5 perception traps that make us pay more and buy unnecessary

If financial management was all about counting money and planning, we would be great at it. But when it comes to financial decisions, our brains often work against us. We overpay for goods and services or buy something useless, not because we do not know how to count. It's all about the peculiarities of perception and bias, which does not give reason and make the right decision. But if you realize your bias, then you can overcome it.

1. The sunk cost error

If you've ever had a failed relationship that lasted too long, you've already run into the sunk cost mistake. You invest in something, and even if in the end everything turns out badly, you do not stop, because otherwise it will turn out that all your efforts were in vain.

Here are some real life examples.

You are driving to a hardware store that is very far from home, hoping to buy a good smartphone there. But what you wanted is not there. To justify the long journey, you buy another smartphone that you don't like. And after a few weeks of use, buy another, because this one does not suit you.
You are looking for the right thing on the site of a large online store for half an hour, but you do not find anything suitable. You don't like anything, but you've spent so much time searching that you feel like you just have to buy something.
You buy the wrong bathroom paint, but instead of buying another and repainting, you buy more of the wrong paint and paint another room with it too.

Maybe you go to a university you hate in order to get a specialty that you will never work in? Maybe you have a loss-making business that sucks money and brings nothing, but you keep fueling it?

These are all long term financial mistakes. But they can be dealt with. First, you need to identify triggers - the conditions under which you think and act biasedly. Then calculate how much more you will pay if you continue to invest your money wrongly.

For example, you might have a trigger thought like this: "I went as far as I could [insert any bad decision here]."

When this thought occurs to you, realize that you are at risk of making a sunk cost mistake. Then ask yourself, "How much will I pay if I keep doing this?" Of course, the calculations will be approximate, but this will give you a chance to reasonably assess the possible losses.

For example, if you buy more of the unsuitable paint, you figure out how much you will have to spend to repaint the room again - because you don't like this paint and sooner or later you will admit it.

Recognizing your triggers is the best way to avoid misbehavior.

2. Support your choice

Buyer remorse always starts with denial, also known as post-purchase rationalization, or support for a choice. It is ignoring other points of view in an attempt to defend a decision you have already made.

For example, you decide to buy an iPhone of the latest model, you just fell in love with it and decided that you should have it. To justify buying a smartphone that costs two of your salaries, you start convincing yourself that this is the right choice.

Tell yourself that you are buying it for a long time, because the smartphone is of high quality and, unlike Chinese phones, will last longer than a year, convince yourself that all successful people have an iPhone, and this, one might say, is an investment in a bright future, and so on.

This is Stockholm Buyer Syndrome, and this is how it is explained in one of the

Andrew Nicholson Founder of digital psychology and marketing consulting site The GUkU.

Post-purchase rationalization, also known as Stockholm Buyer Syndrome, is a brain mechanism that helps eliminate cognitive dissonance. This is the kind of discomfort we experience when two contrasting beliefs arise in front of us.

If our own internal excuses are insufficient, we seek additional evidence to support our decision, ignoring facts that conflict with them. This process is called bias confirmation.

This often happens when you are making tough decisions and purchasing decisions are very often tricky.

There is only one remedy for this - do not get stuck on a solution, think broadly. Of course, this is easier said than done, especially considering that we think much narrower than we think. You just need to accept other people's points of view and consider them, and not immediately discard because it conflicts with your decision.

It is also helpful to have someone around to help you maintain your sanity. For example, you tell your spouse about a decision to buy something expensive, and his surprise and rejection of your decision can help you think better in time.

Moreover, if you start to defend your point of view with fervor, this can be a trigger for a bias towards buying. If you recognize the trigger, it will be easier for you to recognize the bias and.

3. Snap effect

You may have heard of the effect of anchoring in trading. This is when you rely too much on the first information you receive about a product and let that information guide your subsequent decisions.

For example, you see a cheeseburger for 300 rubles on a restaurant menu and think: “300 rubles for a cheeseburger? Never! And then you buy a cheeseburger for 250 rubles from the same menu and it seems to you a perfectly acceptable alternative.

The anchoring effect also works during negotiations. For example, you are interviewing and say that you are ready to work for a salary of 30,000 rubles or more, which is actually much less than what you expect. It becomes your peg, and instead of setting a higher bar, you lower it and settle for lower wages as a result.

Use the anchoring effect to take advantage of your negotiation. In this way, it can influence not only how much you spend, but also how much you earn. Rather than just recognizing this effect, you can deal with it by doing your own price research.

For example, you buy a car and the dealer tells you a crazy price - he tries to influence you with the binding effect. But that doesn't matter, because you've already figured out how much this car costs and you know what price to actually expect.

The same goes for your salary. Find out how much people in your field of activity, in your position, in the company you want to work for. This way you will have realistic expectations, regardless of the number that will be given to you at the interview.

4. The herd effect

You take out a loan for a car and overpay a substantial amount in a few years. At the same time, you do not have an urgent need for a car and you can safely save up the required amount so that later you can buy a car without a loan.

But you still take a car on a loan, because “everyone does it” and the loan does not seem to you to be a bondage with a large overpayment. This is the herd effect in action.

Instead of making an informed and thoughtful decision that will bring you more benefits, you agree to disadvantageous conditions that are considered the norm in society.

The herd instinct makes us ignore retirement savings, thinking something like, "None of my friends are saving for retirement, why would I?" Your friends have nothing to do with your retirement, but herd instinct forces you to connect these facts and rely on the result.

Following the crowd isn't always a bad thing. If you really need a car, for example for work, taking out a loan is the only option available, and it will pay off.

Overcoming the herd effect does not always mean doing things differently from the majority. This means independently analyzing the options and choosing the best solution for yourself.

When you need to make a financial decision, calculate everything, consider different scenarios, and then choose what works for you.

5. Status quo

Status quo bias is when you prioritize decisions that won't change your life. And it can work against you when it comes to finances.

Here are some examples.

Your monthly spending is more than your income, but you can't live without cable TV, restaurants, or expensive coffee breaks.
Instead of investing your money, you continue to keep it in a savings account with scanty income for many years.
You can connect to a cheaper tariff plan, but it is more convenient for you to stay on the old tariff plan, which you have been using for several years, although it is twice as expensive as the new one.

We prefer the status quo because it's comfortable. It is difficult to show willpower and change your life. But if you start to change gradually, you can deceive your mind and overcome the influence of this effect.

For example, if you want to change your lifestyle and stop spending more than you earn, start small, eliminating one cost area at a time: stop going out to restaurants one month, expensive gadgets the next, and so on.

Yet bias is not always a bad thing. Let's say you have some savings and then a crazy investor comes and wants you to withdraw all your money from the account and invest in his new fund.

Being biased about the status quo or supporting your choices will save you from impulsive and costly changes that will do you nothing. In such a situation, it is better to listen to the investor, and then consider his idea from different angles, based on your own knowledge.

However, in most cases, we do not even realize our bias when making financial decisions. And while this blind spot affects your choices, it does more harm than good.