4 Science-backed Tips to Making Better Financial Decisions

Decisions, decisions, decisions. From what to wear in the morning, to which Netflix series to watch at night, all the way to where we want to buy our first home, just about everything in our lives requires us to make a decision.

There is no way to make the right decision 100 per cent of the time, and more often than not, we only recognise a bad move when it is too late.

But fret not – Planner Bee is here with four science-backed tips to help you make better decisions, especially those that concern your finances.

Before that, let’s understand the basis from which these tips are derived: proactive decision-making.

What is proactive decision-making?

Neuroscientist Dr Caroline Leaf defines proactive decision-making as a process that someone goes through to deliberately and intentionally analyse their thoughts and feelings objectively before making a decision.

There are two main parts to the proactive decision-making process. First, understanding how to be a proactive decision maker. Next, understanding and recognising what prompts bad decisions to be made. When we practise this on a regular basis, we start to become wiser in our decision-making.

How to be a proactive decision maker?

As human beings, we make future decisions based on our past experiences. These experiences influence our perceptions, shape our judgement, and in turn, make us fall prey to possible reactive decisions. By being a proactive decision maker, we can avoid succumbing to these impulsive and reactive choices.

The process of being a proactive decision maker involves disassociating yourself from the situation you’re in, almost as though you are helping someone else evaluate their thinking and helping them plan out the next steps.

This deliberate, intentional, self-regulative way of thinking is proactive, and the good news is that our brains will respond in a very healthy way if we practise doing this on a regular basis. In fact, Dr Leaf shares that when we do this, we become smarter and wiser!

In her book “Think, Learn, Succeed”, Dr Leaf lists some key factors that lead us to making bad moves.  When we have a better understanding of why, how, and when we make poor decisions, we can learn to avoid those pitfalls and, in turn, make better ones.

Here’s what not to do:

1. Making decisions when you’re tired

While our thoughts are infinite, our brains are not — and they get tired. When our brains are tired, the chemicals don’t flow as they should. This can cause us to make bad decisions.

According to a study on the impact of sleep on financial risk-taking, individuals who sleep better “have less distortion of probability, are less susceptible to the present bias, and have a lower discounting rate.” The study’s results show that there are cognitive deficits in making decisions, especially financial-related choices when one is sleep-deprived.

What we need to do is allow our brains to rest before making decisions. This also means avoiding making purchases when you’re feeling exhausted, because you’ll probably regret it. Avoid that bedtime shopping habit on Instagram, or meeting with a financial advisor to make big decisions during a busy and exhausting time at work.

Read more: Top 10 Worst Financial Mistakes

2. Making decisions while you’re distracted

When we try to multi-task and are distracted by many things, we can make bad decisions. Your brain’s processing capacity at any one time is limited, so processing multiple pieces of information at a go can be exhausting.

For example, if you’re listening to a podcast, texting a colleague to settle a work issue while navigating through the crowd to shop for an item, you’re probably not doing any of these responsibilities justice.

You could end up giving your colleague the wrong piece of advice, or buy the wrong item and end up spending more than you should.

Dr Leaf recommends organising your thoughts and tackling each thing you need to do so that it can have your full attention. To apply this solution to the scenario above, you should pause the podcast, find a seat and take time to settle the work issue before you head back to shopping.

By doing so, you prioritise what needs attention most and what can wait. Completing what seems most urgent or important can also help to ease your mind and refrain from overwhelming or rushing you while you make other decisions.

Remember, tackle your battles one at a time. Find a way to control distractions, not the other way round!

3. Making decisions when you’re emotional

Making financial decisions while you are feeling extreme or chaotic emotions is a big no-no. Be it mood swings, increased stress, irritability or anxiety, they can all cause impaired judgement, leading to bad choices.

When you find yourself in such a situation, you should let the people around you know that you are not in the right emotional state of mind, and attempt to defer the decision-making to a later time.

However, if a decision needs to be made urgently, some simple breathing or physical exercises such as walking and stretching can help to calm down your nervous system and ease your mind. Avoid suppressing how you feel as this can make things worse.

4. Making decisions when you have too many choices

Imagine you are buying your first insurance policy. Chances are, you will be at a loss over which type to get. Should it protect you against high hospitalisation costs, give you sufficient critical illness coverage, help you with early retirement planning, or should you opt for a simple savings policy to bolster your pot of gold?

Being presented with too many choices and being made to choose the supposedly best choice can overwhelm you, leading to impulsive or bad decisions made. It can also lead to decision-making paralysis, which is the inability to decide out of fear of making the wrong decision.

The solution here is to take your time to sort out your choices, prioritise the top two to three choices available based on the information you have, and set a reasonable deadline to make that decision.

In this example scenario, you can perhaps write down the available options, research and read about buying your first policy, and talk to your close friends to ask them for their opinions.

Keep your options open and talk to your financial advisor to hear what they suggest. Finally, take your time to decide what might be the most suitable choice for you with your given budget and needs.

In conclusion…

Undoubtedly, it is easier and quicker to make decisions based on past experiences, as opposed to making the effort to disassociate yourself from the situation and become a proactive decision maker.

Despite this, it is important to recognise situations where you would more likely make a bad decision so you can consciously take a step back and reassess.

The next time you’re tired, distracted, feeling emotional, or spoilt for choice while making decisions, hit the pause button. Don’t make decisions on a whim when you know you’re not thinking clearly. Instead, follow these guidelines to try to make as best a decision as you can!

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