Have you ever wondered why you keep putting off managing your personal finances, even though it's crucial for your financial well-being? It seems irrational, right?
In the 1950s, a psychologist named Leon Festinger came up with a theory called “Cognitive Dissonance.” This theory explains the discomfort we feel when we hold conflicting beliefs, values, or attitudes. This mental struggle can sometimes make us angry, hostile, or intolerant. In the context of financial planning, if we're not honest with ourselves, this inner conflict between short-term desires and long-term goals can lead to procrastination. Some people might tell themselves, “I don’t have the money to save,” even though they still want financial security for themselves and their families. This kind of thinking is irrational, especially when not based on objective analysis.
For example, we tend to stick to what we know, a concept known as the status quo bias. This bias makes us prefer the current situation, even if change could bring better results. From daily financial decisions to long-term retirement planning, we often choose what's familiar because it feels safe. This comfort can lead to inaction, stopping us from exploring new opportunities and hindering our financial growth.
Recognizing how this bias affects our economic behavior is crucial to overcoming it. It can be unsettling to realize that we often act irrationally when it comes to financial planning. Particular tragic is the failure of individuals to acknowledge that it is not how much one saves/invests that matter, but how long. Procrastination of long-term financial planning is a hugely expensive form of cognitive deviance for those who engage in self-deception.
Think about it!