(weekend reading) Question your Money Behaviour

Most human habits & attitudes towards money have some amount of eccentricity. Here are some funny money habits explained
by Sharmila Ramnani, FinanceInsights

Do you believe you have good money habits? You may be wrong. Read on to assess some money habits that are worth assessing and changing…

Valuing some of your money more than the rest

People tend to compartmentalise their money depending on where it has come from and where it is to be spent. For instance, do you treat your earned income (salary or professional income or business income) in the same manner as money won in gambling? Clearly, none of us do. Rational thinking would have treated both inflows in the same manner. But our tendency to bring emotions in our money decisions — treating earned income more seriously because of effort made to earn this while money won in gambling is treated lightly because it is not ‘due’ or ‘earned’ — blurs our rational thinking where money is concerned. In reality, money received from earned income and gambling carries the same value and should be treated equally.

Changing Treatment of money depending on the deal size

One’s treatment of money also depends on the size of the receipt. For instance, if you got a tax refund of Rs 2,000, you would handle this money with more thought than if you got a tax refund of Rs 500. The size of a transaction also has an impact on your spending decisions. For instance, while making a spending decision, discounts offered are always welcome. However, the value of the transaction will have an effect on the value you assign to the discount offered. For instance, if you want to buy a pair of pants for Rs 1,000 and the store offers a 10 per cent discount on this; i.e., you can get the pants for Rs 900, you will not value this discount as much as a discount offered by an electronics store offering a television, whose retail price is Rs 15,000, at a 5 per cent discount.

The hurt from a loss is more intense than the pleasure from a gain

Research indicates that the pain of making a loss is far more intense than the pleasure of making a gain. Have you faced a situation where you were advised to switch your investment from Company A to Company B and, when you actually did so, it resulted in you incurring a loss on your investment in Company B? If yes, you will never forget this for the rest of your life and you’d want to kick yourself for this. Alternatively, if you were advised to switch from Company A to Company B and you did not do so and then saw the stock of Company B rise, you would regret your decision not to switch, but the regret will be less intense than the regret of booking a loss in the first case. Similarly, if you did switch and eventually made a gain, the intensity of pleasure due to the gain will be lower than the intensity of pain of loss (i.e., if you switched to Company B and made a loss). The habit of avoiding the pain of losing can result in putting you at a disadvantage. One example is panic selling. The moment you see the price of your stock fall marginally, you decide to exit quickly so that you will not have to face a higher loss in case the price continues to fall.

Getting overwhelmed by choice


We are faced with too many investment opportunities today. We need to select a combination of investments in different avenues such as equity, mutual funds, commodities, property, fixed income securities, pension plans, investment-based insurance plans, etc. Also, under each investment option, we are faced with too many choices. For instance, there are more than 6,000 companies listed on our stock exchanges and more than 400 mutual fund schemes to choose from. Not only this, we have the option of investing in our country and anywhere else in the world.

Often, this choice leads to a decision paralysis (the mind freezes into indecision due to vast choice). As a result, investment money stagnates in a low-income investment such as your bank savings account.

Avoiding Change

We humans don’t like change. We tend to prefer a status quo situation. This also reflects in the way we deal with our money. Let’s understand this with a situation. If your grandfather has recently passed away and left a large number of bank deposits in your name, if you are an equity investor, you will tend to let the bank deposits remain instead of converting them to equity. You will do this even if you have a number of equity investment opportunities staring you in the face. Why? Because of love and respect for your grandfather and the need to take care of his money. Even if the inheritance is received in cash, you will tend to avoid investing it in equity in order to ‘protect’ grand-dad’s cash. However, if your grandfather was an equity investor and you received the inheritance in the form of an equity portfolio, you will start to reshuffle the portfolio according to your investment style right away.

Endnote

Try to deal with your money dispassionately. That is the only way you will use your money optimally to build your wealth.

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