Implications on Our Finances
Both instant and delayed gratification have important consequences when making financial decisions. Which end of the spectrum one leans to can be a key factor in determining one’s financial success or failure.
Daniel Kahneman, a Nobel-Prize winning psychologist known for his work in decision-making, behavioural economics, and prospect theory. He gives an interesting perspective of the implications of decision-making and its effects when it comes to finances.
Kahneman suggests that as humans, the weakness of decision-making often occurs because we are more emotional than numerate, especially when it comes to mental accounting. He notes that people tend to save and borrow at the same time, instead of treating their whole portfolio of assets as one whole.
People tend to do this because they keep their money in different mental accounts, which they have different rules for. This may not be a bad thing if the math was done right, but people often have a hierarchy of these mental accounts that tend to favour emotional desires, as opposed to the more practical and numerical needs.
If we are more prone to instant gratification, we might splurge on the latest gadget or fashion that’s on sale. We choose to only worry about the credit card bills later on. Perhaps we feel we deserve to splash our money on a luxurious vacation, instead of saving it for our children’s education. We might be tempted to heavily invest in a stock or financial product without taking the time to do proper research, due to peer pressure or us not wanting to miss out on the hype and the “rare opportunity”.
However, if we are more prone to delayed gratification, we tend to take more effort to take a step back, reflect, and consider the future aspects of our decisions and their consequences over time. We will be exploring the intricacies of what affects the choices we make and how to take better control of them later on.
Right now, let’s play a quick quiz to find out more about our own personal gratification habits. Try not to think too much into the scenarios. Be honest with the answers that naturally come to your mind, that are consistent with your everyday decision-making. Ready? Let’s give it a go!