Important factors that influence our thinking and affect money-related decision-making.

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Life is made of choices, especially when it comes to money. That way, if we make bad financial decisions, we will live by the consequences of those decisions. If we want better results, we need to make smarter decisions. But what are the factors that affect our financial decision making?

1- Emotions and Feelings

When it comes to money, greed and fear are the most common emotions that can trigger bad decisions. As we know, when stock markets fall, investors panic and tend to sell stocks in order not to lose more money in the short term.

On the other hand, greed can drive investors to turn to get-rich-quick schemes, fueled by a desire to make the most money in the shortest possible time.

While fear and greed can lead us in the wrong direction, they are not the only emotions our brains are susceptible to.

Anger, such as is experienced in difficult divorces, can lead embittered spouses to make disastrous financial decisions. Feelings of sadness and emptiness can lead people to engage in unplanned purchases in an attempt to fill an emotional void. In times of exposure of life on social networks, jealousy and envy make many people have a more expensive lifestyle than they can afford.

The link between depression and debt is real, as debt can make a person feel helpless, hopeless and low in self-esteem. In addition, depression compromises a person's ability to make clear, rational decisions. Consequently, it can lead to lethargy and total inaction, which in itself can be a bad decision.

Emotions and feelings play a much bigger role than we insist on recognizing. So it is one of the factors that affect our financial decision making.

While many financial problems are mathematically simple to solve, emotions and feelings can make them more complicated.

2 - Financial exhaustion

According to a recent World Bank study, people with lower incomes are more likely to make poor financial decisions. They are committed to what is known as "financial burnout."

Your constant struggles trying to balance the day-to-day bills impact your psychological resources and can result in bad decisions.

As such, being heavily in debt or in serious financial difficulties can lead people to believe that they will never get out of their financial difficulties. Consequently, they are more likely to continue making wrong decisions.

For example, financial fatigue can lead a heavily indebted person to spend money playing the lottery instead of paying down debt.

So, exhausted from constantly worrying about money, working hard for a living and living precariously, those who suffer from burnout are less resilient and more susceptible to bad financial decisions.

3 – Lack of self-control

When it comes to creating long-term wealth, self-control can be more important than intelligence. Being able to defer the reward involves deferring immediate desire fulfillment and focusing on some greater payoff in the future.

Exercising self-control involves planning and thinking about what might be, and then comparing it to the opportunity that presents itself at the moment.

Being able to plan, think ahead, assess opportunity costs and defer reward is a key indicator of future success. Compulsive shoppers and spenders are unable to make the connection between how their current spending affects future financial security.

Our consumer culture has increased impulse spending as more consumers relate pleasure to shopping. And they know that the purchase was probably a bad financial decision. It is definitely one of the factors that affect our financial decision making

4 - Insufficient financial education

Failure to grasp and understand key financial concepts is another factor that can lead to poor decision making. Essential financial skills, such as budgeting and controlling expenses, are important life skills. And most of the time, they are not taught at home or at school.

Not understanding how compound interest can work for or against you can lead people to buy on credit without a full assessment of what they are paying in the long run.

A lack of understanding when it comes to the risks and rewards of investments can cause people to keep their money in low-return investments that don't keep up with inflation over time.

Ignorance of consumer protection rights is also harmful. It can cause individuals not to ask for refunds or replacements or to be misled by large companies.

5 - Prejudices

Behavioral and cognitive biases present real challenges to building wealth, and we are all susceptible to them. Depending on our investor personality type, biases can affect the way we think or act. It is another factor that can lead us to make wrong decisions.

Cognitive biases such as confirmation bias are emotional and affect the way we think or feel, while behavioral biases such as herd instinct affect the way we behave in certain circumstances.

For example, you may believe that cryptocurrency is the best investment to make and then actively seek out information that supports your opinion. By succumbing to confirmation bias, you deliberately exclude information that is contrary to your opinion and only focus on information that reinforces your belief in the cryptocurrency.

“Herding” or herding effect is a common behavioral bias that causes investors to follow each other instead of carrying out their research and analysis. Using a ‘safety in numbers’ approach, investors flock in fear of missing out on an investment opportunity. So, based on the false belief that “not everyone can be wrong”, investors choose to follow the herd rather than get independent, well-researched advice.

6 – Lack of counseling

Not seeking solid, independent financial advice and trying to go it alone can also result in poor financial decisions. Financial planning, which includes taxes, retirement funds, estate planning, risk protection, and investments, is a highly complex field to try to navigate alone.

The belief that one knows more than an experienced and qualified consultant is known as an overconfidence bias.

In many cases, you are very confident in your own potential simply because financial planning is not your area of ​​expertise, although you like to think it is. Overconfidence is demonstrated daily by investors trying to time the markets despite overwhelming evidence that it is rarely a successful strategy.

Whether due to overconfidence or lack of confidence, not having an advisor who can guide you can result in poor financial decisions.

7 - Too much information

The large volume of information, whether correct or not, makes it very difficult to find information that is reliable to help in decision making.

The amount of investment types and options available to potential investors is extensive, and information overload can lead to analysis paralysis: Being so overwhelmed with information that you don't make any decisions can serve to exacerbate your financial problems.

We are all subject to making bad financial decisions. However, it is possible to try to reduce the possibility of being affected by the factors listed above using some strategies.

Looking for reliable sources of information, discovering what can influence the decision-making process through studies in the fields of neuroscience, cognitive psychology and behavioral economics are attitudes that can improve the decision-making process.

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