I am not a psychologist, but I have learned a little about decision making in business. Here are some common biases or mistakes that people need to be aware of when they are making important decisions in personal finance, business, and investments:
1. Anchoring Bias – This happens when one puts more emphasis on a certain piece of information. It can be the result of previous opinions and emotions. For example, one can get too attached to an investment such as a stock and believe that it will return to a certain price. As a result, the investment could be held for too long and could lose even more value.
2. Loss Aversion Bias – This happens when one is too afraid to take a loss causing him/her to lose even more. This can be illustrated by the idea that people tend to be more risk tolerant in the realm of losses and more risk adverse in the realm of gains. What does that mean? Take, for example, a situation where an individual is in a casino. If he wins a lot of money, he is less likely to risk it all in a bit gamble. However, if he loses some money, he is more inclined to continue playing to try to win it back (and puts himself in the position to lose more money). In this case, he is more risk adverse when he wins and more risk tolerant when he loses.
3. Sunk Costs – In business and also in any other personal decisions, you cannot base your decisions on past costs/expenses because they are already “sunk costs” and should no longer factor into your decision. Sunk costs are costs that cannot be recovered once they have been incurred. For example, if I bought a movie ticket before my friends arrived, and they decided they did not want to watch the movie, I have a decision to make: go watch the movie alone (which is not very fun) or spend time with them (which could be more fun). The cost of the movie ticket is a sunk cost since no matter what I choose, the money was already paid. The only factor in my current decision should be which activity would be more fun for me.
4. Overconfidence Bias – Many analysts struggle with this bias as they believe they are correct in their analysis. In fact, everyone is usually too confident that they are correct. Being too confident in your opinion might hurt you if you refuse to listen to others or if you do not do the proper research to support your opinion.
5. Confirmation Bias – This occurs when one looks for information that confirms his own biases. For example, if I think company X is really good, when I research the company to see if I want to invest in it, I might only look for the information that confirms my bias. I might ignore information that tells me that the company could struggle in the next year.

Yahoo just had a good article today about ways to mess up your credit score that mentions some of the same point I made in a previous post. The article highlights 7 ways to hurt your credit score:

1. Close credit accounts – I mentioned this in a previous post. Closing credit cards can really hurt your credit score.

2. Let credit cards collect dust – Creditor will close your account if they see that it has been inactive for a very long time. This could reflect negatively on your credit report.

3. Run up high balances – This one is obvious. Don’t go maxing out your credit cards. You should only be using a portion of your available credit each month.

4. Apply for new credit repeatedly – You do not want to have too much revolving credit. This means, just have a few credit cards. Nothing excessive.

5. Don’t pay fines or bills – If you miss payments on any fines or bills this will obviously hurt your credit scores. If a company that is billing you needs to send your bill to a collections agency, you need to make sure to pay that bill right away or risk your credit score dropping.

6. Ignore mistakes on your credit report – If there is a mistake on your credit report, correct it immediately! You also want to check your credit report and credit score a couple times a year. This can really hurt you in the long run if you are trying to get a loan in the future and they see the error on your reports. You can claim it was a mistake, but if you don’t get it corrected, it won’t make a difference.

7. Make late payments or miss payments entirely – This one is obvious too. Late payments will kill your credit score. If you were a lender, you would want the person to whom you are lending money to have a good history of making payments.

Many of my friends have graduated and will be starting jobs and their careers soon (those who were lucky enough to find employment in this economy). Although I have not been working for all that long, I have learned a couple things that I want to share.

1. Manage expectations – Under-promise and over-deliver. If something takes 2 days to do, tell your manager it will take 3 days. This gives you a buffer time in case it actually takes longer to do and also makes you look like a star when you deliver the assignment earlier.

2. Learn by asking questions -Always ask questions no matter how stupid they sound. If you hear something in a conversation that you don’t understand, ask what it is. If you read something you don’t understand, don’t be afraid to ask someone. It is important to show that you are always ready and eager to learn and to improve your skills.

3. Anticipate questions – Think like your boss before you hand in your work. Anticipate any questions that he/she might have. Your goal is to give them your work, and not to hear back from them. If you anticipate their questions, you are in effect going above and beyond what is expected of you.

4. Communication is key – Make sure you know what is expected of you and to paraphrase each assignment that is given to you. Clarify with your manager so that you know the level of detail or quality that he/she is expecting.

I’ve signed up to get email updates from a fairly new website called Groupon that is available in certain cities: Boston, Chicago, New York, Washington DC, San Francisco, Los Angeles, and Atlanta. The idea behind this website is collective bargaining power. The website sells coupons daily that leverage collective bargaining power. If enough people purchase the coupon, they get the special deal/discount that is listed on the coupon.

These deals are pretty good most of the time, although I still try to stick to my idea that I only spend money on things that I need. With that in mind, I get these email updates daily, but have not actually bought any of these coupons.

Previously, I mentioned that Chase is changing the rewards program on its Chase Freedom Card. This is true, according to the Wall Street Journal, but it appears they are doing it slowly through the year.

Here is a description of the new rewards program:

“Under the points-based program, dubbed Ultimate Rewards, customers will earn points for every dollar spent on certain Chase credit cards, with no earnings caps or expiration dates. Points can be redeemed for travel, cash, statement credits or gift cards, generally on a one-for-one basis with each point worth one penny. Users can also redeem points for merchandise, although the redemption rate is slightly less than one percent.”

And what they are going to do:

“For Chase, the move is also a way to replace older versions of its Freedom card, some of which had offered richer cash-back rewards and bonus opportunities. Throughout the year, all Chase Freedom cardholders will be moved to the rewards program, where they will earn 1% cash back (or one point) for every dollar spent and 3% cash back (or three points) for every dollar spent in categories that change each quarter. Chase had already moved to those terms for new customers last November.”

In my last entry about this, I had not received a letter from Chase in regards to the change. For me, this means that Chase has not gotten around to changing my reward program. Hopefully, I will have a couple more months before they do, so I can still get a check for $250 for $200 in rewards since I am so close. I realized now, I also don’t have to cancel my Chase Freedom card since I can just go with the reduced (standard) rewards version:

“The standard Freedom and Sapphire cards — where users earn one point for every dollar spent — don’t have annual fees. However, some Chase Freedom cardholders who want to earn a fixed 3% bonus for spending in grocery, gas and fast-food categories, will soon pay a $30 annual fee.”

Labels: credit cards