Sunday, July 14, 2013

Why You Cannot Treat Money With Rationality (and How to Fix It)

Lifehacker pointed out a TEDx presentation (kinda TED conference, but locally organized) where psychologist Daniel Crosby points out 4 biases that we share... and we have the same biases on finance AND love. That's why we behave toward both with irrational behavior.

The "I Can Change Them" (or "Fixer Upper") bias

Do you marry the person you love, thinking that you can change them, fix them up? You do the same with your money, investments, income opportunities, and the like.

Basically, you overestimate your power to compensate for the weaknesses of whatever your choice was. The person's bad habits? I can help him/her change that... maybe not. The business have a dark past? Don't worry about it, just worry about the future!  Hmmm... that may not help at all.

"This Time It's Different" Bias

Those who divorced are more likely to divorce again (and again). People believe "this one will be different", "this one will be the one". Unfortunately, this new one is probably just a rebound, and the problem that caused the original divorce was never found and fixed.

Same thing with money. Scam victims often fall for a reload scam, with the victims thinking "this one will be different", without considering what made the scam a scam. Just because there's something "new" mixed with this whatever doesn't make it new. This is called "new era thinking". Pyramid schemes have been around as old as money itself. HYIPs are the new pyramid schemes and Ponzi schemes, except they operate online. eToys, the online equivalent of Toys R Us, had a bigger evaluation than Toys R Us, despite never earning a profit. It's a bubble fed by new era thinking. Scam victims often fall for the same thing... over and over.

"The Prince Charming" Bias

In romance, the deux ex machina ending is a Prince Charming saved the day, sweeps the heroine off her feet, solved all the problems, and they live happily ever after. People often expect the same in love... and money.

Just as in love, where you may think 'this one is "the one"', you will think of an income opportunity or a job or an investment as "the one" that will solve all your problems, even though the odds are highly against it. Furthermore, scammers are very good in keeping up appearances, and most people stop looking for faults when they see a check in their inbox (or in their friend's or neighbor's inbox), never mind that they are far from recovering what they put in.

"Just Can't Quit You" Bias

"Breaking up is hard to do", said the old song... the pain of separation often will cause people to stay in hurtful relationships far longer than they should have. Same with money situations. Even after realizing they have been involved in a scam, scam victims often will try to "work within the system", talk to management, upline, trying to "reform" the scam, without realizing that the deck had been stacked against everybody by the founders and there's nothing anyone can do to turn a scam into a legitimate business. Instead of getting out from a losing deal or a potential scam, they will ride it to the end, until assets are frozen by law enforcement and/or the founders disappear.

Watch the presentation yourself:
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1 comment:

  1. Thanks for posting this! I've been thinking a lot about the psychology of Ponzi victims as they seem to have a near religious blind faith for whatever scheme they're mired in. As long as they're getting returns, there seems to be no amount of red flags that cause them to stop proselytizing.