- Wealth growth has more to do with the mindset than the figurative perception of numbers.
- There are common everyday cognitive biases involved in spending, saving and investing that keep wealth stale or stagnant.
- Individuals are often helpless against these biases.
Numbers may feature greatly in building a fortune, but so does the cognition of the individual or groups of individuals in question. Features of the requisite cognition for amassing, reinvesting and evolving wealth may be corrupted by a number of biases that we are usually given to; such as spending more and saving less in the guise of the live now or you-only-live-once philosophies. Some of these biases include:
Denomination effect: Studies have shown it is far easier for anyone to run through a pocket full of change; N20, N50, N100, N200 and even N500 as opposed to breaking a N1000 bill. We seem to be oblivious or unconsciously negligent of the additive run-through-pocket effects of these little capable bills.
Status quo bias: From insisting on the same brand of cereal to sticking to the same terms of an investment for years on end; It is often appealing to keep playing safely within the parameters of our defined norms, whether or not it is detrimental to the growth of our wealth or not. Even this insistence on playing safe is in itself unsafe.
Impulsive/Instant gratifications: For instance, choosing to travel overseas for the thrilling adventure of sitting through a football at the stadium, rather than saving for later, or nibbling on a supposed savings account to pre-order the new iPhone 7 (or other trending gadgets) antagonizes the rewarding concept of delayed gratification.
We easily ascribe to rewards-on-the-go rather than pray-save or invest in the future. We only live once after all.
The relativity trap: This anchoring bias explains why anyone would be given to cheaper offers that come immediately after a more expensive pre-negotiation whether they are overly offsetting anchor prices or not.
Ostrich effect: Probably by reason of how ostriches dig, there is a myth-based saying that an ostrich will hide its head in the sand when afraid so as to remain oblivious of the coming threat. This is metaphorically similar to how humans are perceived to behave when investing. Humans are known to behave similarly on the subject of investing when investing – anyone will stay away from bad news or negative reports that threaten even the thought of our good fortune.
Overconfidence: A seeming sixth sense or having-a-knack-for-these-things-kind of perception isn’t a befitting guide to making investments. According to Steven Dubner, the best thing an investor can do for their money is admitting what they do not know. Admittedly, honestly presenting one’s self as a novice concerning certain subjects may reveal a weak-point for prey to feast on. However, basing money matters on a make-believe expertise or some unstructured or unfounded sixth sense isn’t a better option.
Planning fallacy: Planning for the future often requires allotting specific time intervals for pulling off tasks involved. Such planning is a little complicated and may result in a time-frame under-budget for tasks and as a consequence, expectations will fall short.
Fear of losses: It a common fear; the fear of losing money, yet some are more afraid than others when it comes to making investments. Investments are hardly ever without the risk of losing money but they still have their benefits. Investors, with the larger fear-share, are prone to making careless impulsive decisions without proper considerations or the required patience for the downside of the financial markets to blow over.
Post-purchase rationalization: Referred to as “the buyer’s Stockholm syndrome” by a marketing expert, this rationalization as the name implies, comes after having made a purchase. This bias insists on the conviction that our purchases are worth whatever was spent on it and also that we are thrilled with having made those decisions.
Procrastination: Procrastination is the non-active state that allows the things we postpone become more expensive to obtain. Postponed tasks range from missing out on bank promos or offers tailored to that account we are still planning to open, differing the building up of a saving account, to the investment we are delaying because we are waiting for turbulent economic waters to become still.
Restraint bias: The belief in our ability to control our impulses may give room for its overestimation. When this happens, we are likely to seek out ways to prove our purpose mastery.
Ownership effect: This effect prompts the need to possess items we’ve longed for and obsessed over at any cost required; affordable or otherwise.
The bias of blind spots: This, is the investors guide to cognitive biases. It is probably the most crippling bias because it prevents the recognition of any of the above-listed requisites for stagnant wealth.
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