The way we perceive our world, interact with each other, and make decisions is influenced by our subconscious paradigms and values. We are not often aware of this influence.
With respect to our finances the more we become aware of these viewpoints the better we can make sure they work for and not against us. We use these filters in our daily living.
Confirmation bias is where we focus only on information that supports our already established viewpoint or opinion. This is prevalent in the political perceptions people have, especially with respect to how citizens perceive parties that they are not affiliated with. This can also be a big obstacle in our interpersonal interactions.
Did you know that the most popular item on a restaurant menu is the second most expensive entrée? That is because restaurants are aware of our anchoring bias, where we use the first information we receive to help us process any other information. Therefore the $95 grass fed steak makes the $42 free range half chicken seem like a bargain. I observed this exact pairing on a menu the last time we were invited to eat out. Anchoring bias can also cause us to disregard or discard information that is valuable simply because of our confirmation bias.
Confirmation bias can also cause us to make decisions that keep our status quo. Change is uncomfortable and we factor that into any decision that could disturb our comfort zone. We will of course make changes if circumstances force us. But why wait for that scenario? A lot of financial planning is preventative.
Part of the reason we sort information like that is to reduce our discomfort when information is presented that causes what is termed cognitive dissonance. Most people will do anything to lessen cognitive dissonance and to maintain the status quo, including discarding or disputing information that causes it.
It is easy to rationalize our spending habits and decisions to put more value on items we purchase or experiences we pay for. It is human nature to want to fit into whatever community we are a part of.
Research has shown that many of the decisions we make are not as rational as we believe them to be. Our decision making skills are strongly influenced by our emotions. In my financial planning practice I have seen many instances of that, enough to write many blog posts.
Two books I highly recommend that will be encouraging and edifying are: The Organized Mind by Daniel Levitin and Predictably Irrational by Dan Ariely.
Also if you want to know the source for some of the ideas in this post please contact me.