Bad with money? Blame your brain
We all know the story. It’s barely halfway through the month and our bank account is already spiraling rapidly towards zero. We blame ourselves, we tell ourselves we will do better next month, but next month arrives and it’s the same old story.
That this happens to us is no surprise. Our brains evolved during a time when little counting was needed and when calculating compound interest was still millennia away. Behavioral economists have been researching the way our mind misjudges financial challenges, and found that the ways we do this are predictable, to a large extent. Not only our flaws are predictable; also the art and science of effective personal finance management is a domain well understood. What’s currently missing are widely available tools that help us bridge the gap between what we want and what we do.
Every euro you spend is a vote for the life you value.
The challenge of personal finance is to balance what you value in the short term with what you value in the long term. To do this, you have to answer two questions simultaneously. 1) Is this action the most valuable way to spend my next euro?; and, 2) Given all the money I will make in my lifetime, am I spending most of my money on what I value the most?
Why we’re bad with money
A big challenge for managing money is to assess how much we should pay for something. How can you know how much something is worth? Economists call this assessment valuing optionality. We ought to compare all the possible ways to spend our next euro and pick the one that brings us the most value. However, due to the infinite possibilities, this exercise feels futile for most of us. The three most common challenges to managing value are:
🥰 Value is determined experientially
Those familiar with experience design already know that there’s more to value than production cost plus margin. What something is worth depends on…