It is common to believe that financial planning has little to do with emotions, which is pure logic, numbers, discipline and principles to follow. But that is usually the reason why many people fail in the organization of their finances, a situation that ends up affecting their personal finances.
There are usually very few who sit down to order their assets to do projections through the development of a budget, so they end up spending their money without clear objectives and suffering the shocks of repeated economical crisis that leave them defenseless.
It is for this reason that financial emotional intelligence plays a very important role in the healthy and prosperous development of the personal economy.
Although in the past, the medical field was the one that mainly focused on the brain study, in recent decades, other areas, such as the financialThey have also sought to understand it.
Thus, the economy and finance with neuroscience to give an explanation to our behaviors, either as investors or as consumers, taking into account not only the brain but the nervous system and even the hormones and the emotions.
As a consequence, in recent years, it has even been discovered that this type of intelligence is essential to determine the social and financial success of people.
Many people spend their money without clear objectives and suffer the shocks of repeated economic crises. Photo: Marcelo Carroll
“In personal finance, emotional intelligence is as or more important than in other areas of life. Because emotions can play a trap that costs a lot of money“, said author of the book” The Art of Deciding “, Master in Finance and director of Liebre Capital, Ezequiel Starobinsky, to Clarion.
“We all believe that we are very rational when it comes to thinking about personal finances, but the truth is that there are emotions (not entirely conscious) that make a good part of our behavior irrational in this regard,” he added.
What are the emotional traps in finance and how to solve them
1- The unjustified fear of the unknown and of loss
The fear of the unknown is something that we carry in our genetic memory. It is common for the huge number of people who are unfamiliar with finances to take personal financial decisions with an excessive component of that fear. For example, that you save only buying dollars which is, in long periods of time, very inefficient.
Another classic trap when it comes to taking care of personal finances is the disproportionate fear of loss. It is true that no one escapes the risk-return rule, and whoever claims the latter, some level of risk must be willing to assume. However, in some cases, fear of loss makes one suffer more waste of money disproportionately to the loss itself.
Fear and ignorance lead to very inefficient financial decisions regarding savings. Photo: Martín Bonetto
Emotion is disassociated from reality. For example, wealthy people who suffer or get very angry when they lose small amounts, even ridiculous ones. Unlike the fear of the unknown, this emotional trap may have to do with the ego, with the fact of failing and that that small loss represents the pain of being wrong. It can also happen that a small loss triggers an unwarranted fear of losing everything.
The objective measurement of risk (for example calculating well “the maximum possible loss or thinking in probabilistic terms) should help to dissolve the fear of the unknown when investing. The fear is imaginary. The risk is real.
2- Adrenaline risk addiction
At the opposite extreme, there are those who do not have any kind of fear that moderates them. On the contrary, they are addicted to financial risk, which reveals some kind of lack of emotional intelligence or self-regulation.
In finance there is what is known as addiction to financial risk or “stock gambling” that leads us to bet all the time in the world of stock values, without being able to take our eyes off the screens with quotes.
In general, those who suffer from this addiction, end up spending fortunes in commissions and rely too much on quick intuition, which in the long run detracts from the quality of the decisions and results, by far, in greater losses than gains. In addition, of course, the psychological wear and tear of constantly winning and losing.
The adrenaline rush of financial risk is fun and tempting, but never allow yourself to become addicted. You should never make financial investments for more money than you can bear to lose..
3- The expensive pleasure of the short term
To achieve financial freedom one day, it is key to continue the golden rule of saving whenever you can. In finance, many small coins make a great coin.
Those who have a culture of saving since they are young, it is possible that they reach the average life with a level of savings that generates passive income, which naturally provides degrees of freedom when it comes to managing our time.
But for this it is necessary, always, the first thing: generate more than what is consumed, sustained over time and well managed. However, many people operate exactly the other way around: they consume more than they generate.
The relationship between money and happiness levels is a subject of study for science. Photo Shutterstock.
It is clear that you have to indulge yourself in life, but always within the reasonableness of what our finances allow. Borrowing at very high interest rates to take, for example, a pleasure trip, and staying with the rope around your neck for months and months, does not make sense but it does have a very high cost.
People with low emotional intelligence generally do not have long-term visibility, and overweight choices that give us short-term pleasure at the expense of long-term finances. Bad business. The long one day comes.
4- The ego, the difficulty of admitting the mistake and the loss of money
Many times decisions are made that do not bring the results we expected, and that is when one begins to ask the uncomfortable question of how far to sustain the decision.
When one make a decision that doesn’t work, it is quite likely that it will last longer than it should, incurring larger losses and more wasted time. This is especially the case when the decision involved money and / or effort and / or time.
One gets stuck in the ego, which accounts for everything invested in a decision and when it is not working, we do not want to accept the loss.
Everything that one has already invested in a decision should not be considered when sustaining it or not. What one put in the past is already there, disappeared. But the past often muddies decisions of the present.
It should focus on today to clearly see the future without dysfunctional emotions contaminating vision.