Financing Your Life A Guide to Controlling Your Finances, Today
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Last month we discussed some powerful and damaging psychological processes that can undermine your budget and spending plan. Today, let’s talk about two more.
Gambler’s Fallacy
Odds and statistics can be helpful when determining risk, but there is a deep science behind analyzing data in order to determine resultant odds. When a person is under the influence of the gambler’s fallacy, they assume that a series of unusual events (such as a lucky streak or a wave of bad luck) means that they can rely on a change to that series in the near future. This often happens with gamblers at losing slot machines—the players are hesitant to leave the one machine they’ve been losing at for hours because they think that the “odds” put them closer to breaking that wave of bad luck.
But nature isn’t always balanced and the odds of a certain type of outcome don’t necessarily change due to recent events unless those recent events have a direct bearing on future events. But often, in the stock market and with other variable financial instruments, current performance isn’t necessarily related to future performance. If you make a decision for any reason that starts with, “Odds are …,” you’re not making choices based on the right set of data.
Post-Purchase Rationalization
Similar to confirmation bias, post-purchase rationalization is a way of justifying a purchase. Unlike confirmation bias, post-purchase rationalization occurs after you’ve already bought the item or service. This process will cause many to ignore the flaws and shortcomings of the products they buy in order to convince themselves (and others around them) that this particular item or service was the right choice for them.
There are several issues that this creates. First, it eliminates the opportunity for the consumer to explore returning the purchase and getting a refund, which could then be applied to the superior product that they should have bought. It also prevents the buyer from learning from mistakes in order to improve his or her outcome on future purchases.
Have you noticed yourself falling victim to any of these tricks of your subconscious?
