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In this episode, Chelsea shows us the specific ways our brains are wired to work against us when it comes to money, and how we can counteract our self-sabotaging money tendencies.

Based on an article by Sarah Doyel:

Temporal discounting:

Confirmation bias:

Post-purchase rationalization:

Anchoring bias:

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Hey, guys.

It's Chelsea from The Financial Diet. And if you haven't done so already, I highly encourage you to subscribe to this very channel so that you can keep getting more amazing videos about money and life.

And if you want to take things to the next level, hit that Join button and join us at The Society at TFD. And today, I want to talk about the realities of being a human with a human brain. A lot of the time on this channel, we focus on the good habits that you want to create in order to manage your money or to become more productive or to get more out of every day.

And of course, these are good things to know about. It's important to have the right tools to do things like manage a budget or keep a schedule. But it's also important to remember that sometimes knowing what you should be doing is not going to be enough.

Our brains have a specific way of perceiving and understanding things. Our brains have default habits and modes that they click into that can often undermine even the most knowledgeable person when it comes to their finances. Cognitive biases, which are essentially our brains' tendency to veer away from logic, can lead us to make all kinds of less-than-optimal choices, even when we know better.

But the good news is, with the right precautions, it is possible to outsmart your brain. So let's get right into it with four ways to outsmart your brain when it comes to money. The first thing to outsmart is hyperbolic discounting.

What is hyperbolic discounting? Hyperbolic discounting, also known as time or temporal discounting, is our preference for immediate over future rewards. We might value something more when it's immediate.

Credit cards are a prime example of hyperbolic discounting. We buy something that we might not be able to afford right now on credit, potentially risking spending more in the long term due to high interest rates, rather than waiting and saving up. So how do you deal with this?

Well, the most important thing to do is to get more and more concrete about how you think of and imagine your future self. It's so easy for our brains to only be able to think of ourselves in the present because, technically, that's the only time in which we exist. But it is very likely that we will exist in the future.

We just have a difficult time envisioning ourselves there. So draw up specifics about that person. Imagine yourself a week from now, a month from now, a year from now.

Write out lists of what that person will want, things that you would want that person to be able to do, freedoms you would want them to have that you don't currently have. Sketch out a life for yourself that you can then work toward, rather than just sort of always nebulously assuming at some future date you will be better with money or have more of it or what have you, because those things don't just happen. And similarly, you want to actually visualize yourself having to deal with the consequences of impulsive decision-making.

For example, if you're going to be buying an item on credit that you can't necessarily afford, take time to actually write out how much you would be paying in interest. And then visualize yourself making those painful monthly payments. And do the calculation of how much more that item is going to cost when you factor in the interest.

You want to make the future version of yourself and the consequences feel just as real and tangible as the current-day reality. Something I love to do on a yearly basis is to write out a very detailed plan of what I want my 2020 to look like. I list out all of my assets.

I list out my current stumbling points, my goals, things that I want to do, things that I'm not sure I'm going to be able to do. And I try to make as vivid and detailed a portrait as I can of what the year would ideally look like. That way, I can start to contextualize all of my choices within that framework rather than just what feels good in the moment.

The second thing to overcome is choice-supportive bias. What is it? Akin to confirmation bias, which entails looking for information that supports our personal beliefs or values, choice-supportive bias occurs when we focus on information that reassures us we've made the right choice and ignores perspectives that might suggest otherwise.

Choice-supportive bias often manifests as a post-purchase rationalization, which is basically the mental gymnastics we do after a purchase to convince ourselves that it was worth it. So the first step in overcoming choice-supportive bias is to be able to recognize and identify when it's happening. Pay attention to how you feel after making a specific purchase or a specific financial decision.

Do you feel a pit in your stomach that you might immediately start rationalizing away? Do you feel like you wouldn't necessarily want someone to know that you made this purchase? Once you have identified that this choice may not have been a great one, you need to immediately forgive yourself.

Because shame is always going to drive you further and further into that rationalization process because our brains don't like to feel shame. You have to correctly identify what it is about the purchase or decision that you may be wanting to rationalize. And give yourself permission to say, hey, maybe that wasn't the best choice.

