So, what is that keeps you from improving your finances? While you could say “the economy” or “the lousy company I work for,” would it be fair to say that poor financial decision-making also has something to do with it? How many times have you regretted a purchase, kept throwing money at a failing business or investment, or continued to sink money into that money pit of a car or a house? How often are your financial decisions ruled by your emotions instead of sound financial sense? Recent research shows that there’s a simple and powerful technique you can use to do something about that. In this post, I’ll show you how to use this technique to improve your finances.
At The Wharton School of Business, they’ve discovered that poor financial decisions come from mental-emotional biases that interfere with good decision-making. One of these is called the “sunk cost bias.” What this means is that when we invest in something financially and emotionally it is hard to give up that investment even when it proves to be a poor choice—and we are likely to keep escalating that commitment even though it takes us farther and farther into debt, suffering, or disappointment. Both individuals and corporations fall into this bias and it can be hard to break free from. For example, do you choose to go to that outdoor concert you paid for even when the weather is lousy and you are almost certain to have a miserable time? As a company, do you continue to invest millions in a failed product?
The roots of this bias are “negative” emotions such as fear, anxiety, anticipated regret, or worry. For example, our “fear of loss” is actually much stronger than our “attraction to gain,” so we will neglect percentages and rationality when we make decisions that involve letting something go, even if it isn’t working for us. We also tend to overweight the possibility of an amazing turnaround, even when all evidence shows us that what we’re involved in is doomed to failure. Once we’ve invested in something we stick with it even as it takes us down. Companies will keep pouring money into failed ventures and individuals will keep sinking money into failed investments.
So what’s the magic cure to these negative mental-emotional biases?
Yes, you read it in the title. It’s meditation.
Yes, really—and this is coming from the prestigious and fairly conservative quarters of The Wharton School. Here’s what they’ve found:
Even 15 minutes of meditation, such as following your breathing or doing a relaxing body scan, has an amazing ability to short-circuit the sunk cost bias and other negative emotional factors that lead to poor financial decisions. How does this work? Well, it seems that meditating activates the parts of your brain that enable you to observe your behavior and circumstances more objectively, while releasing the emotional attachments that lead you to make poor choices. After only 15 minutes of meditation, participants in the Wharton study were 30 percent less susceptible to emotional biases that led to poor financial decisions.
And, that’s just after one session of meditation. Consider what might happen if you practiced meditation every day? Research shows that regular meditation practice builds strong circuits in those parts of your brain that enable you to relax emotionally and observe things more objectively. When you build those circuits through repetition, they are much easier to access when you need them.
So, the next time you have an important financial decision to make, you might try doing some deep breathing for 15 minutes or practicing your favorite meditation technique first. You might save yourself a lot of money and dramatically improve your finances.
I would love to hear strategies that have helped you improve your finances in the Comments below. And please share this post with your family, friends, and co-worker through the social sharing links. Thanks for sharing!