Why Your Brain Makes You Poor

Did you know that more than 80% of Americans make the same financial mistakes repeatedly? Do you ever wonder why you keep falling into the same traps with your money?

Hi everyone, welcome back to We're Talking Money. I'm Phil Clark, founder and wealth advisor here at OmniStar Financial Group, and today we're diving into a rather fascinating topic: behavioral finance. Now, understanding this concept could be the key to breaking free from those frustrating financial mistakes that many of us seem to keep making.

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Let's face it, managing money, it can be tough, and especially when things like inflation are restricting the value of our dollars. Whether it's overspending, not saving enough, or managing risky investments, human behavior is a repeat of patterns that can hurt our financial health. But what if I told you that it's not entirely your fault? There are psychological biases at play, quietly guiding your decisions, and sometimes in the wrong direction. Those forces are among us, and chances are you have experienced them at some point.

Behavioral finance is very often the culprit to a lot of our poor financial choices, even when we know better. Let's talk about a few of the key concepts that I think can help you get better with your money.

So the first one that we're going to consider is something called loss aversion. This is a popular one, but it doesn't mean you've heard of it. Think about it this way: have you ever held on to a bad investment, like real estate or a car, just because you didn't want to realize a loss? Maybe you thought, I'll hang on to it just a little longer, maybe the value will at least get back to my starting point, to my basis, only to watch the value continue its decline. We fear losing money more than we enjoy gaining it. That can often cloud our judgment.

The next one that we're going to look at is called overconfidence, and this is a very strong bias. Many of us will buy a few things in the market, we hit a couple of winners, and all of a sudden we think we have this market figured out. Overconfidence creeps in, and before you know it, your decisions will become more risky. After three decades in the investment business, I am sure that many of us think we're better investors than we really are, and that can lead to overtrading or playing the fool's game of timing the market. Don't get caught there.

Next, we're going to talk about emotional decision making. Now, emotions like fear and greed, they play a huge role in our financial choices. Whether it's panic selling in a downturn or buying into a hot stock because of FOMO, fear of missing out, those emotions can drive us to make decisions that we later regret, and sometimes that regret comes at a high cost.

Think about when you see a friend or maybe a family member, they get something that you really like. Suddenly you need to keep up. Everything we do, it's driven by emotion. Try to use something called the 24-hour rule or the 48h hour rule. Think about what you're about to purchase. Remember, in other shows we've talked about thinking through things in terms of two lists: required, desired. When you consider how it might affect your long-term financial goals, it just might change your mind.

Next, let's talk about confirmation bias. This is when you seek information that simply confirms your existing belief. All you have to do is search for that confirmation using Google and you will find it. Whether you want to buy something small or large, you can find something on the internet that will tell you it's a great purchase, you need it. Don't fall for that. Look at the other side of the equation. Research why you don't need it.

And finally, let's talk about something called the herding bias. Now, herding bias is the tendency to follow the actions of a larger group, whether those actions are rational or irrational. When we get into a group, we tend to follow them. It's why it's very often said by many experts, you tend to become what you hang around.

Once you start recognizing these biases, you can start to overcome them. Understanding how your mind works can be the difference between making smart financial decisions and repeating the same costly mistakes. How many times have your emotions or overconfidence led to a decision down the road you realized it really didn't make you happy? That happens to the best of us, but we can control it by knowing ourself and really understanding what drives us.

We've discussed some of the key psychological biases that easily lead us astray when it comes to money: loss aversion, overconfidence, and emotional decision making. So what financial mistakes have you made, and how do you think behavioral finance plays a role? Drop a comment below. I'd love to hear your thoughts, love to know what you're doing to change some of these biases.

And if you want to learn more tips on managing money smarter, please subscribe to our channel. If you liked today's video, hit that thumbs up button and share it with anyone who you believe can benefit from this kind of guidance. Thanks for watching, and I'll see you next time when we're talk