3 Money Decision Traps and How to Avoid Them

Decision making is a process, meaning there is a definitive sequence of steps to go through to arrive at the result. When it comes to making wise decisions, particularly decisions involving money, I’ve found myself frequently falling into three common traps, but fortunately, over the years I’ve been able to formulate some personal ways to avoid these traps that can hinder my decision making process and avoid the pitfalls that come from potentially making a bad decision.

1. The “either or” trap.
Also known as the “binary trap,” this trap presents itself as a decision one way or another — to do something or not. Should I do this, or not? Should I buy this house or not? Should I go to this school or not? Should I buy this HDTV or not? Should I buy this car or not? Should I take this job or not?

A decision can never be better than all the available alternatives.

If you leave yourself only two alternatives, by default your decision can never be better than two choices. When you consider only two choices, you leave out other ideas that may actually be the best alternative. You are only prioritizing between two choices!

How to avoid the “either or” trap.
Ask yourself these three questions:

  • What am I really trying to accomplish financially or otherwise?
  • What is the best ________? The best use of my time, the best use of my money, the best use of my resources, the best use of my talents, the best whatever. By asking this one question, you open up a lot of potentially superior alternatives.
  • Are there any other choices I haven’t considered? If the answer is “Yes,” obviously you have the potential to make a better decision.

2. The feelings trap.
Most everyone has fallen into this trap, having made a decision based on “gut feelings.” Ask people how they arrived at a decision and you’ll hear, “I felt it was the right decision…to buy that home,” “It seemed right…the way the steering wheel felt,” “I felt led…to decide to go to THAT college,” “I just sensed…that something was wrong at that company.”

Decisions should be made on the basis of our prioritized goals, not our feelings.

Feelings can be valuable and you shouldn’t discount them altogether, but feelings can change…for no obvious reason. You and I may feel one way on Monday and another way on Tuesday. That shouldn’t be the way we make decisions, particularly financial decisions. Feelings may be indicators of our goals and objectives, but they are not the objectives.

How to avoid the “feelings” trap:
Ask yourself these two questions:

  • What are the goals I’m trying to accomplish? What are my real objectives?
  • Do each of my objectives have the same priority? Are they all of equal importance?

3. The opinion trap.
Sometimes, I have made a decision based solely on the advice of friends, but doing this makes one critical BAD assumption: that my friends and advisers have the same goals and objectives that I do. Therein lies the trap, that we use the advice of people who may not have the same ideals that we do.

Seeking advice is certainly a wise decision because there is a margin of safety in a “multitude of counselors.” But that advice should tell you about the validity of YOUR goals and objectives and it should not take the form of a gathering of opinions to make use of “majority rule.”

How to avoid the opinion trap.
Ask yourself this one question:

  • Is this decision my own, or is it the collective decision of my advisers?

You are the one that will have to live with your decision, not your advisers.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.
–Robert Frost

There were three “road” possibilities in this poem, the left fork, the right fork, and to return back from where the author came. Then again, did he have to stay on the road? Why not blaze your own trail? It isn’t an “either or” decision!

photo credit: Mr.mt

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NOTE: This post was included in the Carnival of Personal Finance #169 at Banker Girl. Thanks