Financial choices are not only rational but affections, habits and cognitive biases are enormous. By understanding these psychological traps, you can make more sound decisions and prevent these traps that most individuals fall into.
Loss aversion causes us to be scared of losing money than acquiring it. This usually results in keeping the losing investments too long or taking the necessary risks which will help us out. Knowing this bias will enable you to be more objective about decisions.
Mental accounting trap makes us to treat money differently depending on the source. We may save tax refunds and spend bonuses or be economical with savings and loose with credit. Money is money and it does not matter its origin but handling it in a similar way would yield greater results.
We overestimate short-term payoffs and undervalue long-term gains on the basis of present bias. That is why it is less powerful to think of saving something to retire or to create the emergency funds than to purchase something now. The natural tendency can be beaten by developing systems that will automate savings.
Financial errors are based on social comparison to a large extent. Lifestyle inflation and a debt results of social media influencer friends, neighbors, or social media influencer friends. Creating an understanding of when you are making decisions out of comparison as opposed to your true values and goals is very important towards financial well-being.