“Behavioral finance” sounds like something only wolves of Wall Street need to worry about. But if you know a little about this topic, you could improve your regular saving and spending. Behavioral finance merges psychology and money, and experts are figuring out the science behind why people make irrational financial decisions. In the age of self-discovery, would you like to know why you make those impulse-buys or bad investments? It could have something to do with times of crisis (like the entire first half of 2020). John Forlines is the founder and chairman of JAForlines Family Office. So he tells Bold TV how your environment affects your behavior.
Reset your reference points
It’s human nature. Our behavior changes in times of crisis. For example, take the year 2020. With the global pandemic and nationwide economic shutdowns, our reality changed faster than you could say quarantine. Forlines says the most common mistake you can make is not resetting your reference points. At the beginning of a crisis, we typically guess it will end quickly. So when the situation continues (like these shutdowns), we have to constantly adjust and react. For example, many people haven’t made plans for after unemployment runs out. This situation causes stress, which can lead to bad decisions.
Looking at the long game
So how stressed should you be right now? Here’s what you should know about times of financial crisis: The effects are short-, medium- and long-term. Short-term effects can overtake our decisions if we don’t reset our reference points. Medium effects last about three to six months and are typically negative. For example, the first part of our stimulus checks are running out, and our public markets will be rocky for a while. But experts believe the long-term effects won’t be terrible. Don’t let the cognitive stress of the moment make you freak out. Do your research and hold the line!