Rutul Davé

Financial decisions, and to each their own

Financial decisions, and to each their own

An interesting topic in The Psychology of Money, one of my favorite financial books, is about the idea of how “theory isn’t reality” when it comes to financial decision making. What might seem unreasonable to you, might be a perfectly reasonable decision for someone else. What we experience as outcomes of the decisions we make, and everything we experience in our lifetime tends to have an outsized influence on how we think and the financial decisions we make.

A recent blog post around the topic of Why People Make Dumb Financial Decisions on Purpose, Ben Carlson describes this interesting aspect of financial decision making very well.

You might have come across this exact question, or some form of it before.

1 million or 50 million

No matter how many times I have seen this type of question before, I always make it a point to do the thought exercise myself to answer the question. And, not surprisingly, I always find that the choice I make is heavily influenced by so many other things in my life, not mathematics or pure logic.

As Ben summarized, “Sometimes happiness, comfort, satisfaction or safety trump dollar signs. Math is good for maximizing probabilistic games but not always in real life.

The housing market provides a great society-wide case study in this concept. There is a reason why regardless of what’s happening in the economy, the mortgage interest rates, and the world in general, people buy and sell houses each year.

Existing home sales