Getty Images/John Lund You’ve probably heard that your financial decisions should not be based on your emotions. However, this may be more difficult than it appears, particularly if the market falls. Indeed, there could be a multitude of psychological biases preventing you from accumulating wealth. According to certified financial planner Michael Finke, professor of asset management at The American College of Financial Services, this is because the part of our brain that allows us to imagine the future doesn’t move as quickly as the part that handles emotions. “The emotional portion of our brain was successful when we were fleeing saber-toothed tigers,” said Finke, whose research involves individual investor behavior. Instead of thinking ahead, it may lead to the sale of investments to calm the emotional component of the brain. Invest in You: Invest in You: Invest in You: Invest in You: Here’s a decade-by-decade approach to accumulating wealth. How to re-establish your personal finances during a recession There are five methods to spend money that can make you happier. The good news is that you can work to overcome your prejudices. “Knowledge is power,” said certified marriage and family therapist Dr. George James, the non-profit Council for Relationships’ chief innovation officer and senior staff therapist. “The more you know, the more power you own.” What you read, what you listen to, and who you engage with can all help you learn.” Here are six prejudices to be aware of and how to overcome them. 1. Aversion to loss Loss aversion is the strongest emotional bias, referring to the desire to avoid any risk that could result in a loss. It could lead to investors selling something that has dropped in value and buying more of something that has increased in value. Finke explained, “That could explain why many investors underperform the market.” Instead, he recommended, use the reasoning half of your brain to make investing decisions and then disregard them. Set up a mechanism to rebalance your portfolio automatically so you don’t have to make decisions based on emotion. “We use that reasoning part of our brain when we prepare for the future,” Finke explained. “That is why it is critical to consider our financial objectives.” 2. Effect of endowment When people possess something, they tend to place a higher value on it. For example, you may have inherited stock from a family member or invested in a rising-value asset. “It can be tough to sell a stock if we become emotionally invested in it,” Finke explained. However, if it accounts for a significant amount of your portfolio, you’re taking on a lot more risk. He claims that being significantly invested in one thing will not provide a better return than a well-diversified portfolio. “Another aspect is that if it doesn’t work out, it implies I’m incorrect,” James, a member of the Invest in You Financial Wellness Council, added. “I’m going to stick it out because I want to be correct.” Instead, consider your options logically and ensure that you have the correct balance of assets for your purposes. The third fallacy is the “sunk cost” fallacy. Stone | Getty Images | Jordan Siemens This occurs when you continue to invest money in a losing endeavor as a result of previous investments, such as spending $2,000 to repair a car that continues breaking down. Because of the amount of money you’ve already invested in the vehicle, you don’t want to buy a new one. Finke urges, “Don’t concentrate on terrible decisions.” “Only concentrate on the best course of action for the future.” 4. Bias against the status quo A status quo bias occurs when you do nothing because you are frightened of a negative outcome, even though the option is worth the risk. “You obsess on the thing that’s going to make you feel bad, and that justifies not doing anything,” Finke explained. You might, for example, keep a stock that has decreased value because you don’t want to lose money. Instead, consider the price in terms of how it compares to predicted future prices and dividends. Also keep in mind that there are tax benefits to taking losses when it makes sense to do so. When you sell assets at a loss, you’ll be able to offset some of the gains you made, lowering the amount of taxes you’ll owe. 5. The consequence of joining the bandwagon It doesn’t mean a stock is good for you just because everyone else is purchasing it. People, on the other hand, feel safer following the crowd. A good example is the recent surge in so-called meme stocks like AMC Entertainment and GameStop. Individual investors flocked to the stock market after being spurred by social media, and many of them may have lost money as a result of the market’s volatility. “You hear stories of people making money on extremely hazardous ventures and you feel like you’ve missed the boat,” Finke added. “The fear of regret is causing a lot of people to make poor investing decisions.” Confirmation bias is number six. People frequently seek out information that supports their pre-existing opinions. Any other review will elicit a negative emotional response, forcing you to reconsider your perspective, according to Finke. However, it’s critical to gather data from a variety of sources in order to make well-informed decisions. SUBSCRIBE: Money 101 is an 8-week financial literacy education sent weekly to your mailbox. REMEMBER TO CHECK OUT: According to an anthropologist, sociologist, and philosopher, money doesn’t make you middle class; here’s what does. 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