But I don't have to make it again. I can use it as an opportunity to learn and change my future behavior. Because if we start allowing ourselves to make all kinds of excuses as to why it actually wasn't that bad of a choice, we'll be more likely to make that choice again in the future.

And to help stop choice-supportive bias in its tracks, practice mindfulness techniques in your spending. Be a nonjudgmental observer of your own internal dialogue. Are you rationalizing a purchase before you've even pulled out your wallet?

If so, take a few deep breaths, and allow the thoughts to pass through your mind as you analyze them at a critical distance. Number three is status quo bias. What is status quo bias?

Humans are creatures of habit. We prefer our current state, even if the situation is less than ideal. This psychological preference is called the status quo bias.

As someone who has a naturally avoidant personality when it comes to money, I personally struggle with status quo bias all the time. Because let's be honest, for many of us, the idea of making any kind of change in life can feel scarier than staying in a situation which we know isn't good for us. And this can be true when it comes to overpaying for certain things because we're more likely to stay with whatever's familiar.

Or we're hesitant to negotiate. But it could also be in terms of opportunity cost. For example, many of us stay at employers long past when we should probably be going elsewhere to make more money.

Statistically, most people get their biggest bumps in pay when they go outside of their current employer and move up and over in the ladder rather than just straight up within their own company. But it can be overwhelming to leave the space that you know, especially if you're early in your career and you haven't had a ton of experience with changing employers. I personally was underpaid for years at the beginning of my career because I simply didn't have the courage to look elsewhere.

But just acknowledging that status quo bias exists can be very helpful because it allows you to understand that your preference for the current situation is not an unbiased view. And it allows you to account for that bias. The best way to counteract this is to set limits around making a change and stick to them.

Confining your brain's natural discomfort with change to a limited window of time helps you overcome the fear in actually tackling the issue. For example, if you have something in your life that you might have been overpaying for, like a phone bill, take a dedicated hour of time to research and choose a new option and then to go with it. Having that deadline on the time in which you have to be making these uncomfortable changes makes you more likely to just dive into the cold water and make the change that scares you.

Lastly, number four is anchoring bias. Anchoring bias refers to our subconscious preference for the first piece of information we receive in a decision-making process. Our brains latch or anchor themselves to the first price or figure that we see.

Anchoring bias is why the on-sale but still expensive dress seems like such a deal after we've seen the higher price tags surrounding it or why a $13 glass of wine on a $20 glass menu calls our name even though we usually spend $7 max on a bottle at Trader Joe's. It's also why potential employers might offer a lower salary or hourly rate than they need to because they know that perspective employees will match their expectations to the initial offer. When it comes to combating anchoring bias in real time, knowledge is power, and preparation is key.

You want to be informed about the market surrounding any particular price, whether it's what someone is offering you for a job or what you're possibly preparing to pay for a given item. The more you can set limits around what you are and aren't willing to accept before a number comes into the picture, the more likely you will be to stick to that number during a negotiation process. When it comes to purchasing things, it's often useful to have reference to a competitor who might be offering a product for less.

Or when it comes to salary negotiations, doing a ton of research on places like Glassdoor ensures that if they're opening up with a lower number than market rate, you're going to be aware of it and be able to contextualize the proper negotiation outside of just their opening offer. You don't want to get anchored to an opening number that might not be appropriate. So it is important to have an opening number in your own mind that is based on market figures.

And it's also very important, especially in situations of negotiation, to have a true sense of walk away. Sometimes we can't afford to walk away from a negotiation, but sometimes we can. And although it can feel difficult, you would be surprised at how many times a true sense of, I'm going to have to walk away at a certain point, is what ultimately pushes the person to give you the number you want.

At the end of the day, having the right tools and knowing what you should do is an important part of the battle. But another part is understanding how your own brain works and why we might have tendencies to get into some of these bad financial habits to begin with. Being aware of how your brain might be defaulting to things that don't necessarily act in your favor is a good way to ensure that you're not going to be repeating really bad patterns when it comes to managing your money.

None of these things will be changed overnight. But being aware of them is the first step. And as always, guys, thank you for watching.

And don't forget to hit the Subscribe and Join button and to come back every Monday, Tuesday, and Thursday for new and awesome videos. Goodbye.