We know who we like or don’t like but do we do know why? Unfortunately, it’s not the idealistic view of human nature that we would like to think. Our opinions are influenced occasionally by relevant information, but more often by irrelevant information; occasionally by reasonableness but more often by absurdity. Contrary to what we want to believe, we’re filled with biases and mental shortcuts that do most of the thinking for us. There’s no such thing as “neutral” decisions, or seeing the world “as it really is.” We’re all biased, we all believe silly things for silly reasons, and there’s no better illustration of that than in politics.
#1: Third-person effect – An individual’s overestimation of the effect of a mass communicated message on others, or an underestimation of the effect of a mass communicated message on themselves.
This Election: Every voter
Personal Finance: Advertising
It’s easy to see how advertising impacts our neighbors, friends and family members. But if you’re like most people, then like most people, you don’t realize you’re like most people. So we miss all the ways we fall prey to the puppeteering of advertisements ourselves. We rarely fully understand the extent to which advertising is control what we want or don’t want. And that’s exactly the purpose of advertising – make you think that you’re in control; that what you buy or don’t buy is a result of your own personal preferences. Of course, in reality it’s not. Everyone is influenced by advertising. It’s just you see it better in others.
#2: Bizareness effect – The tendency for bizarre material to be better remembered than common material.
This Election: Trump Supporters
Personal Finance: “Google employee, 23, plans to save 90% of his income by living in a truck on company parking lot.”
Is this a story on all the major news outlets because it’s good advice? No, it’s on TV because it’s bizarre. It has nothing to do with money and everything to do with entertainment. But I must admit: It’s impressive. Just not as impressive as learning how to earn, save AND SPEND money responsibly. Because learning how to spend money is just as big of a skill as earning and saving it is.
#3: Naïve realism – The belief that we see reality as it really is – objectively and without bias; that the facts are plain for all to see; that rational people will agree with us; and that those who don’t are either uninformed, lazy, irrational, or biased.
This Election: Every Voter
Personal Finance: “That’s a good deal!”
How do we know if something is a good deal? We have to compare across time horizons, right? What was it then compared to what it is now. The loving (and philanthropic?) retailers of the world make sure this is easily done without much effort (because they care about you?). We’ve all seen it: $100 with a big red X through it with $80 below it. In other words, it WAS $100 but NOW its $80. What a great deal!
I think everyone understands that retailers do not do this because they care about you – they do it because it’s incredibly effective in changing your perception about price. Even when we know that the original price is absurd!!
Retailers are the kings of anchoring, a cognitive bias where the initial exposure to a number, regardless of its absurdity, serves as a reference point and influences subsequent judgments about value. Take this for example: People participating in a bazaar auction were shown a bottle of wine. Before bidding, they were asked to write down the last two digits of their social security number, and pretend that was the price of the wine (i.e., if the last two number of your SS# were 53, pretend the price of the wine is $53). Then they bid. What did they find? People with social security numbers between 0-19 bid an average amount of $9, whereas those with numbers 80-99 bid $26 on average.
Why such a big difference? When someone with a social security number of 03 thinks of a $3 bottle of wine they say to themselves, “Great. But how much would I pay (bid) for this wine? I guess I would go as high as $9.” When someone with a social security number of 97 thinks of a $97 bottle of wine they say, “No way! I wouldn’t pay more than, I don’t know, $26 dollars? But certainly not $97!” Social Security numbers, having nothing to do with anything, had a great deal with how they bid.
So, are we influenced by suggested retail price? More than we’ll ever realize.
#4: Parkinson’s law of triviality – The tendency to give disproportionate weight to trivial issues.
This Election: Clinton Supporters – she made a big deal about Trump’s slogan
Personal Finance: What we spend money on
What do I mean by this? It’s simple: What we spend money on means very little. How we spend money is what matters.
