We all make mistakes with money, some more than others. And in this economy, who needs it?
But many of these mistakes are avoidable if we can understand how we think about money. Here are 10 biases that psychological research has shown affect our judgement…and how to avoid them.
1. Status quo bias
One of the biggest reason people lose out financially is they stick with what they know, despite much better options being available. We tend to choose the same things we chose before. And we continue to do this even when better options are available, whether it’s goods or services.
Research on investment decisions shows this bias (e.g. Samuelson & Zeckhauser, 1988). People stick to the same old pension plans, stocks and shares, even though there are better options available.
It’s hard to change because it involves more effort and we want to avoid regretting our decision. But there is better value out there if you’re prepared to look.
2. Post-purchase rationalisation
After we buy something that’s not right, we convince ourselves it is right.
Most people refuse to accept they’ve made a mistake, especially with a big purchase. Marketers know this, so they try to encourage part-ownership first, using things like money-back guarantees. Once you’ve made a decision, you convince yourself it was the right one (see: cognitive dissonance), and also start to value it more because you own it (e.g. Cohen et al., 1970).
Fight it! If the goods or services aren’t right, return them. Most country’s legal systems incorporate a cooling off period, so don’t rationalise, return it!
3. Relativity trap
We think about prices relatively and businesses know this. That’s why recommended retail prices are set high, then discounted. Some expensive options on restaurant menus are there only to make the regular meals look reasonable in comparison.
The relativity trap is also called the anchoring effect. One price acts like an anchor on our thinking. It’s easy to fall for, but also easy to surmount by making comparisons they don’t want you to make (read more about the relativity trap).
Use price comparison websites. And try comparing across categories of goods. Is an iPad really worth a month’s groceries or three years of cinema trips or a new set of clothes?
4. Ownership effect
We value things more when we own them. So when it comes to selling our stuff, we tend to set the price too high.
It’s why you sometimes see second-hand goods advertised at ridiculous prices. Unlike professionals, amateur sellers develop an emotional attachment to their possessions (read the research on 6 quirks of ownership).
It also works the other way. When bidding on eBay, it’s possible to feel you already partly own something before you actually buy it. So you end up paying above the market value.
When buying or selling you have to try and be dispassionate. Be aware that unless you set limits, your unconscious may take over.
5. Present bias
In general humans prefer to get the pleasure right now, and leave the pain for later. Economists call this hyperbolic discounting.
In a study by Read and van Leeuwen (1998), when making food choices for next week, 74% of participants chose fruit. But when deciding for today, 70% chose chocolate. That’s humans for you: chocolate today, fruit next week.
The same is true of money. Marketers know we are suckers for getting discounts right now, so they hide the pain for later on (think mobile phone deals). Unfortunately buy now, pay later offers are often very bad deals.
One way to get around this is to think about your future self when making a purchasing decision.
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Chat Rooms in Paltalk Scene
A chat room is a Web site part of a Web site or part of an online service (such as America Online) that provides a venue for communities of users with a common interest to communicate in real time. Forums and discussion groups in comparison allow users to post messages but don’t have the capacity for interactive messaging. Most chat rooms don’t require users to have any special software; those that do such as Internet Relay Chat (IRC) allow users to download it from the Internet. Chat room users register for the chat room of their choice choose a user name and password and log into a particular room (most sites have multiple chat rooms). Inside the chat room generally there is a list of the people currently online who also are alerted that another person has entered the chat room. To chat users type a message into a text box. The message is almost immediately visible in the larger communal message area and other users respond. Users can enter chat rooms and read messages without sending any a practice known as lurking.
Because chat room messages are spontaneous and instantly visible there is a potential for abuse which may or may not be intentional. Site hosts typically post a frequently asked questions (FAQ) list to guide users to appropriate chat room behavior such as introducing yourself when you enter a room making it clear when you are directing a question or response to a specific user and reporting disruptive users for example. Disruptive users may verbally abuse other chatters monopolize the conversation or even just disable it by repeatedly typing the same word or phrase into the conversation a practice (much frowned upon) known as scrolling.
Chat rooms can be found that focus on virtually any aspect of human endeavor or interest. Various sites such as Yahoo provide a directory of chat sites. Others such as MSN Web Communities guide users through the steps required to create their own chat room.
