When we decide how to invest, can we always be sure that we are choosing rationally? The answer is simple: no. Very often our brain takes paths that we ourselves do not know. He favors instinct, even when he thinks for a long time. He deludes himself that he is evaluating the pros and cons with lucidity, but secretly lets himself be seduced by the belly. And the belly risks leading us astray, especially when it comes to money.
«If a racket and a tennis ball together cost 110 euros and the racket costs 100 euros more than the ball, how much does the ball cost? Everyone, by instinct, is led to answer 10 euros. But it is wrong: the correct answer is five». The explanation comes from Diego Rizzuto, from the scientific training and communication company Taxi1729, which on Friday held a conference entitled in the Rome headquarters of Consob Choose what I want, organized as part of the initiatives for Financial Education Month and aimed at an audience of high school students.
PREJUDICE OF THE STATUS QUO
At stake is not only calculating, but our ability to judge and make decisions, threatened more often than we think by actual mental traps. An example is the "Status quo bias", which in behavioral finance indicates an exaggerated tendency to leave things as they are.
«An experiment was carried out in an English supermarket – continues Rizzuto – First six jars of jam, then 24 were placed on a stand. When there were six jams, 40% of people stopped to taste and 30% bought one. When the cans rose to 24, 60% of customers allowed themselves a taste, but only 3% bought. This shows that oversupply complicates the decision-making process and causes people to give up. Choosing is tiring: it means enduring the idea that perhaps we have made the wrong decision». And with 24 alternatives the probability of making a mistake is too high.
LOSS AVERSION
Another mechanism is the one that intervenes when it comes to pension funds. In theory, supplementary pensions are a rational choice that protects us from future difficulties: why, then, do most people not want to hear about it? «In this case loss aversion comes into play – explains Rizzuto – The action of putting money aside today for when we will be 70 or 75 is experienced by the brain as a loss, which is why most people reject it first. And even when you are convinced, usually the mechanisms of inertia and postponement are triggered».
To overcome this obstacle, economists Richard Thaler and Shlomo Benartzi came up with "Save More Tomorrow”, a program according to which you don't start saving immediately, but with the first salary increase. Basically, you put something aside before you have it: in this way the decision is easier and the psychological cost lower.
THE “ANCHORAGE” AND “COMPARISON” EFFECTS
Two great classics of behavioral finance are the “anchoring” and “comparison” effects. The first occurs when we have to to determine a quantity and let ourselves be influenced by any number placed before us. The second instead intervenes when we are called to evaluate a quantity and we do it through a comparison.
An illustrious example is provided by Steve Jobs, who combined these two effects in the presentation speech of the iPad held in San Francisco on January 27, 2010. At the beginning, the Apple founder says that "according to the experts" the Apple tablet should cost “less than a thousand dollars: that is 999 dollars”. Then, moments later, the revelation: the actual price of the iPad is $499. Sounds like a deal, right? The credit goes to Jobs, who before he anchored our brain at $999, leading us to price the product in that order of magnitude, then amazed us with a much lower price. Warning: not low per se, but compared to the estimate our brains had been prompted to create.
Mental traps and cognitive errors of this type are used every day by those who want to sell us something. "For this reason metacognitive skills are fundamental - concludes Rizzuto - When you have to make financial decisions it is important to know not only finance, but also yourself".
