Rational financial decisions are the pillars of financial success. To achieve this, one must be familiar with the concept of Behavioral Economics.
Behavioral Economics focuses on the psychological and economic reasons why people make irrational decisions from time to time. Understanding this can help you “rewire” your brain and help you have a better understanding of how you could earn money faster.
Knowing what triggers your irrational decisions can help you change, do more positive financial actions, and hopefully make you more money.
With this in mind, how can you know if you need “rewiring” to form better financial habits?
You could ask yourself these following questions to have a better grasp as to where you are in terms of financial status:
- Am I debt-free?
- Am I financially independent?
- Is my money spent on the things that truly matter to me?
- Am I hitting my current goals?
- Am I financially stable?
- How much I earn?
If you answered “no” to these questions, you probably need to form better financial habits to help you achieve monetary liberty.
How do you decide what to do? What are some of the things that affect the choices you make? How long does it typically take you to make a significant decision? Based on the limits you have, are you able to make decisions that would best maximize your outcome?
Definition of behavioral economics
The focus of behavioral economics is on how people make decisions and the factors that affect those decisions. The central claim of behavioral economics is that human beings are not always rational and that certain factors affect their decision-making. You will discover all there is to know about behavioral economics in this explanation. Ready? Afterward, keep scrolling!
What exactly is the meaning of behavioral economics? Behavioral economics employs psychology and economic theory to develop new explanations for how humans interact in an economy. It seeks to offer an alternative to conventional economic theory, which assumes that all humans are rational and make optimal decisions all of the time.
In an ideal world, people would always make optimal decisions that benefit and satisfy them the most. In economics, rational choice theory states that when presented with multiple options in a scarcity situation, humans will choose the option that maximizes their individual satisfaction.
This theory holds that, given their preferences and constraints, people are capable of making rational decisions by effectively weighing the costs and benefits of each available option. The final choice will be the best option for the individual. The rational person has self-control, is unaffected by emotions or external factors, and thus knows what is best for himself. Unfortunately, behavioral economics explains that humans are not rational and are incapable of making rational decisions.
To help you in this process, here are six steps that could rewire your brain:
Decide That You Want To Change
Awareness is the first step to change. Being aware that your financial habits should change to earn more money could help you focus your energy on the right financial actions.
You might be focusing your energy on the wrong job or hustle, which doesn’t even pay well. Instead, you should be aware of your setbacks in earning more money and decide your subsequent actions.
You should mentally choose to dedicate yourself entirely to this process, whether for a brief moment or a more extended period.
Are you the sort to buy anything whether it’s on sale or not, even if it wasn’t something you had planned to do? Such impulsive purchasing can result in a number of unhealthy spending habits, including: Justifying Unplanned and Poor Purchasing Decisions. It’s simple to create justifications for overspending and persuade yourself that you need an expensive purse or new technology.
Taking out an impulsive credit card purchase. Since impulsive purchases are unplanned, you might not truly have the money to pay for expenses. That indicates that you are using credit to buy things that you cannot afford.
Recognize Your Negative Financial Habits
Accepting negative habits could help you better understand what triggers it, whether psychological or economic, and adjust from there. Breaking the cycle of negative patterns enables you to be one step closer to achieving your SMART goals.
Create A Goal
Once you have recognized your negative habits, it’s now time to set your goals. Do the math and get clear on the amount you want to achieve, whether per week, month, or year.
Knowing how much you should earn helps you stay focused and motivate you to make more money. Plans can also indicate if you are acquiring the right amount of money you want to achieve.
There are several ways that you can help yourself keep track of your goal. For one, you can track your expenses by having an invoice system for every amount that goes in and out.
Determine The Actions Needed To Attain Your Goals
Now that you have your goals, how are you going to achieve them? Deciding and writing down your interventions helps in creating a clear path to your goals. For example, you could write down how much you should be earning in every side hustle, spending every day, and other financial activities.
This could help you set your budget for the day and stay on track towards your goal. Furthermore, you should steer clear on what triggers your negative financial actions. You can also think of different income ideas to help boost your earnings.
Have A Sharp And Positive Mindset
You now know your goals and how to achieve them. Now, the hardest part is doing it. To help you have a sharp mindset, visualizing and manifesting your success can be done, among others. It helps you mentally rehearse yourself to achieve your financial goals and keeps you motivated until the end.
Staying positive, despite some setbacks, can assist you in focusing your energy on your desired outcome. Having the opposite mindset can hinder you from achieving your success; hence, you should try to keep yourself in a positive environment to help you maintain a positive attitude.
Track Your Progress
How would you determine if you are achieving your goals? You measure them. Tracking your progress helps you stay on course and ensure that your actual and targeted results are not far from each other. If you have a business, paystub generator is critical for bookkeeping purposes.
Something like an invoice can help make tracking your progress easier. Creating these documents can help you see how much money you are spending and determine if you are earning a reasonable amount for your hustle. It also acts as proof for owners to ensure that there are no discrepancies and they are gaining the amount of money they ideally should be achieving.
Principles of behavioral economics: rational decision-making
The principles of behavioral economics challenge the notion that humans can make rational decisions that allow them to maximize their gains given a set of constraints.
There are two perspectives provided by behavioral economics that challenge human rationality:
- Rationality with boundaries.
- Restricted self-control.
Principles of behavioral economics: Rationality with boundaries
According to behavioral economists, there are many constraints on people’s ability to make rational decisions, which causes them to act irrationally.
Consider this. You are not like your friends. You may perceive things differently than others, and this is true for everyone on the planet. We all have different levels of perception, intelligence, skills, and so on, which influence how we think and make decisions.
According to bounded rationality theory, there are three constraints on individual choices:
- There isn’t much information. We are all faced with limited or inaccurate information about something, which can lead to irrational decisions.
- Capacity for thought We are not all capable of processing large amounts of information in order to make a decision, which limits our ability to make rational decisions.
- There are time constraints. There may not be enough time to consider all of the options and explore all of the options in order to make a fully rational decision.
Final Words: Behavioral Economics
If you can follow these six steps and stay motivated until the end, it can help you earn money faster. Having a clear mind and goal assists you in making more rational choices financially. Initially, this process may start as a struggle, but you would eventually build momentum and become second nature to you as you continue doing it.