understand and embrace who we are.

Would it help to know that our brains are not wired to make wise financial choices consistently?  Would it free you to know that humans have been making the same financial mistakes for centuries?  Fear and greed, corticosterone and endorphins, our past, present and future selves continue to collide daily and play out in our decisions around work, investments, spending and giving in ways that may not always be in our best interest.

Remember the commercial “This is your brain” and “This is your brain on drugs”?  The field of neuroeconomics is rapidly shedding light on how our brains work “on money”.  How the reflexive and reflective components of our brains impact decision making. It is fascinating to understand how the amygdala – one of the brain’s centers for expressing fear reacts when the market takes a precipitous plunge.  Our reaction is similar to being chased by a lion and we have the urge to flee or sell, sell, sell!   The field of behavioral finance delves into how our brains affect our emotions and our behaviors around money.  The biases that are inherent in our financial decision making include a loss aversion bias.   Studies have found that financial losses are felt between two and two-and-a-half times as strongly as financial gains.  It hurts twice as much to lose $100 than gaining $100. Loss aversion favors inaction over action and the status quo over possible alternatives. Therefore, when it comes time for us to act upon the gathered facts and analysis we have undertaken, unwarranted optimism and unreasonable risk aversion come into conflict. This bias can keep you stuck in a job you don’t like, stay in a home you can’t afford or hold on to a losing investment longer than you should.

We can capitulate to our hard wired brains or we can recognize the complexities, take a deep breath and change the underpinnings of our decisions.  Acknowledge that we make mistakes, let go of the guilt, learn from them and use our mental and emotional capacities along with technological advances to mitigate and manage what we do moving forward.

On December 4th, it was announced that Madoff victims will be getting a holiday treat as over 9.16 billion will be returned to his investors.  While this only represents about 57% of the lost cash, it is something.  What lessons were learned?  Will this 9.16 billion be handled differently?  Will recency bias, where people tend to give untenable weight to a recent event in making decisions, have these investors putting their money under the mattress?  Will they combat that behavioral bias with good, solid exploration into the best way to invest given their values and goals?

Whatever financial decisions lie ahead for you, recognize that you are amazingly complex and acknowledge that you have limitations, but they are not unsurmountable.  You can creatively and resourcefully do your money differently one day at a time.

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