History
The first dedicated online chat service was the CompuServe CB Simulator in 1980 created by CompuServe executive Alexander “Sandy” Trevor in Columbus Ohio.
Text-based chat
Online chat is a way of communicating by sending text messages to people in the same chat-room in real-time.
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Further information: Outline of psychology and Index of psychology articles
Psychology is the science of mind and behavior. Its immediate goal is to understand behavior and mental processes by researching and establishing both general principles and specific cases. For many practitioners one goal of applied psychology is to benefit society. In this field a professional practitioner or researcher is called a psychologist and can be classified as a social scientist behavioral scientist or cognitive scientist. Psychologists attempt to understand the role of mental functions in individual and social behavior while also exploring the physiological and neurobiological processes that underlie certain functions and behaviors.
Psychologists explore such concepts as perception cognition attention emotion phenomenology motivation brain functioning personality behavior and interpersonal relationships. Some especially depth psychologists also consider the unconscious mind.a Psychologists employ empirical methods to infer causal and correlational relationships between psychosocial variables. In addition or in opposition to employing empirical and deductive methods someespecially clinical and counseling psychologistsat times rely upon symbolic interpretation and other inductive techniques. Psychology incorporates research from the social sciences natural sciences and humanities such as philosophy.
While psychological knowledge is often applied to the assessment and treatment of mental health problems it is also applied to understanding and solving problems in many different spheres of human activity. Although the majority of psychologists are involved in some kind of therapeutic role (clinical counseling and school positions); many do scientific research on a wide range of topics related to mental processes and behavior (typically in university psychology departments) and/or teach such knowledge in academic settings; and some are employed in industrial and organizational settings and in other areas such as human development and aging sports health the media law and forensics.
Etymology
The word psychology literally means “study of the soul” ( psukh meaning “breath” “spirit” or “soul”; and – -logia translated as “study of” or “research”). The Latin word psychologia was first used by the Croatian humanist and Latinist Marko Maruli in his book Psichiologia de ratione animae humanae in the late 15th century or early 16th century.
Kirk J. Schneider PhD is a psychologist and psychotherapist who has taken a leading role in the advancement of existential-humanistic therapy and existential-integrative therapy. His major books are Existential-Humanistic Therapy (2010) Existential-Integrative Therapy (2009) The Handbook of Humanistic Psychology (with James Bugental and Fraser Pierson) (2001) The Psychology of Existence (with Rollo May)(1995) Rediscovery of Awe (2004) and Awakening to Awe (2009).
In 2004 Dr. Schneider was the recipient of the Rollo May Award from Division 32 of the American Psychological Association for outstanding and independent pursuit of new frontiers in humanistic psychology and in April 2010 he delivered the opening keynote address at the First (East-West) International Existential Psychology Conference in Nanjing China.
References
Books:
Schneider K.J. (1990/1999 2nd paperback ed.). The paradoxical self: Toward an understanding of our contradictory nature. Buffalo NY: Prometheus Press/ Humanity Books. (Originally published by Plenum/Insight.) [Translated into Portuguese and Slovakian; currently being translated into Chinese Short Form]. [All books to follow are currently being translated into Chinese Short Form]
Schneider K.J. (1993). Horror and the holy: Wisdom-teachings of the monster tale. Chicago: Open Court.
Schneider K.J. & May R. (1995). The psychology of existence: An integrative clinical perspective. New York: McGraw-Hill. [Translated in 2010 into Chinese Short Form Chinese Peoples University Press]
Schneider K.J. Bugental J.F.T. & Pierson J.F. (2001). The handbook of humanistic psychology: Leading edges in theory research and practice. Thousand Oaks: Sage. (Reprinted in paperback August 2002).
Schneider K.J. (2004). Rediscovery of awe: Splendor mystery and the fluid center of life. St. Paul MN: Paragon House.
Schneider K.J. (2008). Existential-integrative psychotherapy: Guideposts to the core of practice. New York: Routledge.
Schneider K.J. (2009). Awakening to Awe: Personal stories of profound transformation. Lanham MD: Jason Aronson.
Schneider K.J. & Krug O.T. (2010). Existential-Humanistic Therapy. Washington DC: American Psychological Association Press (Theories of Psychotherapy Series).
Magazine Articles:
Schneider K.J. (2003 July/August). Enchanted agnosticism. Tikkun Magazine 39-41.
