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Wednesday, May 11, 2011

Why Did I Do That?

Have you ever asked yourself that question? Why did I spend that $500 for retail therapy when I cannot pay my bills? Why did I write the check to the guy who promised a guaranteed 25% investment return if only I would follow his secret steps to success?

Enter the science of Behavioral Economics. To oversimplify, behavioral economics helps us identify why we do what we do . . . especially as this relates to money decisions. It’s possible that you wrote the check, in part, because of a human tendency toward Herd Behavior. If I can convince you that lots of other people are making money doing this same thing, you might just want to join the crowd.

We are living in tough times, and the financial well-being of many seniors has suffered. As a result, there may be more incentive than normal to fall into the trap of financial scam artists. If I sound sincere, produce “real” statistics, and promise that you can make up your lost ground in a hurry, that‘s pretty tempting.

Resist the temptation, and remember, if it sounds too good to be true, it usually is. At least ask yourself whether it’s logical that this one person could truly have such amazing inside information when no one else does.

Following conservative savings and investment principles may be frustratingly slow, but at least you won’t be throwing your money away. Who knows, your savings might even grow enough for a little retail therapy!

Blog posting provided by:

Michael Snowdon, CFP ®

Michael is president of WealthRidge, a wealth management and financial planning firm, and is a professor emeritus of the College of Financial Planning. His focus in financial planning is to coach people in the process of meeting their goals and achieving their dreams.