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Feb 17, 2022

You may not realize it, but most of us hold an engrained bias about money. On today’s episode, we’ll break down a recent study by Morning Star, that details why people make the decisions they make when it comes to their finances. How much could a money bias be costing you?

Everyone has their own attitudes about money. Those with a present bias focus on living today rather than contemplating long-term outcomes. 

People with low a low level of present bias were three times more likely to spend less than their monthly income and seven times more likely to plan for the future. If your goal is instant gratification, you may be losing out on money.

Another common bias is base rate neglect. This is where you are judging the probability of something happening based on new information while ignoring the original assumption. We see this with over-selling and buying in investing. Those with a high level of base rate neglect generally have lower savings. 

With overconfidence, we see people put too much weight into making their own financial decisions. Confidence is great, but you need to step back and look at things realistically. In contrast, those with a loss aversion bias are extremely fearful of losing money relative to the gains that they may get. 

The study showed that respondents with lower financial bias experienced a healthier financial life. As Abraham Lincoln once said, “I am a slow walker but I never walk back.” One of the things we can do to change our financial mindset is to put speed bumps in our decision-making process. This can protect you from impulsive and emotional decisions.

It’s always a good idea to take some time for introspection and contemplate where you may be missing gaps in your retirement plan as a result of pre-conceived financial biases.

 

Morning Star Study: https://www.cnbc.com/2022/01/14/98-percent-of-americans-have-at-least-1-money-bias-study.html

 

What we discuss in this episode:

1:24 – Having a money bias

3:30 – 98% of us have a money bias

3:52 – The present bias

5:23 – Base rate neglect

6:26 – Overconfidence

7:09 – Loss aversion

7:50 – Having a lower financial bias

8:40 – Low level of present bias  

11:06 - High levels of base rate neglect

13:30 – Putting speed bumps in your plan

14:28 – Trying to be objective  

 

Get additional financial resources here: http://flemingfinancialservices.com