You may like to think of yourself as a rational steward of your money, but behavioral scientists say a wide array of psychological quirks and behavioral biases can cause people to make poor financial decisions.
As a result, we often wind up losing money on avoidable fees, excessive debt and missed financial opportunities.
That’s the key finding of a new paper published in Behavioral Science and Policy, which lists some of the most common financial behaviors that cause people to inadvertently harm themselves.
The paper outlines steps governments and financial institutions can take to limit some of the financial damage. But you may be able to course correct and avoid these mistakes yourself – once you identify what is holding you back.
Here are just some of the common behavioral mistakes the researchers say people make:
1. You don’t shop around.
Many people fail to look at other options when considering a major purchase or financial product. As a result, they wind up missing out on opportunities to save money on a better deal.
“Many mistakes stem from either considering bad financial options or failing to attend to better ones,” the researchers wrote. “For example, many homebuyers do not do any comparison shopping when they apply for a mortgage, they simply go with the first financial institution they contact, which may not necessarily be the best option.”
I’ve been guilty of this myself when signing up for new financial products. With my first two credit cards, I didn’t shop around for the best deals. I went with the first cards that were offered to me by personal bankers.
Remedy: To avoid missing out on potential opportunities, shop around before you buy.
2. You ignore the terms of your loan.
People often overlook key details about loans and other financial agreements. “In some circumstances, people actively avoid information that would help them make better decisions,” the researchers wrote.
In other cases, they pay closer attention to a product’s marketing material than key financial details, such as APRs or fees.
This is a financial mistake I also have made. Before becoming a personal finance writer, I didn’t even know the APRs my card charged or what fees I might have been paying. As a result, I made a number of irrational decisions.
For example, I remember consistently carrying a balance on my highest rate store card, even though I would have been better off transferring that debt to a lower rate card.
Remedy: To get a more accurate sense of the financial commitment you’re making, experts recommend you carefully comb through a credit product’s agreement and pay special attention to any extra charges or fees.
3. You get overwhelmed.
People tend to shut down when faced with complicated decisions and fail to act if they feel they are in over their financial heads. That, in turn, can lead to destructive procrastination when it comes to money matters.
I’ve gotten into trouble, for example, when I put off opening my financial mail because I felt overwhelmed by all the paperwork. I’ve also harmed my finances by actively avoiding my retirement accounts and making decisions about how to save and invest my money.
In addition, people with less financial literacy sometimes have trouble making accurate monetary calculations or correctly estimating how much something will cost. As a result, they wind up choosing products that are more expensive than they thought.
Remedy: To combat that overwhelming feeling, break down financial problems into smaller chunks and list small, concrete steps you can take to address them.
4. You allow emotions to affect decision-making.
Emotions can play a disproportionate role in how people think about their finances and react to certain challenges.
For example, feeling angry or annoyed could cause you to soothe yourself with an ill-conceived purchase.
I can relate to this, too. As a longtime impulse shopper, I’ve found that a little retail therapy can be a helpful tool for combating anxiety. But if I’m not careful, I easily overspend.
People’s environments can also affect their financial decision-making.
For example, researchers say that even the weather can affect a person’s mood and subsequent financial decisions. In addition, people tend to be heavily influenced by the people around them, leading them to give more credit than they should to iffy advice or irrelevant anecdotes.
Remedy: To avoid being overly influenced by other people, try not to compare yourself to your neighbors or friends.
“If consumers look to financially capable peers for guidance, they may gain valuable information that helps to counter the problems that arise,” researchers wrote. “But social comparison can also create a sense of envy or discouragement that can deter people from engaging in better financial behavior.”
And when feeling stressed or depressed, it’s better to get some exercise rather add to your credit card balance.
See related: How behavioral economics explains 6 common money mistakes, Who your kid is dating influences their money habits