What kind of car you buy doesn’t matter. How you buy the car is what matters (with cash, because you planned ahead). How much you spend on groceries each month doesn’t matter. How you came up with that amount is what matters (because you have a plan/budget). Where you go on vacation doesn’t matter. How you prepared for that vacation is what matters.
It’s easy to focus on the trivial things. It’s also a waste of time.
#5: Halo effect – A cognitive bias in which an observer’s overall impression of a person, company, brand, or product influences the observer’s feelings and thoughts about that entity’s character or properties.
This Election: Every Voter
Personal Finance: Dave Ramsey (or any other personal finance personality)
When we like someone we’ll find any reason to like. But when we don’t like someone we’ll find any reason not to like them. I can’t think of a better example in personal finance than Dave Ramsey. You either love him or you hate him.
Take his “12% growth on mutual funds” idea. For me, I don’t bat an eye when I hear this. Do I believe it? Of course not. But it doesn’t bother me that he says it. However, others go into a fit of rage as if “12%” was synonymous with punting little kittens into the air.
The fact of the matter is that “12%” has nothing to do with our emotions. I don’t care what he says regarding mutual funds (I’m an Index fund kind of guy) because I agree with everything else that he says. So I give him grace with some things. On the other hand, there are many people that don’t agree with anything Dave says. So they’re looking for ways to validate why they hate him. The 12% figure is perfect for the job. It makes them mad because they don’t agree with other things that he says.
#6: Negativity bias – Refers to the notion that, even when of equal intensity, things of a more negative nature (e.g. unpleasant thoughts, emotions, or social interactions; harmful/traumatic events) have a greater effect on one’s psychological state and processes than do neutral or positive things.
This Election: Cruz Supporters. Look what happened in Chicago – it’s trump’s fault!
Personal Finance: “Credit cards offer better protection!”
If we were required to continuously listen to five second clips of “I was not robbed using my debit card” by everyone who’s ever used a debit card and not been robbed, it would take several decades of listening to get through every clip. At the end of those decades two things would be apparent: First, people would have to really go to the restroom. And second, no one would put as much weight on the “protection” a credit card offers. Does it maybe offer better protection is some cases? Sure. Is it the sole reason you should use it over a debit card? No. The one case in which it helps shouldn’t over shadow the 700,000 cases where it didn’t.
#7: Ingroup bias – The tendency to favor one’s own group.
This Election: Every Voter
Personal Finance: Keeping up with the Joneses
Just like it’s rare for a self-proclaimed republican or democrat to ever vote for the opposing party, it’s similarly rare for consumers to deviate from what they should/want to look like. Part of our identity – as an individual, a family, etc. – is tied to another individual, family, etc. We want to do things like Joneses, as well as do things not like Belsky’s. We wear similar clothes, buy similar houses, and go on similar vacations as the people we identify with – people in our “group.”
On one hand this all very helpful. Instead of starting from scratch, which could be a very tedious and psychologically draining experience, we take social cues from others we aspire to be. They’re doing __, and they seem happy. So let’s do it as well!
On the other hand, it can put us in some unfortunate predicaments. Our loyalty to our supposed identity can become detrimental to our actual identity. Cars that are supposed to make us happy don’t. Houses that are supposed to be a blessing turn into a curse. All in the name of staying true to our group instead of ourselves.
#8: Availability heuristic – A mental shortcut that operates on the notion that if something can be recalled, it must be important, or at least more important than alternative solutions which are not as readily recalled.
Example: If a random word is taken from an English text, is it more likely that the word starts with a K, or that K is the third letter? Generally everyone says the former; that there are more words that start with K. But letter K is more often the third letter. Why are so many people wrong? It’s easy to think of words that begin with K (kind, kid), and hard to think of words that have K in the third position (acknowledge, ask).
