Learning how to handle money, live within a budget and decide when to save and when to splurge is one of the greatest challenges of young adulthood (and frankly, for many, all of adulthood). You may be able to rattle off a definition of a credit derivative swap, ace calculus and win every argument with the screen when you watch TV financial pundits, but still find yourself struggling with debt and savings. Why? David Krueger, a former psychiatrist and current executive coach, and co-author of The Secret Language of Money: How to Make Smarter Financial Decisions and Live a Richer Life, has one possible answer: psychology.
In an interview in on Bankrate.com (hat tip to Consumerist for pointing the way), Krueger argues that understanding the emotions and assumptions that swirl around money are just as important as solid budgeting, sensible spending and basic math. He also points out some of the common biases that can mess with your money, including:
- The transference fallacy. We tend to idealize the confident and wealthy and believe that just because something is exclusive, it’s desirable. Our desire to be in the chosen group of insiders can overwhelm our common sense. The prime example: Bernie Madoff.
- The confirmation bias. “We make a choice, then cherry-pick data to confirm that we made the right decision, obscuring evidence to the contrary.”
- The optimism bias. This is the tendency to believe that things will somehow work out and that the money will miraculously appear. It can severely distort plans for retirement.
Like overweight people who need to deal with not just calories in and calories burned when they’re hoping to lose weight, but also must examine the emotions surrounding food, Krueger argues quite sensibly that we need to take an honest look at the ways our human quirks and biases can warp our relationship with money. Doing so allows us to correct for these influences and get our finances under control. It’s not an incredibly ground breaking idea but it’s one that, in light of our recent collective financial meltdown, bears repeating.
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