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Don't let emotions dictate your financial decisions

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Michelle Blog PhotoDid you know that we are psychologically hardwired to make financial decisions that aren’t necessarily in our best interest? It’s true. Behavioral economists have discovered that our financial decisions are strongly influenced by our emotions and not in a good way.

For example, objective logic would insist that getting $10 should make you equally as happy as losing $10 makes you sad. However, research shows that not only are we more upset about losing $10, but we’re twice as upset. It turns out that you would need to get $20 to feel ok about losing $10. Researchers call this a loss aversion ratio of 2 to 1. It’s not rational, but it does affect how we handle money—our financial decisions and the outcomes.

This loss aversion can have a big impact on investing behaviors and can wreak havoc on your future financial security. The risk is that you’ll come up short at retirement. To learn more about psychological weaknesses that influence your financial decisions, go to the Winter 2012-13 issue of your$ magazine and read the article, "P$YCH!"

Michelle Slawny, CFP®