This Election: Sanders Supporters
Personal Finance: Extended Warranties
Just like the socialist Bernie Sanders wants us to think about ludicrous student loans and the evil filthy rich (because we can all think of someone is impacted, and thus “it must be really important and WE SHOULD DO SOMETHING!”), places like Verizon want you to think about your new phone breaking into a million pieces as soon as you get home. But although we remember dropping our phones in vivid detail, the likelihood an extended warranty being a good idea is very slim. Moral of the story: Don’t get extended warranties, even if you can vividly remember the excruciating pain of cracking your screen.
#9: Backfire effect – In the face of contradictory evidence, established beliefs do not change but actually get stronger.
This Election: Me – “I need to find a way to like ___ because (the highly annoying) George hates him.”
Personal Finance: Shopping Bans
As far as I can tell, Shopping Bans are the same thing as diets. It has the same benefits of a diet (short-term reduction of calories/spending). But it also has all of the same downsides (very hard to maintain, band aide to larger issues, etc.).
If you’ve ever been on a diet you know first-hand that the easiest way to crave something is to tell yourself you can’t have it. That’s why I can confidently say I will never participate in a Shopping Ban – because it will, over the long-run, make things worse. And even if it does work, it’s sidestepping the actual problem (how we’re spending money) and focusing on the symptom (what we spend money on).
Instead of the stereotypical exclusive diet (can have this, can’t have that), learn how to incorporate all foods into a reasonable diet that first prioritizes calories in verse calories out, and then focuses on the particular foods that make up those calories (clean vs dirty foods.)
Instead of a Shopping Ban, make incremental and continuous financial progress by learning how to spend money while concurrently reaching other short- and long-term goals (this is known as a budget).
#10: Egocentric effect – Recalling the past in a self-serving manner, e.g., remembering one’s exam grades as being better than they were, or remembering a caught fish as bigger than it really was.
This Election: Republicans – “We wouldn’t be in this mess if Reagan or Lincoln was still in office!!!!!!”
Personal Finance: “I don’t spend a lot of money.”
We all know of at least one person who thinks they are frugal/non-spender but actually spend a ton of money. They clip coupons, get all the Buy One Get One Free promos out there, and every other “deal” out there that makes them falsely believe they are frugal. But when you look at it objectively (i.e., money spent, not on what deals they got) you see that not only are they not frugal, they’re a spendthrift.
This is most common in marriages, where the (stereotypical) husband thinks the (stereotypical) wife spends too much shopping. In some cases, this is an accurate assessment – the wife does spend more than the husband, typically shopping . But it’s surprising how often the husband thinks this, but it’s actually the exact opposite: The husband, thinking he is frugal, is spending more money than the wife who loves to shop.
Why? Because when we think back about how we handle money and what we spent it one, we manage to spin it in a light that best supports our preexisting assumptions (“I’m frugal. See, I got a good deal.” Instead of “I just spent $50.”). The husband might not shop as often, but he spends more money in total. The problem is Mental Accounting, where we count how often we shop (subjective) to how much we spent (objective/what matters).
What can we do about it? We need more objectivity in our lives – AKA Budgeting – so we don’t play back our actions with a subjective twist (“I really didn’t spend that much. Plus, it was on sale.”). Use a budget to move away from subjectivity to a more objective view.
#11: System justification – The tendency to defend and bolster the status quo. Existing arrangements tend to be preferred, and alternatives disparaged, sometimes even at the expense of individual and collective self-interest.
This Election: Democrats
Personal Finance: Budgeting requires change.
Like with most things, the hardest part in budgeting is getting started. It requires us to do things differently, and if there’s one thing about people it’s that they hate doing things differently. I think what makes budgeting so difficult for people is they focus on all the reasons they shouldn’t start budgeting instead of all the reasons they should start.
One of the unique things that I’ve learned about doing something that most people don’t (budgeting) is that it’s liberating to challenge the status quo. It’s fun to see people going in one direction and decide to go in the opposite. It makes the necessary sacrifices much more enjoyable.
Question: Are these biases impacting your vote and wallet? Of course not! Not you! (Yes they are.)