How to be less stupid and make fewer mistakes in economic decisions

The umpteenth disaster cryptotechnology on the ground, pyramid schemes, gurus flea market promising gold… It's an economic jungle out there and any wrong choice could mean ruin. But if one thing is clear, it is that when it comes to euros, savings and investment, our ability to make good decisions is easily clouded.

Money awaken our irrationality and therefore, the first step towards good management is don't make stupid decisions.

This seems obvious, but we will see that it is much more difficult than it seems.

Why are we doomed to be stupid with money?

In 2002, Daniel Kahneman and Amos Tversky won a Nobel Prize for their work showing that, essentially, When money enters the picture, our ability to make rational decisions goes out the window.

I want to make it clear that this phenomenon has more to do with inevitable psychology than with a lack of intelligence (which also contributes, of course).

Although ignorance is very expensiveMost of the mechanisms that lead us to make bad economic decisions are caused by cognitive biases that we all have.

We are human and we are programmed for this. And it gets worse because such biases and mechanisms are explored by marketing and behavioral economics to trigger emotions that make us consume and buy more, or fall into profitable investments only for those who propose them.

So today we will protect ourselves from bad economic decisions by learning to “be less stupid.”

Top 7 factors that make us stupid

To be less stupid with money, there are some general factors that lead us to make wrong decisions and other specific factors that have to do with the economy itself.

For general items, Adam Robinson's theses will be useful to us. This investor, who is also a chess master, educator and a complete renaissance man, raises 7 factors that lead us to act stupidly in any situation.

These are:

1. Find ourselves outside our circle of competence. Which connects with Warren Buffet and Berkshire’s most famous investment advice: “Invest in what you know.” The fact that you are a good engineer does not translate into wisdom about geopolitics or social media. The chances of making stupid decisions for the pride of believing that you know more, when you are outside your specialtyis almost 100%.
2. The stress. Let us not make decisions (that we can postpone) in difficult times.
3. The rush. Another element that, when present, is a prelude to bad decisions. It's no surprise that salespeople and marketing use urgency for something.
4. Obsessed with a result. This will make us tie ourselves to the Titanic when it sinks. Winners pick battles, change direction, and constantly give up. Don't be fooled by self-help phrases.
5. Being overloaded with information. A current classic. After a saturation point, this information works against us rather than in our favor.
6. Being in a group where social cohesion is important. That work meeting, that investment group where everyone wants to do something that doesn't feel good to us... If status and social conformity in a group are more important than objective results, fertile ground for stupid decisions.
7. we find ourselves in front of a authority or specialist. As we've already seen, when it comes to divination, many experts are worse than monkeys throwing random darts. Or to see who is against the boss who is not aware of the number 1 factor we saw. The presence of this other factor can be a harbinger of likely stupid decisions, especially when we talk about authority.

The practical application of this is clear. Know them to recognize these factors when they are present and, if so, stop to analyze with a cool head and eliminate them as far as possible. If not, foolish decision lurks nearby.

The good thing about these 7 general factors that lead to stupidity is that They apply to any situation.. However, when we talk about economics, savings and investment, it is not enough to avoid foolish mistakes.

Specific Economic Factors That Lead Us to Stupid Money Decisions

There are too many not to turn this into a book, but These are some of the most important Always keep in mind to avoid predictable obstacles:

The hyperbolic discount

For which we value something present much more than something future. In other words, we tend to accept 50 euros today more easily than 100 euros in four weeks.

This bias also leads us to think that later we will do better than we do now. So, on Monday we will definitely start saving, tomorrow we will start making a budget… And so we pester our future selves constantly with bad economic decisions.

loss aversion

We move more to not lose than to win. That's why, Many products use this bias to manipulate us in your marketing and that we buy more.

FOMO (Fear to lose) or fear of losing something good is also another big driver of bad decisionswhich lead us to unnecessary expenses and disastrous investments.

The Sunk Cost Fallacy

Or how we're losing at roulette, but with one more double or nothing bet, we'll definitely get it all back. As soon as we keep throwing money down the drain on bad decisions.

We don't want to admit mistakes. This fallacy greatly affects supposed “good” investment advice, such as staying and to holdor buy low values and investments that won't return, just as we won't win double or nothing at roulette.

The same goes for purchases that are a disaster and a financial hole, like that luxury car we keep losing money on. He must keep a cool head and be systematic in reducing losses.

The belief in silver bullets and free lunches

They are programmed deep into our psyche, but the reality is that none of this exists.

Do we really think that if someone has found an infallible investment method, they will sell it to us for 49.99 euros? Do we really believe there are risk-free investments with great returns that experts don't know about, but a guy on YouTube does?

The secret is that there are no secrets.

The “ostrich effect”

The poor ostriches don't bury their heads in the sand in the face of danger, but they are the myth and we are the reality.

Our natural aversion often makes us Let's not be firm on the subject of money so as not to face the hard and uncomfortable.

So, we continue another week without:

• put us once with some goals and a budget employees.
• Canceling loans, cards and services whose interest or monthly payments end up being “financial death by a thousand small cuts” that bleed us dry.
• Check your expenses carefully and realize that we dedicate much more money than we thought to whims or addictions. This is a classic among peers dedicated to personal finance, that is repeated in conversations. When they go through their clients' actual cash outflows, they always have the weirdest conversation in the world and I don't envy them.
• Don't think about retirement, plans or insurance until it's too latebecause, for now, we believe there is still time (spoilers: No).

Not understanding arithmetic or probability well

Which is normal, because we weren't made for them Natural way. They require effort and education that almost no one invests and, with great excitement, Marketing knows it can overcome ill will that we have.

Thus, free does we behave irrationally and it is expensive, or many offers are confusing in themselves or contribute to spending more than expected, attracted by the initial promise of savings.

Be careful in the presence of all this, because what seems too good to be true is too good to be true.

In short, with money and the economy there is an irresistible tendency to behave stupidly. We are reminded of this every day by many headlines, but knowing all this, we can be a little less stupid more often. It's a start.