This week, I’m talking about behavioral finance. An incredibly important topic when it comes to your money and your retirement, yet at the same time it’s something that few people really, truly understand. Essentially, behavioral finance looks at how your psychology, your emotions, and your biases impact your decisions and your behavior when it comes to your money.
Today, I’m talking about how you can use behavioral finance to your advantage, and it’s relatively simple: Awareness
Earlier this week I talked about some common behavioral finance blunders - namely, how fear and greed emotions cause investors to buy and sell all at the wrong times, how loss aversion can impact everything from small purchases to big retirement decisions, and how herd behavior can drive you to make thoughtless decisions.
What ties all of this together in my opinion, is awareness. Just having a basic understanding of how your biases, emotions, and past experiences influence how you see the world and how you make decisions goes a long way towards minimizing those decisions. When you are aware of those illogical and emotional forces that are acting on you, it’s easier to stop and say “ah, I know what’s causing me to feel that way,” and because of that awareness, you’re less likely to get lulled into a bad decision.
Lately, I’ve been working a lot on improving my patience and trying to keep my cool in stressful situations and not get upset, raise my voice, or lash out. When you live with a 2 year old who throws his dinner on the floor while smiling at you, and then 5 seconds later loses his mind when you won’t let him watch a show on TV, you can begin to see why I am trying to work on my quick temper. For my family’s sake and my own sanity, it’s a work in progress.
While it’s still very much a work in progress, and sometimes I feel like I’m making no progress, I have had some success controlling my temper, and a big part of the reason is because I pay very close attention to that frustration bubbling up. I am hyper-aware of when I’m about to blow my top and that awareness and my determination to get better allow me to take a pause, take a breath, and choose to speak and act calmly.
The same thing is true with your behavior when it comes to your money. So focus on those decisions you’re making every day, week, and month that impact your wallet and retirement, and take steps towards becoming more aware of the emotional and psychological forces that are at work in your decision-making.
That’s it for today. Thanks for listening. Tomorrow, we’re going to recap the week and I’m going to give you a little preview of next week’s theme.
My name is Ashley Micciche and this is the One Minute Retirement Tip.
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