Playing
Mind Games with Your Money
According to behavioral economists, your deeply rooted attitudes toward winning, losing,
ownership, and wealth may lead you to make choices that are irrational,
impractical, or against your best interests. As you read the following
scenarios, think about how your instincts might affect the way you handle your
finances.1
Scenario
1: You’ve decided to buy a new television, but you don’t
know which one you want. You notice a sign at the electronics store advertising
a high-end television for $99 — a great deal. Do you buy the $99 television or
wait to do more research?
Scenario 2: Imagine the same
situation, only the store is also offering a better television with more options
for $159. Do you buy the $99 model, the $159 model, or wait to do more research?
Many people might buy the television in Scenario 1, but wait to do more research
in Scenario 2. The multiplicity of choices in the second case may lead them to
believe there could be even better choices elsewhere.
This phenomenon could help explain how some investors feel about mutual funds.
With more than 8,000 funds available, many feel intimidated at the prospect of
choosing the right one.2 As a result, they do
nothing and risk missing out on potential gains.
After reading the following paragraph, how would
you answer the next two questions?
As head of the Mongol Empire, Genghis Khan systematically conquered much of
central Asia before returning to Mongolia, where he died.
1)
Did these events happen before or after 151 A.D.?
2) In what year did Genghis Khan die?
To expedite the decision-making process, we commonly anchor our minds to an idea
or fact that we can use as a reference point. As you answered the questions
above, 151 A.D. probably seemed too early to you, but with the number fixed in
your mind, you became more likely to guess too low on the second question —
too close to 151 A.D. (Genghis Khan died in 1227 A.D.)
The same phenomenon can sometimes happen to investors. They may buy or sell
based on arbitrary targets instead of deciding whether an investment meets their
specific goals.
Changing your attitude about money may not lead to pure financial success. But
recognizing common psychological tendencies might help you keep your instincts
working for you.
1) Gary Belsky and Thomas Gilovich, Why Smart People Make Big
Money Mistakes and How to Correct Them, Simon & Schuster, 1999
2) Investment Company Institute, 2003
© 2002
Emerald Publications
