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December 1, 2013

Want to make smarter money decisions? Use these tips from Economist Noreena Hertz

Noreena Hertz advises people in power, including presidents, prime ministers and CEOs, about international debt and globalization. She also wants to help people like you and I make better financial decisions. When she became sick about 6 years ago and was put through the medical runaround of “expert” opinions on what she should do to get better, she ironically found a wealth of incredible research about finance. In her newly published book “Eyes Wide Open: How To Make Smart Decisions In A Confusing World” she outlines some of the biggest influences on our decision-making process when it comes to finances.

One of the first things Ms. Hertz advises is that you don’t put financial “experts” on a pedestal. In her opinion, just because someone sounds authoritative or appear to know what they’re talking about doesn’t mean that their advice is the best. As she says “It’s as true in personal finance as it is in medicine – experts do get it wrong. The fact is, doctors misdiagnosed one time in six.” What she advises is that a person gets their financial information from as neutral a source as possible because that source will, in most cases, be the best source.

Hertz further advises that a person should always be aware of their emotions because those emotions will cause then to perceive the information they are being given in different ways. For example, when you visit your mortgage broker on the same day that you’ve read something “sad” in a newspaper, it could negatively affect your decision as well as reading something “happy” can do the same. In other words, before you make a financial decision or meet with your financial advisor, mortgage broker or banker, duly note how you’re feeling and make sure that your “emotional thermostat” isn’t too hot or too cold.

Another interesting tidbit that Ms. Hertz found is that people should not make financial decisions when they’re hungry. Just like grocery shopping isn’t a good idea if you haven’t eaten in a while, making financial decisions on empty stomach is a bad idea.

Hertz also recommends that you seek out conflicting opinions. For example, if you have an idea about a particular financial decision and your financial advisor tells you that it’s a great decision or that you are a genius for thinking it up, that can cause a reaction similar to a dopamine rush that someone gets when they’ve just had sex or have eaten chocolate. This can, obviously, be quite misleading. Before you make any financial decisions you should also get the opinion of someone who doesn’t agree with you.

If you haven’t had a whole lot of sleep you definitely don’t want to be making financial decisions as far as Ms. Hertz is concerned. If you’ve just “pulled an all-nighter” or have gone through a weeks’ worth of long days and fitful nights, physiologically speaking your body is like someone who’s drunk on alcohol. This can lead to bad financial decisions that can hurt  you in every financial area of your life.

Before making financial decisions she also advises to avoid any sort of sexual stimulation. When studies were done among a large group of heterosexual males, one half of whom had recently viewed a Victoria’s Secret catalog and the other half who adjust see pictures of rocks and trees, the half that spend their time looking at lovely lingerie models were more inclined to seek immediate monetary reward then their counterparts who simply looked at an actual tree or bush.

Talking to all sorts of people, including close family and friends and getting their opinions isn’t such a great idea either. Hertz describes the time that we live in as a “data deluge” inasmuch as not only experts but also family members, friends and even acquaintances are offering their financial opinions and “expert” advice. She advises that it’s better to talk to one or two people that you have given you excellent advice and information in the past and stay away from  the “shotgun” information approach.

One last bit of advice that Hertz gives is that, before making financial decisions, a person should meditate. Here’s the reason in a very easy to understand example. A person has just won $1 million and the lottery and is offered $1000 to you. Most people asked said that they would forgo the money because it was such a relatively low amount and “hurtful”. Monks however, after meditating about the financial decision, made the rational choice and said “yes” to the offer. Keep in mind that monks don’t use, make or need money in any way.

Filed Under: Personal Finance

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