Let’s talk about bad habits. No, I’m not talking about Ed Sheeran’s song. I want to discuss your investment habits and some stereotypical human traits that unfortunately hinder your long-term wealth creation.
First and foremost, one of the big terms in behavioral finance, particularly in psychology, is what we refer to as “tunneling.” This is something that comes naturally to us, so don’t beat yourself up about it.
Tunneling is the tendency to focus on small details rather than the big picture.
We often fixate on mistakes or bad investment decisions instead of considering the overall situation. Think about it: when you look at your investment portfolio, does your attention immediately gravitate towards the underperforming aspects? It’s a common tendency, as we instinctively try to avoid losses. However, this tunnel vision can hinder our ability to see the broader perspective and make sound decisions. Remember, nobody makes correct decisions 100% of the time, and it’s essential to view all decisions collectively rather than fixating on individual errors.
Another term for this is “siloing.” – Instead of focusing on one isolated issue, consider the collective whole, as your overall wealth position is likely much stronger than the impact of one bad decision.
The other common bad habit is what we call the “planning fallacy.” – Human beings tend to be overly optimistic about things, often underestimating the time or cost involved in various endeavors.
For example, you might underestimate how long a home renovation project will take or how much it will cost. This tendency can lead to unrealistic expectations and financial setbacks. It’s crucial to be realistic about your objectives, goals, and challenges to avoid falling into the trap of planning fallacy. Once you adopt a realistic mindset, you can mitigate this habit and make more informed decisions for your long-term wealth creation.
So, are you being realistic about your overall objectives, goals, and challenges? Addressing these two common bad habits—tunneling and planning fallacy—can greatly improve your financial outcomes over time.
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