We shop at Costco about once a month or so. It’s about a 40-minute drive across the bridge and into Kelowna. One day, after we returned from our shopping trip, I noticed that we had been charged twice for one of our purchases – $18.99. The thought of going back over the bridge in rush hour traffic (which I swear is twice as bad as Calgary), just before supper made me cringe. Luckily, Costco has a flexible policy and I was able to get my refund on the next trip. How many people, I wonder, who would normally take the time to shop around for lower prices and clip coupons, etc. would have just let it go rather than return to the store?
Here’s another example. I purchased a pair of Reeboks at Zellers (when they were still around). A couple of days later I saw the identical shoes for 55% off in their flyer. I took the receipt to the store and received my refund. When I mentioned this to a co-worker, she said, “I would never do that!”
Why not? Is it embarrassment? You don’t want to make a scene? You don’t want to look cheap?
Behavioural economics, the study of the neuropsychology behind how we behave with our money, has won Nobel Prizes. There’s a lot more going on than dollars and cents when it comes to making decisions about our money and our lives.
Economics has finally recognized that we are not rational creatures; we’re not all about the accounting and spreadsheets.
Our emotions affect our choices
Why do we want to prepay our mortgage? It’s a sense of security.
Why do we own an expensive car? It’s a symbol of what we are working for and what we think we deserve.
Why does this man use his life savings to pay for his son’s education? He wants a better life for his son and knows he will care for him in his old age.
We all know how important insurance and a will are, but why do we often put off dealing with them?
Can you change irrational behaviour?
We all want to make better decisions in life, decisions that make us happy personally as well as financially, and many decisions have a personal cost as well as financial costs.
Changing behaviour means acknowledging that there are factors beyond money that influence how you spend, save and make plans for your money.
Listen to your inner voice. Why do you make financial decisions? Is that your dad’s voice in your head? What will people think? Are you anxious? Do you want to feel secure? Do you shop when you’re bored? Do you just avoid anything financial because you don’t like math? How do you rationalize your behaviour?
You are more likely to change when you recognize where you are coming from – your motivations, your needs, your fears, and your dreams.
Final thoughts
Before I got into banking and finance, my university major was psychology. On first glance you may think that these two fields are polar opposites. But personal finance isn’t just about the stock market returns, interest rates and insurance. It’s the way we have been brought up to think about money that can help or hinder us in making decisions.
From career choice to homeownership to relationships to parenthood, money is about much more than numbers. Our money choices sometimes have less to do with money than with what we want: happiness, security, peace, and what our time is worth.
In this monthly series I’ll explore how emotions and perceptions are a large component of the financial decisions we make and each choice has a personal as well as financial cost and reward.
