How we treat money is surprisingly similar to how we act in romantic relationships: we tend to act irrationally with both. In this TEDx talk, psychologist Daniel Crosby points out the biases people tend to have that can sabotage our finances or love life.
It’s an 18-minute video, but one that’s both entertaining and informative. Dr Crosby talks about four specific psychological biases that lead us to irrational behaviour:
The “I Can Change Them” (or “Fixer Upper”) bias: We tend to think we can “fix” people when history has shown those “fixer uppers” will keep acting the same way despite our intentions. Similarly, in money, we tend to think we can beat the odds when it comes to financial decisions (ignoring warning signs when buying stocks, for example).
“This Time It’s Different” Bias: Divorce rates are much higher for second and third marriages than they are for first ones. We keep believing this time will be different — even when we don’t change what led to what went wrong in the past. When it comes to money, psychologists call this “New Era Thinking”. It’s why financial bubbles recur and why people over-value stocks (like the unprofitable eToys instead of Toys R Us).
“The Prince Charming” Bias: This is when we believe one (highly unlikely) relationship or event will sweep us off our feet and fix all our financial or romantic problems. We’re nine times more likely to be crushed by our televisions than we are to win the lottery, but we buy billions in lotto tickets despite the extreme improbability of ever winning because of the Prince Charming bias.
“Just Can’t Quit You” Bias: Finally, breaking up is really hard to do. “We hate losing, and we hate breaking up twice as much as we are happy about a similarly sized positive event.” Financial examples of this bias include the gambler who can’t quit the table or the investor who rides a losing stock to the bottom, because both can’t stand a sure loss.
Our relationships with both people and money are emotional. Before you make a major financial decision, consider whether you’re affected by any of these biases. (And here are a few more foolish things we do with money and when dating.)