Investor's Deep Dive
Investment Insights You've Never Heard
Investor's Deep Dive
This is your Brain.
Our Brains want to make quick decisions. Great for running from a saber tooth tiger; not so great for money management. Learn why and what to do about it.
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Ever walk out of the store, like feeling so good about saving ten bucks on something.
And realize later you dropped like 50 on something else without even thinking.
Happens to the best of us.
It's like our brains have a mind of their own when it comes to money, right?
Yeah, it's crazy.
We're diving into that today.
How our brains really deal with money.
We're going deep on this one, looking at money and how we decide, behavioral research.
This stuff is like eye-opening.
Seriously, it turns out our brains aren't always rational, especially with money.
No kidding.
So what's the deal with that?
Why are we so bad at making sensible financial decisions?
Well, our brains are kind of lazy in a way.
They love taking shortcuts.
Lazy brains, I can relate to that.
Right.
In psychology, we call these shortcuts heuristics.
Yeah.
They're basically mental rules of thumb that help us make quick decisions without overthinking
everything.
Okay.
So like, instead of analyzing every single option at the grocery store, we just grab the
first brand of pasta we recognize.
Exactly.
Heuristics are usually helpful in our daily lives, but when it comes to money, they can lead
to some, well, interesting choices.
Interesting.
Give me an example.
Think of it like this.
You're facing a choice involving money.
Your brain instantly activates system one thinking, which is fast, automatic, like your
gut reaction.
Okay.
So system one is all about speed and convenience.
Yep.
You prefer like avoiding danger or making split second decisions, but it's not so great
when you need to think things through carefully, which is where system two comes in.
System two that's the slow and steady one.
Right.
System two is our more analytical, rational side.
It helps us weigh pros and cons, think long term, but it takes more effort.
And our brains don't like to work harder than they have to.
Exactly.
So often, our impulsive system one jumps in and makes financial decisions before system
two even gets a word in.
Gotcha.
How can we tell if our system one is leading us astray financially?
Let me ask you something.
A bat and a ball cost $1.10 in total.
The bat costs $1 more than the ball.
How much does the ball cost?
Ten cents.
That's what most people say.
But the real answer is five cents.
We would.
How?
Our brains jump to that quick obvious answer because it seems right.
But if you actually do the math, it doesn't add up.
That's system one tricking you.
Okay.
So I need to slow down and use my system two more often.
But how does it apply to bigger financial decisions?
This brings us to prospect theory.
This idea that we experience gains and losses totally differently.
Different how?
Imagine this.
You lose a hundred dollar bill.
How much does that suck?
A lot.
Now imagine you find a hundred dollar bill.
Does that feel as good as losing a hundred dollar bill felt bad?
Hmm.
Probably not, to be honest.
That's the heart of prospect theory.
Losing money hurts way more than gaining the same amount feels good.
We call this loss aversion.
Okay, I can see how that could be a problem.
But how does it tie into everything else?
Think of your income as your baseline.
Prospect theory suggests the further you move away from your baseline, either gaining
or losing, your brain reacts less strongly.
Okay.
That sounds a little like those optical illusions where you think you see one thing, but
your brain's playing tricks.
Perfect analogy.
Let's say winning five bucks feels awesome.
Winning ten bucks doesn't feel twice as awesome, right?
True.
Because each additional dollar you gain feels a little less exciting.
On the flip side, losing twenty dollars feels awful, losing thirty dollars while not
ideal doesn't feel that much worse.
So our brains are hardwired to be more sensitive to those losses.
Exactly.
And this loss aversion can make us do some financially irrational things to avoid those
losses, even if it means missing out on good opportunities.
So we're hardwired to avoid losses.
Totally.
But how does that actually work in real life?
Oh, it pops up everywhere.
Like what?
Give me an example.
Have you ever tried to sell something you own and felt like you deserved way more than
anyone was offering?
Oh, my gosh.
Yes.
All the time.
Yeah.
Especially now with all the online selling platforms, I'm like, this is worth at least
double.
Exactly.
That's your brain on the endowment effect.
