Have you ever just gone along with the crowd on something you probably wouldn’t do on your own? Do you ever get caught up in the minutiae of something and fail to see the big picture? Or do you have an opinion about how things should be so deeply embedded in your brain that you can’t imagine otherwise?
These subconscious actions we often find ourselves taking are known as pattern behaviors. They can creep into the decisions you make around your finances and health – and that’s usually not a good thing.
Behavioral finance looks at the reasons people make the financial choices they do (choices that are often irrational). This field of research is all about trying to understand biases in human behavior when it comes to money.1
Turns out, most financial decisions are based on subconscious behaviors. They are ingrained deep within our psychological human nature, and identifying these behaviors is difficult unless they are brought to your attention.
We put together five common behavioral traps people tend to fall into when making decisions around their finances and health. If you realize you’re doing any of these things, you can identify them and shift your decision making to be more logical and informed.
Finances: While most of us may see ourselves as above average in our knowledge and abilities, that estimation can prove detrimental when making financial decisions. Overconfidence reflects the tendency to overestimate or exaggerate one’s ability to successfully perform a given task.2 This behavior may also be boosted by self-attribution bias, for example, when an investment turns out to be a good one and you think that’s due to your natural ability to pick good investments. However, when an investment turns out badly, you say it was just “bad luck.” This behavior doesn’t allow you to learn from the mistake and commit to do the work to make better decisions in the future. Instead of falling prey to this trap, make sure your decisions are based on solid research and guidance from a financial professional and not just a gut feeling.
Health: If you don’t have a family history of cancer or heart disease, you might think it’s OK to participate in bad habits such as smoking and eating fatty foods. Having an overconfidence in your health can lead to unhealthy choices. Instead, stay on a balanced diet of whole foods and practice daily exercise to keep the wellness you have and fend off illness or issues with weight.
Finances: How do you look at your finances? Do you focus on the performance of individual stocks or the entire portfolio? Framing is the tendency to view a scenario differently depending on how it is presented.3 By narrowing the frame to concentrate on individual equities, you are likely to feel the impact of a poor performance or loss. Instead, look at your entire portfolio. This offers you a wide frame to see how other investment wins balance out the losses.
Health: Do you ever look in the mirror and think, “I hate my thighs” or some other part of your physique? By focusing on one area such as thighs or belly fat, you’re not seeing the big picture of your overall health. Instead, consider measurable recommended numbers for your height and age such as total weight, blood pressure, blood sugar, cholesterol, and body mass index (BMI).
3. Herd Behavior
Finances: Do you tend to watch and copy what other investors are doing? Do you feel they know more than you know so they must be making the right moves? Herd behavior is the tendency for an individual to mimic the actions of a larger group, whether those actions are rational or irrational.2 By just following what everyone else is doing, such as when there is a panic and sell-off in the stock market, you’re not doing the research to see whether that’s a good decision. Instead, base your investing decisions on solid research and try to keep this knee-jerk reaction out of it.
Health: Do you tend to jump on every fad diet that comes around? If, in your efforts to lose a few pounds, you are going on extreme diets hoping for a quick fix, you might be falling into herd behavior. This behavior can cause a yo-yo effect with your weight and wreak havoc on your metabolism. Instead, stick with a balanced program of eating healthy and exercising on a reasonable and consistent basis. Use an activity tracker and calorie counter apps to help you stay within healthy and sensible boundaries.
4. Mental Accounting
Finances: Do you tend to divide your money into separate accounts, such as a bill paying account and vacation fund, and never touch it except for that purpose? Mental accounting is the tendency people have to separate their money into different accounts based on miscellaneous subjective criteria, including the source of the money and the intended use for each account. 2 This approach may help you save, but if you’ve got a “fun money” fund and a high debt hanging over your head, you may want to think more strategically about using that money to pay off the debt first and treat every dollar with the same value to be applied to your overall strategy.
Health: Have you ever been on a diet and allowed yourself a “cheat day” where you could eat anything you want? Do you use those cheats to allow yourself to binge? By compartmentalizing your diet days and your cheat days, you rationalize that it’s OK to overindulge in your cheating moments, not considering that you may be consuming so many calories and fat grams that you’ve wiped out any good you did the rest of the week. Instead, stick to ongoing plan of eating sensibly, exercising and allowing yourself a reasonable treat ― such as a nice dinner out ― once in a while that doesn’t blow all the good work you’ve done the past few days.
Finances: Do you think something is better if it’s more expensive ― for example, a bottle of wine? If so, you are anchoring, which is the tendency to attach (or “anchor”) your thoughts to a reference point —even though it may have no logical relevance.2 This behavior can get you in financial trouble as you may constantly overpay for things without proof that the more expensive item is indeed better. The reverse goes for stocks. If you find a high-value stock suddenly dropped in price, it may not be because of short-term volatility in the overall market but because of a real issue with the company behind the stock. Instead, base your purchasing decisions on research to find out if the quality is indeed different.
Health: It’s easy to get caught up in the belief that the skinnier you are, the healthier you are. The media bombards us with images of thin people as the ideal. This is not a healthy approach and can lead to eating disorders and over-exercising to the point of injury. Instead, know the numbers for your body size and age that determine what healthy really is (weight and BMI) and reach for a goal of health-conscious eating, not starvation or extreme dieting, and a regular routine of reasonable exercise to get and keep you there.
By identifying and shifting these behaviors, you can put yourself in a position to make more thoughtful decisions on your wealth and health — and that’s a pattern worth developing.
Download our infographic and learn more about subconscious reasons that can often drive financial decisions.
Things to Consider:
- Your finances and your health may suffer from irrational behaviors you may not realize you’re doing.
- By catching pattern behaviors, you can make better decisions based on logic and research.
- We all have the ability to change detrimental behaviors if we choose to pay attention to them.
1 “What is Behavioral Finance,” Investor Junkie, August 2018.
2 “Behavioral Finance,” Investopedia, accessed February 2019.
3 “Frame Dependence,” Investopedia, May 2018.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, tax, legal or financial advice or guidance. Please consult your personal independent advisors for answers to your specific questions.