People are often urged to “go with their gut” or “follow their hearts” and in certain situations in life, that can be really good advice. But when it comes to making sound financial decisions, these kind of choices can actually be the result of cognitive biases, and can lead to financial challenges, like bankruptcy.
What exactly is a cognitive bias and how could it affect your choices?
A cognitive bias is an error in reasoning or decision making. It happens when you choose subjective preferences or beliefs over accurate information. This is why following your gut or using hunches is viewed as cognitive bias. And while it usually isn’t harmful to follow intuition, when making financial decisions it can be disastrous!
When it comes to money, making choices about purchases (or in cases of bankruptcy – keeping things you can’t afford) should always be done based on facts. Making decisions based on emotional attachments, or on flawed understandings of worth, will always lead to financial problems later on. Which is why cognitive bias can actually land you in bankruptcy court if you aren’t careful! So, as a rule of thumb, the more money you’re thinking about spending, the more time you should spend thinking about it.
The ‘sunk cost fallacy’ puts many people in a worse financial position!
Ever heard of the ‘sunk cost fallacy’? Not many people have, but it can play a huge role in your financial future, and can also be a window into your cognitive biases. So what does it refer to? Simple. A sunk cost fallacy is the misconception that the possible future value of objects can be a basis for decision-making. In reality however, emotional investments into objects is a poor foundation for determining their worth!
An example of this would be refusing to give up an expensive house or car that you own, despite the fact that your financial situation is precarious, simply because you’ve “already invested so much time and money into it” and now you can’t let it go. When in reality, the fact that you can’t let it go is the reason your situation will get worse!
You need to keep a clear head when making financial decisions!
When choosing which company to invest in, you need to make that decision based on sound financial advice and that company’s track record, not whether or not your niece works there. When choosing to keep your RCI timeshare, despite overwhelming monthly fees and the fact that you never get to use it because the only weeks available for trade don’t fit into your schedule, you can’t choose based on happy vacation memories. You have to decide based on what you can afford moving forward.
This is where a good attorney comes in. At The Kronzek Firm, we understand how hard it can be to let something go you’re attached to. We know how difficult it can be to make “cold, hard” choices with your money, instead of the ones that feel good in the moment. But our experienced bankruptcy attorneys will help you make the right choices, guiding you through the process, and preparing you for what lies ahead. When you have questions about bankruptcy, or need help deciding if it’s right for you, call 866 766 5245 today. Discuss your situation with a skilled bankruptcy attorney. The Kronzek Firm has been handling bankruptcy cases in Mid Michigan for nearly a quarter century. We can help you too.