Each week across the ACM network Ali and Gaby Rosenberg offer quick tips for big wins in understanding your money. The sisters are co-founders of the Blossom micro-investing app.
You may see yourself as a balanced, logical and reasonable person, but for most people emotion - not reason - is how we navigate our complex world.
Research by Nobel Prize-winning psychologist Daniel Kahneman found that 90 per cent of financial decisions are driven by emotions.
And that's just when things are going smoothly. "Amygdala hijack" describes what happens to the brain when strong emotions like fear, anxiety, anger or even excitement overtake the brain's frontal lobes, which manage rational thought.
This brain "quirk" is often involved when you (sober you) react in the moment in a way you end up regretting later.
On the bright side, not all emotions equal poor financial outcomes. They can help when motivating you to save, try something new or avoid risk.
The key is to be on the lookout for the emotions that most often trip up the average investor.
Fear: It's obvious but fear of losing money can turn up in some not-so-obvious ways, like an inability to take action, avoidance, ignoring risks or recklessness.
Excitement: Being excited is good, right? Not when it means overconfidence. It often follows an unexpected win or out- of-the-ordinary event (which, by its nature, is unlikely to happen again).
Greed: Desire and ambition are motivating forces, but if you find yourself only focused on growing wealth at the cost of other things that are important to you, it's flipped into the greed zone.
A fail-safe way to avoid making emotional financial decisions is having a set of short- and long term goals to refer to. Ask yourself: Has anything changed about my goals? Will this action bring me closer to my goals? Does it create new risks that may stop me achieving them?
A useful check-in during a fear spiral is writing down a list of facts - only the things you can prove. If you're scared of a certain outcome, that's a fact, so record the feeling. But list a separate point with any proof it could actually happen.
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Phone a friend. Ideally not someone directly influenced by your financial success either way, but someone with your best interests at heart. Run the situation (the facts!) by them and get their take.
These tactics will help - mostly because they force you to take a moment's pause. If you've stopped to ask yourself whether you're making a decision based on emotion - or you've read this far - you're already one step ahead of your amygdala.
- Sisters Ali & Gaby Rosenberg are the co-founders of Blossom App.
- Nothing in this article should be construed as being personal financial advice. It is general in nature only and has not taken into account your particular circumstances, objectives, financial situation or needs. You should consider whether the information, strategies and investments are appropriate and suitable for you or seek personal advice from a licensed financial planner before making an investment decision. Past performance does not indicate future performance. BlossomApp Pty Ltd (ABN 74 644 216 151) is a C.A.R. (No. 001284228) of Gleneagle Asset Management Ltd (AFSL 226199). Consider the PDS and TMD at blossomapp.com to ensure the product suits your needs.
- ACM co-owner Alex Waislitz has a stake in a company that provides services to Blossom. ACM is the publisher of this masthead.
