The Role Of Emotions in Finance And Investing Decisions

Usually, people think of finances as a mental, not an emotional, issue. We often perceive financial considerations as far more rational and logical than other types of decisions we make during the week, whether we are making a budget or choosing a stock to invest in. After all, a lot of people agree that we must be financially savvy, or else we will actually pay the price of ignorance.

Making financial decisions is a perfect example of how hard it may be to live up to one’s beliefs. Since we often feel a certain way about something immediately and then afterward try to come up with arguments or justifications for our feelings, emotions play a significant role in decision-making. If you are making a decision, get it checked by a CPA in Westchester County, NY.

How do emotions affect financial and investing choices?

Here are a few of the main feelings that influence your financial choices and how they operate.

1. Fear

When it comes to influencing financial decisions, fear may be the most potent emotion. Loss aversion is the idea that, according to research, the fear of losing $100 is far greater than the excitement of receiving $100.2 Fear is at the core of panic buying, which was seen during COVID-19. Fear causes individuals to buy all 20 containers of hand sanitizer that Target has on hand, ignoring all reason.

Fear is the fundamental driving force behind the insurance industry. In general, insurance companies generate more significant income from premiums than they have to pay out on claims. Even though insurance can be a losing wager, we all happily buy it to alleviate any fears of losing our house, vehicle, or iPhone entirely. Fear can also show up in business and investing, preventing some people from launching their own companies or making stock market investments or causing them to withdraw funds at the first sign of a decline.

2. Greed

In our search for glitzy fortunes, the emotion of greed may push us to take on unnecessary danger. Greed seems to be more logical or determining than other emotions.

According to research, people’s basic instinct is to be kind and share when they are given money and given the option to keep it or give it to someone else. Allowing people to think about this choice in depth, however, tends to make them more reckless.

Greed can cause us to underestimate the chance of bad things occurring, while fear causes us to overestimate them. Greed encourages hasty financial decisions, which may result in gambling, cryptocurrency investing, and lottery ticket purchases. 

3. Anxiety and Depression

Fear and greed are not the same as anxiety and despair. These feelings often end in “decision paralysis,” as behavioral science refers to it.

Anxiety and depression often result in people neglecting their personal financial decision-making because they are caused by relationship instability, job-related problems, or the adverse effects of another financial decision. Sometimes, postponing decisions might be beneficial; for example, it helps to avoid impulse buying. However, there are disadvantages to decision paralysis, such as delaying retirement account investments or failing to pay off debts with unpleasant interest rates that continue to build up.

How to Strengthen Your Financial Choices

Like any other decision, financial decisions can be made with the heart or the brain. Consider asking the following questions to both yourself and other people:

• Is this an objective or emotional choice?
• Do my feelings make me excessively wary and lead me to miss an excellent opportunity?
• Are my feelings making me overly optimistic and oblivious to the dangers of a particular opportunity?
• Is a problematic scenario being made worse by decision paralysis?

Knowing how emotions can impact financial decisions is potent on a meta-level. The next time you have to make an economic decision, consider how your feelings might be affecting your decision-making process.