According to Andrew Palmer’s “Smart Money“, the theory of projection bias leads humans, as consumers, to often make financial decisions that hurt them in the long run. Some are left with emotional regrets while others are hit hard with financial burdens. In order to determine whether or not a purchase or investment falls into this category, you must start with understanding and identifying your own projection bias.
For the average consumer. Projection bias is the simple theory that people base their decisions on their current standing and emotions. For example. If you are shopping for a car to buy. chances are that you will consider purchasing a convertible if the weather has been warm, like during the spring or summer. Alternatively, if you are shopping during the colder seasons, you will be much more likely to not favor a convertible upon realizing that you will not be able to use it during half the year. As mentioned above, once the weather warms up and convertibles start roaming the streets, you will find yourself, once again, with that past desire.
The same concept applies to homeowners and entrepreneurs seeking to purchase real estate. They may consider purchasing a home in hopes that the value will increase enough to make a profit. More often than not, one may study trends and make a confident purchase without taking into account one important factor. Inflation. Charts may show an increase in a home’s value over 10 years but inflation may prove that the value has truly not changed.
Upon reading this, I hope to push you to think twice about spur of the moment purchases. If it is an investment, look out for inflation. If you are considering a new car or home with a pool, consider how often you will actually be able to take advantage of and use that asset!
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