Money brain hacks
Ever feel like it’s difficult to set money aside now, even though you know the importance of investing in your future? You’re not alone – according to behavioural science, our brains naturally struggle to save and invest money. 🧠
Despite thinking we’re on the same team, our brains can sometimes convince us to act in ways that go against our best financial interests through mental shortcuts known as cognitive biases.
Present bias – ‘Fancy holiday next year or fancy dinner out tonight?’ 🤔
We are creatures of the present, which means we are constantly focused on the ‘here and now’. This present bias means that we tend to value an immediate reward more than a future reward, even if the future reward is better. Research has found that this bias can go as far as making us feel like our future self is a complete stranger!
In other words, we struggle to prioritise investing in our future because we feel like we are giving away our money to someone else.
Ambiguity effect – ‘I don’t even know what I’m doing tomorrow, let alone in 10 years!’ 📅
Uncertainty can be scary. Having to think about putting money aside for the future when we don’t even know what the future will hold can make us reluctant to commit to it. This encourages us to stick to more predictable situations and avoid thinking about long-term scenarios.
Loss aversion – ‘Oh no! My investment value went down today (even though it’s been increasing for the past year)’ 📈
Losses can loom larger than gains, in other words – the pain of losing money is more powerful than the pleasure of gaining money, even if it is an identical amount! This bias is particularly relevant for investment decisions. We are more likely to focus on the potential risks of an investment rather than the potential gains, which can make us hyper-focus on investments that have gone down in value while ignoring those that have gone up.
Clearly our brains can sometimes be irrational, but the great news is that we can use these biases to our advantage and trick our brains into making better financial decisions!
According to behavioural scientists, the best way to overcome these barriers is by making saving and investing as automated as possible. By setting your Moneybox account deposits to repeat on a regular and automatic basis, you remove the need to actively think about them, which can help you avoid those sneaky cognitive biases.
So why not review your settings today and beat your brain at its own game! 🏆
Remember, all investing should be regarded as longer term (at least 5 years). The value of your investments can go up and down, and you may get back less than you invest.