Fear & Greed Lead to Irrational Decisions
Fear and greed can drive financially ignorant people to make irrational decisions.
When it comes to money, everyone – wealthy or not – experiences two basic emotions:
Greed and fear.
If you have money, you are likely to focus on all the new things it can buy (greed).
If you don't have it, you worry you might never have enough (fear).
People who are ignorant about how to manage their finances are especially prone to letting these emotions drive their decision-making.
For example, let's say you just received a promotion and a hefty pay raise.
You could invest the extra money into something like stocks or bonds, which would earn you money over time, or you could gratify yourself with new purchases, like a car or house.
If you're a financially ignorant person, this is where emotion takes the wheel.
The fear of losing money is so powerful it prevents you from investing in stocks or other assets because of the perceived risks, even though such investments would bring you wealth in the long-term.
At the same time, greed inspires you to spend your increased salary on a better lifestyle, for example by buying a bigger house, which seems a much more real and safer option than buying shares in a company.
However, this upgrade also means a bigger mortgage and higher utility bills, which effectively negates your raise.
This is how fear and greed hinder the financially ignorant from becoming wealthy in the long term.
So how can you counter these powerful emotions?
By building up your financial knowledge about things like investments, risk and debt.
This will place you in a better position to make rational decisions – even in the face of greed and fear.