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Money Mistakes Even Savvy Professional Make
By Dan Matheson
If you’re willing to spend more for things bought on credit or find yourself “winging it” to track your spending, you’re not alone. It seems everyone makes irrational financial decisions – even those with higher incomes and advanced degrees.
A September 2003 study conducted by Synovate for the Northwestern Mutual Financial Network suggests several “blind spots” regularly handicap financial decision-makers from all educations and backgrounds. The research, which included a representative sampling of doctors, lawyers and certified public accountants, identified the following misbehaviors:
• Loss aversion – it hurts more to lose money than it feels good to gain.
• Framing – how an issue is presented can affect financial decisions.
• Mental accounting – though all money “spends” the same, people treat money differently depending on how they got it.
These “blind spots” are actually three theories in the relatively new science of Behavioral Economics, which explains how and why people make illogical financial decisions.

Losses Loom Larger Than Gains
People tend to be “loss averse” because the pain we feel from losing $100 is much greater than the pleasure we feel from gaining $100. For example, when asked to choose between a 100 percent chance of gaining $240 versus a 25 percent chance to gain $1,000, coupled with a 75 percent chance to gain nothing, more than three-fourths of survey respondents chose the sure gain of $240.
However, when given the choice of a sure loss of $240 versus a 25 percent chance to lose $1,000, coupled with a 75 percent chance to lose nothing, more than two-thirds of this group opted for the chance to lose nothing (and a chance to lose $1,000) over the sure loss of $240. “Loss aversion” is what tempts people to pull out of the stock market when prices fall. Perceived loss may not always be the worst outcome.

It’s All in How You Ask It
Framing depends on your reference point and determines what is most likely to influence you. Survey respondents were asked the same question in two ways to determine if they were susceptible to framing. While roughly half said they could not comfortably save 20 percent of their household’s income, 7 in 10 said they could comfortably live on 80 percent of their income. Clearly, decisions are influenced by how the choices are “framed,” or presented, and by a person’s point of reference.

All Dollars Are Created Equal
“Mental accounting” is a common money mishap because people tend to categorize spending into different accounts. Often the same amount of money is regarded differently depending on our mental view of the situation. 
For example, in the survey, two thirds of the respondents would drive 20 minutes to save $8 on an alarm clock, but almost 75 percent would not drive the same distance to save $8 on a new TV. Mental accounting is what compels people to spend more when they use credit cards than when they use cash, even though all money “spends” the same.
Most people don’t realize their behavior is getting in the way of their financial goals. The best advice for overcoming financial misbehaviors is to learn about your potential “blind spots” and talk with a qualified financial professional to help you understand and improve your financial decision making skills.
Dan Matheson can be contacted at (435) 628-8248, or e-mail him at dan.matheson@nmfn.com, or visit his Web site at www.nmfn.com/danmatheson

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