ARE YOU MAKING THESE EXPENSIVE MISTAKES?
“The greatest psychological trap that we fall into is thinking that our perspective is the only one.”
Psychological traps are like little booby traps that can mess with our minds and make us do silly things with our money. It's like when you see a sale at the mall and you buy something you don't need, just because it's a "good deal."
These traps can make us take risks we shouldn't and generally mess with our financial well-being.
So be careful of these 5 traps, because they can catch you off guard and leave you regretting your decisions.
1. DON’T JUDGE A BOOK BY ITS COVER
Imagine betting on a boxing match and choosing the fighter purely by who has thrown the most punches in their last five fights. The statistically more-active fighter may have won more bouts, but the one with fewer punches may have won five by knockout in the first round. To avoid overreliance on a single piece of information, like an investment's price, it's crucial to stay open to other relevant factors. Be flexible in your thinking and receptive to new sources of information.
2. ONLY HEAR WHAT YOU WANT TO
We all have that one friend who only reads news articles and financial reports that support their belief in a certain investment while ignoring everything else. They create an echo chamber with their opinions which is far away from reality. They look for information that confirms what they already believe while ignoring anything that contradicts it. You should never let this lead you astray - it's very important to consider all perspectives and do your research thoroughly before making any investment decision.
3. YOU NEED TO MOVE ON
Some people cling to a past investment, even if it's no longer worth holding onto. Let's say someone bought a real estate property and invested a lot of money in renovating it. But the property’s value has been steadily declining. Instead of cutting their loss and selling the property, they hold onto it because they've already invested so much money into it, hoping that it will eventually turn around. But this can lead them to lose even more money in the long run. Sometimes it’s just better to cut your losses and run.
4. NO ONE WANTS TO LOSE
What would you do if you have two choices - get ?100 straight away or entertain a 50-50 chance of getting ?200 but also losing ?200? Most people would prefer option 1 because the 50-50 chance of gaining ?200 but also losing ?200 introduces a risk element that many people are not willing to take. This risk element causes people to prioritize avoiding losses over gaining profits, leading to potentially irrational decision-making. As the saying goes, "don't cry over spilt milk" - sometimes, it's better to accept a loss and focus on making better decisions in the future.
5. ARE YOU ONLY RELYING ON MR. KNOW-IT-ALL?
We all know a person who thinks they have a special knack for finance, despite not having any formal training or experience in finance. They are the ones who think they can never lose money. They think they know it all but do they? So, be careful not to let overconfidence cloud your judgment - sometimes, it's better to admit you don't know everything and seek advice from a professional rather than expose yourself to the risk of losing money.
As they say, “always look before you leap.” So, next time you're making an investment decision, take a step back and evaluate whether you're falling into one of these traps.
Stay tuned for our next post for more tips & tricks on avoiding financial mistakes and handling your money better.
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