That what effect?
Endowment effect.
Basically, we overvalue stuff we own just because we own it.
You're kidding?
Yeah.
Right?
So if I find a shirt in the back of my closet that I haven't worn in years, I'm going
to think it's worth more than if I just saw that same shirt in the store.
Pretty much.
It's like ownership becomes the new baseline.
So like selling it even if I make a profit feels like a loss.
Yeah.
Because I'm giving something up.
Exactly.
It misses with our whole perception of value.
Is there like actual research on this endowment effect?
That seems kind of crazy.
Oh, yeah.
There is this classic study with coffee mugs.
Coffee mugs.
Okay.
So they split people into sellers and buyers, right?
And they gave a mug to each of the sellers.
Right.
Then they asked the sellers, how much would you sell this mug for?
And they asked the buyers, how much would you pay for this mug?
Okay.
What happened?
Sellers wanted way more money for their mugs.
No way.
Just because they had the mug in their hand for a few minutes.
Yep.
It's wild, right?
Just owning something even briefly can make us think it's more valuable.
Wow.
Okay.
That is wild.
It's like our brains get attached to things so easily.
They totally do.
And that can make it hard to let go of stuff for a price that makes sense.
This is giving me so much to think about.
Like maybe I need to rethink my whole approach to selling things.
It's definitely good to be aware of.
Okay.
So we've talked about how our brains hate losing money and how owning something warps our
view of its value.
Anything else we should watch out for?
Oh, yeah.
There's more.
This is just the tip of the iceberg.
Hit me.
Hit me.
All right.
So let's talk about how our first impressions, especially with prices, can totally mess
with our spending habits.
Okay.
I've definitely been guilty of this.
Like you ever see those items in a store that are just ridiculously priced.
Like a designer t-shirt for hundreds of dollars or some gadget that's way over price.
Yeah.
Oh, this thing who actually buys that?
Right.
We might think those crazy prices don't phase us, but they can still sneakily influence
us in our brains.
It's called anchoring bias.
Anchoring bias.
What's that?
It's this thing where the first price we see for something, even if it's totally unrelated,
sticks in our minds and affects how much we think other things are worth.
So like if I see that $500 t-shirt, even if I know it's insane, it might still make
me think a $50 t-shirt is a good deal, even if it's not that great.
Exactly.
The first price we see is like an anchor.
It sets a point of reference for us, even if it's totally arbitrary.
Wow.
That's kind of scary.
So it's not just about the actual price is something.
It's about the context, too.
Totally.
Our brains are always looking for clues to figure out how much things are worth, and sometimes
those clues can lead us astray.
So are there any studies that have actually proven this anchoring bias?
Oh, yeah.
There was one where they showed people a CD and asked them how much they'd pay for it.
Yeah.
That makes sense.
But here's the thing.
They showed some people the CD next to an $80 shirt, and others saw it next to a $10 shirt.
Oh, I bet the people who saw the expensive shirt thought the CD was worth more.
You got it.
They were willing to pay way more for the exact same CD just because they'd seen that
high price tag first.
That's crazy.
So even if we know better, our brains can still be tricked.
Exactly.
It's like those optical illusions.
We know what we're seeing isn't real, but our brains still can't help but be fooled.
This is making me rethink my whole shopping strategy.
I'm definitely prone to falling for those original price tricks.
We all are.
It's just how our brains are wired.
So what can we do about it?
The first step is awareness.
Once you know about these biases, you can start to watch out for them.
So like next time I'm about to buy something, I should stop and ask myself, is this really
a good deal?
Or is my brain just messing with me?
Exactly.
Let those mental shortcuts sabotage your budget.
This has been such an eye-opening deep dive.
I feel like I need to rewire my whole brain now.
It's more about rewiring your thinking.
Once you understand how your brain works with money, you can make smarter decisions.
So true.
Well said.
All right, everyone.
That's it for this deep dive into the wild world of our brains and money.
We hope you learned some valuable insights today.
And remember, those mental shortcuts might be sneaky, but they don't have to control
your finances.
Take care, everyone.