Why Do We Do What We Do?

Each month you struggle to balance your financial books. You know you should save money but you don’t seem to know how to. You can’t seem to get out of debt. A familiar story?

Well, if we were to be brutally honest, it’s not overly difficult to do. It’s certainly not rocket science. After all, the basic personal finance principles have been doing the rounds for generations. The Richest Man in Babylon by George Samuel Clason is the quintessential template on the subject, first published back in 1926 but still well worth a read. Even if you don’t want to read through this or the plethora of other books filling the personal finance sections in libraries and bookshops, you can simply Google for a bit of advice.

Admittedly, certain investment topics are hard to grasp if you’re just relying on a blog or an article, and you may need to do some extra study to get a good grasp of it. But if we’re simply looking at the basics of personal finance most of the more obvious concepts are easily in our reach.

Why do we behave so strangely with our money?

So why don’t we take some of these common sense ideas on board? Well, common sense isn’t always common practice and we tend to fall victim to other factors. The thing is, people do what works for them, however irrational that may appear.

Most of us know that we should do more exercise, eat better and stop smoking. But on some level not getting out of the armchair, having another McDonalds and having a few puffs with a glass of wine serve a role for us.

No matter how rational you think you are, you do things you shouldn’t or avoid doing things that you should. This is because we seek payoffs – we want to avoid pain, we embrace comfort (whether comfort eating or comfortable living), and we associate smoking with “being sociable”.

And when it comes to debt and your financial picture in general, it’s easier to have a “present bias” mindset – jam today rather than jam (or possible pain) tomorrow. But unless we become aware of our “whys” (why we don’t choose to pay down our debt, for example) it’s very difficult to be fully engaged in improving our financial picture. Sometimes it’s not as much about our money but about our priorities (or lack thereof).

There’s plenty of behavioural finance research out there (notably from the likes of Nobel Prize winner Daniel Kahneman, Amos Tversky and Richard Thaler) to prove that we aren’t rational beings, however much we’d like to think we are. Once we acknowledge that and determine that some of our actions might be sabotaging our future, we can put in place the actions that will help us take control of our financial narrative.