Why Do We Make the Financial Decisions We Make?

Herd Mentality

When you see a lot of people spending on something, you may go along with it because it seems right. For example, you may have invested in Bitcoin when it seemed like everyone else was.

Present Bias

You are only focused on making decisions in the present, without thinking about their future implications. For example, you overspend on that brand-new hoodie, which may affect your ability to eat out next week.

Risk Aversion

You are too scared to take on any financial risk, leading to missed opportunities. For example, if you are scared to buy that hot stock because of the risk it can go down, you lose out on the returns if it grows.

Sentiments

You don’t want to sell an item because it holds sentimental value. For example, that old picture frame in your attic may be of no present use, but you reject selling it because it holds meaning for you.

Anchor Bias

You irrationally spend money when the price of a product drops. For example, a 50% off sale on shoes may cause you to get excited and spend, even if the new price is still over budget.