Lesson 4 of 4 · 6 min read
The psychology of money: why we make irrational choices
It isn't a lack of information that keeps us living paycheck to paycheck, it is predictable psychological biases. You learn to recognise them in order to counter them, not to blame yourself.
Most bad financial decisions don't come from stupidity but from the way the human brain evolved to work: useful for survival 50,000 years ago, less useful for planning finances over 30 years.
Three biases to remember
- Temporal discounting: we prefer a small reward now to a big but delayed one. That is why it is easier to spend on something now than to save for a goal 5 years away.
- Mental accounting: we treat money differently depending on its “source” or mental “category”, even when the money is identical. For example, we spend a bonus more easily than base salary, although they are worth the same.
- The anchoring effect: the first figure we see influences how “reasonable” a price seems. A TV cut from “4,000 RON (≈ €750)” to “2,500 RON (≈ €468)” looks like a bargain, even if 2,500 RON (≈ €468) is still not a small sum for your budget.
This isn't a character test
These biases are universal: people with economics degrees have them too. The solution isn't “more willpower”, it is systems that work automatically (automatic saving, shopping lists, simple rules), which you will build step by step along the path.
Asset vs. liability: a simple frame
An asset puts money in your pocket over time (rent, interest, dividends, a profitable business). A liability takes money out of your pocket over time (a car with instalments, insurance and fuel; a consumer loan). Not all liabilities are “bad”: a car may be needed for your job. But it is worth knowing consciously which category each big expense falls into, instead of assuming automatically that everything you buy is an “investment”.
In short
- Psychological biases (temporal discounting, mental accounting, anchoring) explain many bad financial decisions, not a lack of intelligence.
- The practical fix: automatic systems, not just willpower.
- Asset = money into your pocket; liability = money out of your pocket. Both can be necessary, but awareness matters.