Schneider K.J. (2005September). Through the lens of awe. Spirituality and health.
Schneider K.J. (2005 SeptemberNovember). Awe-based Learning. Institute for Noetic Sciences Shift Magazine.
Schneider K.J. (2008 JanuaryFebruary). Awe-based work. Tikkun Magazine 20-21.
Schneider K.J. (2009 NovemberDecember). The awe-based challenge to positive psychology. Tikkun Magazine 30-32 73.
Schneider K.J. (2010 Sept.). The case for existential therapy. Psychology Today. Online at http://www.psychologytoday.com/search/query?keys=kirk schneider&x=0&y=0
Schneider K.J. (2010 December). Toward a humanistic positive psychology. Psychology Today. Online at http://www.psychologytoday.com/search/query?keys=kirk schneider&x=0&y=0
Schneider K.J. (2011 Winter). 25th Anniversary Commentary. Tikkun Magazine online at tikkun.
Imagine how ‘future you’ will see the decisions of ‘present you’.
I’m writing a research paper on psychology. (the way the human mind works for us to make subconscious decisions) I have a few good books to take notes from. What I’d like help with is a few suggestions from you all for good sound legitimate magazines or online authors (as I have to submit the bibliography too.)
Thanks!
You need to find your way to your college library website. If you’re enrolled at a college then you have free access to the subscription databases found on your library website. (For high school students you’re a little more limited to what is offered on your public library website or you need to go in person to gain access to the college databases and print journals.)
Examples of database names: PsychArticles JStor ProQuest Academic Search Complete etc.
Each of these databases include literally dozens and in some cases hundreds of journals. You aren’t going to find this kind of material freely available online. The authors publishers and others who work on this material need to earn a living. Libraries pay subscriptions (through tuition taxes etc) in order to provide their faculty/students/patrons access.
Usually you will find a research guide on your library site that outlines the best resources to use for a particular subject (psychology). Here are a couple of examples:
http://library.ucsc.edu/subjects/psychology
http://www.lib.umich.edu/browse/Psychology
You may find that there is research assistance available through some form of chat service found on your library site or a state cooperative site.
Examples:
http://www.oregonlibraries.net/
http://www.library.arizona.edu/help/ask/ask
http://www.cerrocoso.edu/lrc/
Librarians are available 24/7 and want to help you organize your research. Don’t be shy about asking for help.
If ‘future you’ wouldn’t like it, don’t do it.
6. Fear of losses
People tend to sell things when they go up in price, but hold on to them when they go down. It’s one demonstration of our natural desire to avoid losses. This effect has been seen in a number of studies of stock-market trading (e.g. Weber & Camerer, 1998).
The fact that prices are falling, though, is a big clue. If you can fight the fear of losing, in the end it could leave you better off.
7. Familiarity bias
Advertising works partly because we like what we know, even if we only vaguely know it. We even choose familiar things when there are clear signals that it’s not the best option (Richter & Spath, 2006).
Always check if you’re buying something for the right reasons. Mere familiarity means the advertisers are winning. Smaller companies that can’t or won’t afford pricey TV commercials often provide better products and services.
8. Rosy retrospection
We tend to remember our decisions as better than they really were.
This is a problem when we come to make similar decisions again. We have a bias towards thinking our previous decision was a good one; it could be the holiday, house or car you chose (e.g. Mitchell & Thompson, 1994). That’s partly why we end up making the same financial mistakes again: we forget we made the same mistake before.
Before making an important financial decision, try to dredge up the real outcomes of previous decisions. Only without the rose-tinted spectacles can we avoid repeating our mistakes.
9. Free!
The word ‘free’ has a magical hold on us and marketers know it. Behavioural economics research shows we sometimes take a worse deal overall just to get something for free. Watch out if you are offered something for ‘free’ as sometimes the deal is not that good.
10. Restraint bias
Many mistakes with money result from a lack of self-control. We think we’ll control ourselves, but, when faced with temptation, we can’t. Studies like Nordgren et al., (2009) show people are woefully optimistic in predicting their self-control.
So, don’t put yourself in the situation of being tempted. This is why cutting up credit cards is often recommended. We’re mostly weaker than we think, so we shouldn’t give ourselves the opportunity.
Image credit: Jason Rogers
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