Emotional Based Financial Decisions

It’s inevitable that you’ll make financial decisions based on emotions, you’re human after all. Whether it be major purchases like purchasing a property or a home or making investments or even charging your credit card, emotions impact your financial life and the decisions you make every day. However, is that really a bad thing? There’s no real way around it so it might just be better to try and understand why and try to make better financial decisions.

Fear Based Financial Decisions

When you make financial decisions out of fear you are a lot less likely to deploy capital at the most opportune times and are very likely to miss opportunities. This can occur in any market, whether it be real estate, equities, etc. Great investors buy the fear and sell the greed. Although it’s not always an easy thing to do, it’s the one strategy that is most often highly successful. If you hold onto cash or remain uninvested for too long you risk stagnation, in which case you are effectively losing out to inflation. Fear can prevent you from buying a discounted market and fear can give you analysis paralysis. Both of these things can weaken your investment performance in the long term.

Greed Based Financial Decisions

Sometimes you’ll make financial decisions based on greed in which case you aren’t taking any profit on your investment or are risking too much capital in order to see a return that could have negative consequences if it doesn’t succeed. Everyone is susceptible to being too greedy when you need to be fearful it’s a common flaw for many. However, if you can take a step back and evaluate from afar you’ll be able to better understand yourself and make better decisions due to it.

Sunk Cost Theory

Many market participants fall victim to sunken cost theory in which they average down on their losing positions. This can sometimes be the wrong move to make and can lead to further losses but it’s an emotional decision that many consumers still make. Some investments may turn a tide while others may not but sunken cost theory is a fallacy that causes some consumers great grief. The general idea is that you’ve lost so much you will eventually have to be right. This unfortunately isn’t always the case! Avoid this reasoning whenever possible and always try to evaluate based on opportunity cost and future earnings potential.