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Why We Make Irrational Decisions

Why We Make Bad Money Decisions


Have any of you ever spent more money than you intended when shopping online, just to get free shipping? How about buying a bulk item at the grocery store that you probably won't consume, just because it's on sale? If we're buying things we normally wouldn't and those costs don't outweigh the "free" perk than we're not doing ourselves any favors. According to behavioral economics, we make bad decisions systematically and make the same errors again and again. We choose the free shipping time after time, even though it actually causes us to spend more. To find out what other mistakes we make because we're wired to make them just read more.

A recent article in The New Yorker explored these concepts that were the focus of two books, Predictably Irrational: The Hidden Forces That Shape Our Decisions and Nudge: Improving Decisions About Health, Wealth, and Happiness. One experiment outlined in Predictably Irrational suggests that we consistently make the wrong decision because "there's no visible possibility of loss when we choose a free item."

Nudge delves into reasoning why we have so much trouble saving, outside of the explanation that we have trouble acting in our own best interests. It argues that we're loss averse, and can't seem to get past any reduction in our paychecks even though the money is going toward our retirement savings. They suggest that people should be presented with options that would "nudge" us toward making the right choices, like sending credit card holders annual statements of how much money they've wasted in late fees and interest. Seeing the numbers would discourage us from delving into more credit card debt.

Do you think these studies hold any bearing, and are there any "nudge" solutions you can think of that would help veer you away from making unreasonable decisions?

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