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.