Ever made a spur of the moment purchasing decision because the item looked pretty? Or maybe you’ve made a purchasing decision based on the feeling that you were tired, hungry, or too busy to care. Perhaps you can better relate to a stock selling decision based on fear or greed. A common element that guides these decisions is that they are driven by how we feel in the moment. These decisions are led by our temporal emotions, and purely emotional decisions are often detrimental to our long-term success, whether financial or not.
There is a strong correlation between socioeconomic status and the management of emotions. Impulsivity, fear, greed, and apathy all lead to poor financial decision making. Financial decision making involves a confluence of factors, and must include the analysis of quantitative data, intuition, self-awareness, and financial literacy.
A study conducted by Caltech, published in the Journal of Economic Literature proves the correlation between financial decisions and the ability to manage emotions effectively. The study found that experienced foreign-exchange and derivatives traders reacted more calmly to events ie. Trend reversals, than less experienced traders did. Due to their experience, seasoned traders were able to better manage their emotions, while novice traders rode the roller coaster of dramatic events.
Financial #decision-making involves a confluence of factors, and must include the analysis of quantitative data, intuition, self-awareness, and #financial literacy.Tweet
Curtis “Wall Street” Carroll, co-founder of FEEL, which is an acronym for Financial Empowerment Emotional Literacy, has developed a program that teaches incarcerated men how to manage their emotions, so that they can lead themselves towards financial and emotional success when they are released from prison. The program not only teaches financial literacy, but also illustrates the connection between our emotions and our financial decisions. See his Ted Talk at the end of this post.
Here’s a short unscientific quiz that will help you understand if your emotions guide your financial decision making.
Add your points as you go.
Add up your score from the choices made. Always = 1 for each question. Never = 5 for each question. You may have chosen 2, 3, or 4, add these up for each question and see the explanation of your result.
Scored between 20 and 50.
You tend to be an emotional decision maker when it comes to your finances. Perhaps you are driven by insecurity/fear and hang on to your money tightly or you make impulsive decisions based on greed, guilt, or a need to be liked that help you lose your money faster or prevent you from making sound financial decisions. The point isn’t if you have lots of money and hold on to it or don’t have much because you lose it easily. The point is your financial decision making is driven largely by your emotions. The first step in fixing that is to understand how you are making your financial decisions. This self-awareness will guide you toward making better decisions when it comes to your finances.
Scored between 51 and 75.
You tend to be a moderate when it comes to making emotional financial decisions. There are occasions when you may get carried away, but for the most part you think through your financial decisions before reacting to make purchases or selling off stocks during a downturn. Some of your decisions are data driven, while some are emotionally driven. That bodes for good financial decision making and will keep you building your financial plan as you prepare for your future.
Scored between 76 and 100.
Your financial decisions are driven mostly by data and you very rarely rely on your emotions to make financial decisions. You can take the heat of a volatile stock market and never purchase something out of boredom, greed or to keep up with the Kardashians. Your bills are paid on time and chances are you are well aware of psychological marketing techniques. Your financial future is well planned, and it is a plan you are determined to stick with.
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