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How to make better financial decisions: Emotion vs Logic

financial decisions

Financial decisions։ It seems to us that when we talk about economics, the decisive factors in decision-making are sober calculation, rational thinking, and dispassion. Is it so?

On the earth, the whole human
race One sacred idol honors,
He reigns over the whole universe,
That idol is a golden calf.

Mephistophile’s aria

How to make better financial decisions: Emotion vs Logic

In 1860, during the crash of a ship off the coast of California, one of the passengers put on a belt, inside of which were sewn up gold coins with a total weight of about 90 kilograms. In this belt he was later taken out from the bottom of the ocean. When he was drowning, did he own gold? Or did gold own it?

In the manager’s practice, quite often one has to face some features of the attitude to money both from the side of business owners and hired managers. We are trying to find some linear logic in these actions.

It seems to us that when we talk about economics, the decisive factors in decision-making are sober calculation, rational thinking, and dispassion. It would seem that emotions and money are incompatible concepts.

It seems that only the benefit should excite the business person. But ask yourself: how often did you spend money not by the will of reason, but by the will of overwhelming passions. Ask yourself: “Do I manage money or is it mine?”

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Someone saves on staff. Hiring a high-class specialist for the right amount of money is considered wasteful. But at the same time, without understanding anything in digitalization, he loses a lot of money on the acquisition and implementation of an absolutely unnecessary software company.

Or, without any commercial effect and without regret, money is merged for advertising. Huge purchasing budgets are entrusted to extremely unskilled employees. And the costs of traveling sales managers to customers are calculated before the tram ticket.

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You can prepare a lot of reports, analyze everything that is possible. And the final decision by the head or shareholder will not be made according to the logic of numbers, but in accordance with the money scenario laid down in it.

Financial decisions։

Money scenarios are monetary beliefs that, as a rule, are not realized, develop in childhood, passed on from generation to generation in families and cultures, connected by context and often are only partially true.

They are the subject of many works of famous scientists and researchers who were looking for patterns of attitude towards money among people of various groups and psychotypes.

Finance, in principle, is a very delicate topic. Sigmund Freud wrote this: “Money issues will always be perceived by cultural people in the same way as issues of sex – with the same degree of inconsistency, hypocrisy and hypocrisy.”

He first drew attention to the fact that the attitude of an adult to money can be determined by the characteristics of his childhood desires. The parental family of a particular person, his personal experience, as well as the experience of people significant to him, can serve as a source of attitudes toward money.

Psychoanalyst Joan Riviere believed that greed was in fact a manifestation of a desperate search for love. According to her, the things that we consume become for us, if we receive them, a confirmation that we ourselves are good and, therefore, worthy of the love we seek.

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How to make better financial decisions: Emotion vs Logic

According to the data of A. Hanley and M. Wilhelm , people who are prone to impulsive spending have lower self-esteem than rational consumers. For such buyers, money has a symbolic ability to increase their self-esteem.

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They tend to see money as a way to solve problems, and more often consider money as a basis for comparison. They use money to demonstrate status and power and usually say that they lack funds, especially compared to their friends.

Spending money for them is usually associated with internal conflict. Immature people usually have a relatively lower self-esteem, therefore, among them are more often “impulsive buyers”, which are characterized by spontaneous, emotional spending.

It should be noted and gender differences in relation to finance. So, women are more than men prone to fantasies and obsessions about money. They also believe that earnings should depend on effort and ability (Furnham A., 2014).

Women express more frustration over the lack of money and are more envious of those who have it. But most importantly, according to R. Belka and M. Wallendorf , women see money as a way of acquiring things, and men as a way of gaining power.

According to G. Belitskaya , people whose formation of foundations took place even before the era of perestroika in our country have an indirect awareness of their level of security through an expenditure strategy.

A person can accept as a reality the need to save money, the lack of money to satisfy his needs, but he cannot realize his poverty, belonging to the class of the poor, since under socialism, ideas about belonging to such a class were rejected at the level of mass consciousness, respectively, were not formed individually .

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How to make better financial decisions: Emotion vs Logic

We will not give examples of monetary scenarios in this article. There are many classifications, approaches. This is a topic for a separate work. It is important for us that they are, and they affect the consciousness and behavior of their carriers.

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I must say that money neurosis anxiety disorder is the most common neurosis. Like all neurotic processes, it is caused by an unresolved conflict related to fear and anxiety (Forman, 1987).

According to the American Psychological Association (2008), 85% of adults experience anxiety for their financial situation from time to time, 28% will experience this feeling daily, and 36% of cases of anxiety increase over time. Moreover, this condition is often observed among wealthy and even very wealthy people.

There was even a specialization in psychotherapy – “financial psychotherapist”. The role of a financial psychotherapist is to understand those “fairy tales” that we tell ourselves about money or “money scenarios” and try to change them. According to Brad Klonts , one of the founders of the association of these specialists, financial behavior leading to emotional disturbances can be considered a monetary disorder.

How to make better financial decisions: Emotion vs Logic. That is, you do not just earn less than necessary or spend money incorrectly, but do things that seriously affect your life, health, relationships with relatives and career. In this regard, the goal of financial therapy is to change a person’s attitude to money (“money scenario”), to improve financial self-control .

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When we talk about monetary behavior, we should not only think about the category of “buyers”. Managers of all levels who manage budgets are also subject to the same behavioral patterns. This is useful to know when analyzing decision-making processes.

Surprisingly, actions associated with a super-rational object are not taken in the most logical way. Of course, then we will always find the obvious logic or the guilty, depending on the result. But the fact remains. Understand yourself first. Try to understand the prevailing money scenario of those who make decisions over you.

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