Home Insurance Rate Increases and Psychological Traps That Are Costing You
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What is the main topic discussed in this episode?
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When was the last time your brain tricked you into losing money? Almost this morning, Sean. When I'm hungry and lazy, my brain tells me that I need to get an Uber Eats and I almost Uber Eats some croissants. Don't judge me. I feel that. I'm the same way before bed scrolling through my phone and my brain is always telling me to spend money I don't need to spend. Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And I'm Elizabeth Ayola. On this episode, we're going to answer a listener question about how climate change is affecting how people decide whether home ownership is worth the risk and the expense.
But first, we're talking about the behavioral financial biases that are costing you money and what you can do about it. So as a quick recap for folks who may not know, behavioral finance is a field of study that explores how emotional factors and personal biases affect our financial decision making. And it turns out that we are not the highly rational robots making financial money decisions in a vacuum. We're not? Nope. We are highly irrational animals, Elizabeth. We're basically right out of the jungle throwing money at whatever looks shiny and nice to us. But financial biases are a subset of behavioral finance, and they describe how certain preconceived notions or tendencies can lead to some less than ideal outcomes for our finances.
There are so many different financial biases out there. We're not going to mention them all, but I'm going to mention a few that come to mind. First one that comes to mind for me is loss aversion. And that's the idea that losing money is much more painful than earning money. But somehow I don't think that's an idea. It feels like a fact. And we'll do a lot to avoid this pain.
What behavioral finance biases are affecting your spending?
Now, herd mentality is another one that comes to mind, and that is jumping on a bandwagon and taking an action just because everyone else is doing it. And Sean, that makes me think of NFT craze during the pandemic. Do you remember that? Yes. What a scam that was. I wonder how many people are still holding on to their NFTs, hoping that they'll make some money from them. I didn't buy any, thankfully. Me either. Now we have overconfidence bias, and that's being a little too cocky about your ability to invest or make other financial decisions, leading to you making risky or under-informed decisions. Okay, so let's talk about how each of these biases is losing you money, starting with loss aversion. The big issue here is often for active investors who are buying and selling individual stocks because people hate losing money so much.
They might hold onto a stock that is a real loser when they'd be better off just selling that stock. Lots of people are divided on crypto, but it does make me think about that because I do peek into my crypto account sometimes and I'm like, should I sell or should I hold? But I'm just hoping that one day crypto will retire me. We'll see. I'm hoping that for you, too. Thank you. All right. So here's an example of loss aversion. Let's say that you buy a stock of a company that you've been eyeing right after they go public because you think that company is going to be successful long term. You think they're going to blow up and the stock price is going to go up over time. But then, dum-dum, a few years go by and the stock is half of what it was when it went public.
This, my people, is an example of heartbreak. The company doesn't seem to be on a path towards a high stock price, but you just can't get yourself to sell the stock because the idea of selling it at a loss just breaks your heart too much.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:01–2:10
2
What behavioral finance biases are affecting your spending?
2:10–4:41
3
How does loss aversion impact financial decisions?
4:41–9:59
4
What is herd mentality and how does it influence investments?
9:59–13:40
5
How does overconfidence bias lead to costly financial mistakes?
13:40–34:09
Speakers
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