Economic choices depend more on human psychology than mathematical calculations which people make through their ego-driven behavior and their emotional responses and their instinctual need to survive. Although people believe they think logically their brains make them want to experience immediate pleasure instead of long-lasting safety. The initial step for acquiring actual wealth requires people to comprehend how human beings experience psychological “glitches”.
The Fear of Missing Out (FOMO)
When people observe their neighbor making profits from a “meme stock” or a dangerous crypto coin they must participate in the activity because their body demands it. People purchase stocks when market prices reach their highest point because they want to avoid missing out on social opportunities.
The Anchoring Effect
The first price we encounter becomes the price that keeps us from moving forward. We see the designer bag priced at 1000 dollars which now costs 500 dollars during its “on sale” period as a discount even though it remains a dangerous cost of 500 dollars.
Social Proof and Status
People regularly purchase expensive vehicles or properties outside their financial means to demonstrate their achievement to other individuals. The “keeping up with the Joneses” mindset creates a debt cycle which people use to demonstrate fake wealth instead of showing authentic financial success.
The Sunk Cost Fallac
People continue to invest money into failing businesses or broken-down vehicles because they think they must continue funding operations after making their first financial commitment. People give more importance to their previous financial commitment than they should according to actual reasoning about future events.
Optimism Bias
Most people do not purchase insurance or create emergency savings because they believe that “bad things only happen to other people”. People who have excessive self-confidence experience financial ruin after they face actual emergencies like medical threats.
Decision Fatigue
Our ability to make decisions stops functioning after we spend a whole day making tough decisions at our job. The body loses capacity to assess future expenses which causes people to purchase things on impulse during nighttime or dine on costly food delivery.
Mental Accounting
People handle funds in different ways according to their original source of acquisition. People treat a tax refund of 500 dollars as discovered income which they spend on expensive items while they treat 500 dollars from their salary as essential value which they use to pay their debts.
The Endowment Effect
People assign excessive worth to items which they currently possess. People try to sell their used vehicles and homes at prices which exceed actual market rates which results in them losing business chances and spending excessive time.
Scarcity Mindset
People who grow up in poverty develop a habit of panic spending whenever they receive money because they believe their funds will vanish. This habit prevents them from establishing a reliable savings foundation.
Confirmation Bias
Investors tend to read only the news stories which validate their existing beliefs. A person who loves a certain tech company will only search for positive news while dismissing negative warnings resulting in a “blind spot” which leads to significant financial losses.
