Emotions & how they impact finance decisions
On the other hand, changes in the economy such as inflation increased or reduced taxation, increased interest rates, salary increments, or personal feelings such as love, anger, and anxiety are bound to influence feels, and consequently their spending habits. When people are dealing with financial choices at home such as shopping expenditure, how much to save, or what amount can be contributed to charity, emotions often come into play. Often, we hear talks of clients needing to control their emotions when making investment decisions in light of the present economic hardships. The need to control one's emotions is also needed when individuals make financial decisions outside the financial markets (Ackert & Deaves , 2010). A free and rational mind is much more suited to making ends meet because it is more cautious.
Most often, people buy an item in the heat of the moment, only to later realize that they did not need it. It is a common factor that can easily predispose a person to financial problems if they do not come to the realization that such spending habits can be harmful. Emotions can influence financial choices in the following ways: Emotions can influence you to purchase an item or make an investment or business decision just because others are doing so. That is because people fell morose if they do not obtain something that other people have. It is common for a human being to compare their lives. Being willing to help your friends and acquaintances may seem like a good thing, but it may be foolish to make financial decisions, to make other people happy while putting your finances at risk.
Emotions often tend to make people forget or ignore significant financial consequences/ issues. Failure to address crucial financial issues such as the decision to increase debt at the right moment can blur ones financial picture. Often, people feel like they have enough time to clear their debt. Nonetheless, most end up running out of time, highlighting the significance of dealing with financial problems sooner rather than later. Financial decisions should not be rushed when one is in the middle of a crisis. When faced with an emotionally charged situation, feelings such as anger, anxiety, and sadness may cloud one's judgment, and therefore, they end up making the wrong choices. The desire to deal with the stress affects an individual’s ability to analyze situations rationally.
Eventually, people do not take their time to obtain the best solution for their problems (Savage, 2017). To prevent implementing a problematic choice, it is essential for people to plan in advance for an emotionally charged situation. Indeed, emotions have the ability not only to impact one's chances of being successful with an investment but also their long-term economic plans. The same theory is supported by Ellen Rogin, the author of, “Picture Your Prosperity. ” According to Rogin, our thoughts and beliefs about ourselves have a significant impact on how the rest of our lives turn out to be. By believing that we are scared of investing, or we do not have the capacity to handle finances, those false as well as, debilitating ideas become embedded into our brains.
To overcome such problems, an individual must be aware of the influence their subconscious has, and then come up with solutions to overcoming those fears and liabilities. For instance, an individual may spend more money on gifts and presents to compensate on the fact that they are not spending as much time with their family and loved ones as they need to. A study conducted by Lerner shows that when an individual is feeling thankful/ grateful, our need to spend excessively is lowered. That is to mean those individuals are willing to delay gratification Lastly, Eyal Winter in his article, “Financial Decisions and Emotions,” agrees that is increasingly becoming challenging to comprehend investment client’s attitudes towards risks, expectations, and plans.
Investors are merely less reluctant to make investment decisions on their own or be accountable. It is as if, to them, money is much more significant than life or death. That is why financial decisions are quite problematic. If a person decides to purchase stocks rather than bonds, they would not be in a position to avoid questioning themselves whether they made the right or wrong choice in the future. Conclusion Fear, pleasure, and regret are some of the most substantial factors of motivation with regards to individuals making decisions based on emotions. To prevent feeling regret, in the event that a person loses money, they generally become afraid of making a decision. On the other hand, when a person feels like they have nothing to lose, they are much more willing to take the risk and make a decision.
Making financial decisions when we are vulnerable or very emotional is the worst time to make crucial decisions regarding finances. Emotions blur our judgment of what is rational, true or false. Because we desire or feel the pressure to solve the problem as fast as possible, individuals end up making inaccurate decisions. A person’s ability to make a rational choice, eventually; become overtaken by the desire to do away with the stress they feel. A major part of the problem is that people do not take as much time as it is needed to make the right kind of choices. , & Deaves, R. Behavioral finance: Psychology, decision-making, and markets. Lerner, J. S. , Li, Y. html Triffin , Molly. How emotions drive Bad financial Decisions and How to Take Control.
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