Better Financial Decisions - Insights From a Motivational Speaker
Steal the Show Ep 102: Using Simple Behavioural Economics Principles to Make Better Decisions About Money and So Much More with Oprah Network Host, Preet Banerjee
In this episode of Steal the Show, Michael Port dives deep into the psychology behind our financial decisions with behavioural economics expert Preet Banerjee. Banerjee explains how understanding our cognitive biases can help us make better financial choices and secure our future.
A major theme in the episode is the power of awareness. Once we become aware of how biases like anchoring affect our decision-making, we can start making more rational, informed choices. Preet uses personal finance as a key example of how not being aware of these biases can lead to financial insecurity.
Recognizing Biases
At the beginning of the episode, Michael Port asks Preet to help listeners understand how biases affect our decisions. Banerjee acknowledges that in economic theory, we're often viewed as rational beings, but in reality, our decisions are riddled with irrationality. In fact, there are over a hundred cognitive biases that distort our thinking. These biases influence how we see the world and affect the choices we make—often without us realizing it.
Preet explains that biases, such as cognitive bias, occur when our brains fill in gaps of missing information based on past experiences, beliefs, or prejudices. For instance, our brains often jump to conclusions based on the latest piece of information we've encountered, even when that information isn't logically relevant. This leads us to make errors in judgment that go unnoticed—our cognitive blind spots.
Anchoring Bias: A Key Influence on Financial Decisions
One of the most powerful cognitive biases discussed is anchoring, which Preet describes as the "mother of all behavioural biases." The episode presents an eye-opening experiment to illustrate this: When people are asked to guess the year Attila the Hun was defeated, their guesses correlate with the last three digits of their phone number, even though there's no logical connection between the two. This shows how easily our minds anchor to irrelevant information when making decisions.
This principle directly affects personal finance. Preet highlights how credit card companies manipulate customers through anchoring—specifically, by showing the "minimum payment due" on credit card statements. People tend to anchor to this number and feel that paying just a bit more, say $40 instead of $30, is a good financial move, even though it's far from optimal. Removing the "minimum payment due" line from credit card statements increased monthly payments by 70% among those who carry a balance. This simple change shows how much of our financial decision-making is driven by unseen psychological cues.
The Psychology of Debt and Financial Decisions
As the discussion continues, Banerjee delves into other areas of personal finance, like borrowing for depreciating assets (e.g., cars) versus borrowing for appreciating assets (e.g., houses or education). He notes how, today, many financial products are designed to lure consumers into debt with low monthly payments, which causes people to lose sight of the long-term cost. Preet urges listeners to remain conscious of these tactics when making purchasing decisions.
A big part of financial literacy, according to Preet, is understanding the underlying psychological tricks that influence how we spend and save. The typical method of teaching financial literacy in schools may not be enough. Instead, Preet suggests a Just-In-Time learning approach—learning about mortgages or car loans when you actually need to make a decision about them.
Willpower and Financial Decision-Making
Preet also touches on the concept of willpower. Making decisions, especially when trade-offs are involved, consumes cognitive resources. Just like a muscle, willpower can be depleted, leaving us vulnerable to poor financial decisions later in the day. Whether it’s deciding to save for the future or buying that extra treat, each decision takes a toll on our mental energy. Recognizing this can help you make more thoughtful, strategic financial choices over time.
Self-Awareness and Financial Security
Preet emphasizes the importance of self-awareness in achieving financial stability. People who leave salaried jobs to start businesses often struggle with managing their taxes because they aren’t prepared for the new financial realities of entrepreneurship. Being aware of your financial habits, preferences, and biases allows you to take control and make better, more conscious decisions—whether it's managing debt, saving, or investing.
The Takeaway
In this insightful episode, Preet Banerjee teaches us that awareness is the first step to breaking free from the invisible forces that shape our financial choices. By recognizing biases like anchoring and understanding the psychology behind our decisions, we can make more rational, empowered choices with our money. The key is simple: once you're aware of your biases, you can make better, more intentional financial decisions, leading to greater financial security and peace of mind.
