Have you ever bought something just because it was 50% off? Do you save for holidays but avoid planning for retirement? These everyday decisions might seem random, but they’re rooted in behavioural finance - the study of how our minds influence financial decisions.
According to behavioural finance, real people don’t always make perfectly logical financial decisions. Instead, we’re influenced by psychological factors, like emotions, habits, and peer pressure. These elements don’t just affect what you do with your money, they shape why you make certain financial choices.
Understanding behavioural finance can help you make smarter financial decisions, avoid common pitfalls, and feel more confident about managing your money.
Here are some of the irrational reasons that drive many of our financial decisions:
Bias: For example, choosing a mortgage lender based on familiarity rather than comparing rates is a bias that might cost you a lot of money over time. Behavioural finance encourages you to pause, research, and avoid costly mistakes.
Emotions: Understanding how your emotions influence your decisions can help you stay calm and make an informed decision that aligns with your long-term goals. For example, you might think to cancel your insurance or protection policies because they feel like a “waste of money”, but this could potentially leave you exposed in emergencies.
Social Influences: Many people are influenced into jumping on social trends, like crypto, even though it might not align with their financial goals. Behavioural finance helps you drown out the noise and evaluate whether a decision is truly right for you.
Past Experiences: A bad experience with stocks might lead you to avoid investing in them entirely, even though it’s a key part of building wealth. Behavioural finance teaches you to separate past mistakes from future opportunities.
Traditional finance assumes we’re all robots crunching numbers. Behavioural finance says, “Nope - we’re human!” It asks: Why do we overspend during sales? Why do we procrastinate on saving? How do these human tendencies shape bigger trends, like housing bubbles or meme-stock manias? Even if you consider yourself great with money, subtle biases and emotions can still influence your decisions in ways you might not realise.
At Index Financial Services, we understand that finance isn’t just about numbers; it’s about people. Your financial decisions are influenced by psychological factors, whether it’s how one’s personality influences risk-taking or how one’s motivation affects decision-making. That’s why we take a behavioural approach to financial advice, helping you make choices that truly align with your needs and goals.
In this blog series, we’ll break down key financial concepts through the lens of behavioural finance, making them clear, relatable, and practical.