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Ah Money!!!
It’s one of the few things we all think about every single day; earning it, spending it, saving it, worrying about it. On paper, managing money should be simple. Earn. Save. Invest. Grow. Repeat. The math is very clear. The rules are known. Yet in reality, most of us struggle. We overspend, panic, follow bad advice, or delay decisions we know are important.
Why? Because money isn’t just math. Money is deeply human. And this is where behavioral finance steps in, it is a field that explains why smart, educated, rational people make irrational financial choices. It’s not about calculators and spreadsheets. It’s about psychology, emotion, and the invisible stories we tell ourselves about money.

The Silent Tug-of-War Inside Us

Every financial decision is a battle between two voices inside us:

• The Thinker: logical, patient, analytical. This part of you knows about compounding, the importance of saving, and the value of discipline.
• The Doer: emotional, impulsive, comfort-seeking. This part craves instant gratification, security, and belonging.

The Thinker whispers, “Save for retirement.” The Doer shouts, “But that vacation looks amazing, let’s book it now!”. And you know it very well most of the time, the Doer wins. And that’s how money mistakes are born.
Psychologists Daniel Kahneman and Amos Tversky, pioneers of Prospect Theory (1979), proved that humans consistently deviate from rational decision-making. We don’t simply weigh costs and benefits. We frame decisions emotionally. And in finance, that is too costly.

Stories That will make you feel too familiar

Let me narrate you some stories here and i am sure you will find a piece of yourself in them.

1. Ravi and the “Hot Stock” – The Overconfidence Trap

Ravi was the guy everyone went to for money tips. He followed finance pages, read business news, and proudly called himself an “investor.” One day, a friend whispered about a small-cap stock that was “ready to explode.” Ravi poured most of his savings into it. For a while, he looked like a genius. The stock doubled, and his confidence soared. But when the crash came, Ravi froze, it shook off his confidence completely. Selling would mean admitting he was wrong. He waited, convinced that it would bounce back. But you know, it didn’t. Within months, he lost almost everything.
Research shows that individual investors underperform the market by 1.5–3% annually largely due to overtrading and overconfidence (Barber & Odean, 2001).

Ego is expensive.

2. Meera and the Credit Card – The Present Bias

Meera worked hard and liked rewarding herself, all of us love doing that. Dinner outings, new clothes, small indulgences nothing extravagant. Always on her credit card (I know most of you are thinking here what is wrong in that?). Because to her the minimum payment due never looked scary. “I’ll clear it next month,” she thought always. But “next month” kept moving further away. And you know what within a year, her ₹50,000 limit turned into a ₹1.2 lakh debt. The interest was compounding faster than she could keep up. Now this is where she was wrong.
In India, the average credit card APR is 36–42% per year. Globally, studies show that people with present bias are 15% more likely to carry high-interest debt (Laibson, 1997).
Meera wasn’t careless. She was human. Her brain valued today’s comfort more than tomorrow’s pain. And that’s present bias.

3. The Housing Boom FOMO – Herd Mentality

Not long ago, the housing market was booming all of you know that. Everyone was buying. Friends, relatives, neighbors; all convinced prices would never fall. One of my customer, usually cautious, decided to buy two apartments. “Everyone else is doing it,” he reasoned. “If I don’t, I’ll be left behind.” The boom slowed. Rentals didn’t cover EMIs. Loans piled up. The stress was crushing. I need not to tell you further what has happened, because i know you have already guessed it.
Herd mentality isn’t rare. A Yale study (Shiller, 1984) found that investors often follow “social proof” more than fundamentals, leading to bubbles like the dot-com crash or 2008 housing collapse.
That wasn’t poor financial planning. It was pure psychology.

4. Sunita and the Sale of the Century – Mental Accounting

Sunita was disciplined with money. She budgeted carefully and prided herself on being frugal. But then came the “Sale of the Century.” A luxury handbag brand was offering 70% off. She bought two worth ₹12,000. When her husband asked why, she said: “It’s from my bonus, not our salary.”
Richard Thaler, Nobel Prize–winning economist, coined the term mental accounting. His experiments showed that people treat money differently based on its source (salary vs. gift vs. windfall). This often leads to unnecessary spending.
Sunita wasn’t irrational. She was human. Agreed?

The Patterns We All Share And Have Incommon

Notice something? None of these stories are about foolish or uneducated people. They’re about ordinary, smart individuals just like us. And yet:

• We panic-sell like Ravi.
• We overspend like Meera.
• We follow crowds like the housing buyer.
• We justify purchases like Sunita.

These aren’t random mistakes. They are predictable biases of human nature.

Why Our Brain Tricks Us?

Behavioral finance shows we repeatedly make money mistakes because psychological biases and emotions override rational decision-making, even when we know the right course of action. Our mental shortcuts and instincts, which helped our ancestors survive, are often poorly suited for modern financial choices. Here are some key psychological biases that lead to money mistakes.

• Loss Aversion: This is the tendency to feel the pain of a loss far more intensely than the pleasure of an equivalent gain. This bias can cause investors to hold onto losing stocks for too long, hoping to break even, rather than cutting their losses and reinvesting the capital elsewhere. In simple words we can say that losing ₹1,000 feels is twice as painful as gaining ₹1,000 feels good.
  
• Overconfidence: Many people overestimate their own knowledge, skills, and ability to predict market movements. Overconfident investors tend to trade more frequently, which studies have shown can lead to lower overall returns compared to a disciplined, buy-and-hold strategy.
  
• Herd Mentality: Also known as the “bandwagon effect,” this is the tendency to follow the crowd rather than relying on your own research. It explains why speculative bubbles form as investors rush into a “hot” market, and it also drives panic selling during market downturns. We can sum up it as following others reduces anxiety, even if it increases risk.
  
• Anchoring Bias: This happens when we rely too heavily on the first piece of information we receive. For example, an investor might fixate on a stock’s past high price as an anchor, even though it is no longer relevant to the stock’s current or future value.
  
• Recency Bias: This bias involves giving more weight to recent information and market performance while ignoring historical data. For instance, a period of strong returns might cause an investor to incorrectly assume that high returns will continue indefinitely, leading to disappointment.
  
• Availability Bias: We often make judgments based on information that is easily accessible in our memory. A memorable news story about a successful stock, for example, may cause an investor to buy it, even if a broader analysis would suggest a poor investment.
  
• Confirmation Bias: We tend to seek out, interpret, and favor information that confirms our existing beliefs while disregarding contradictory evidence. An investor who is optimistic about a stock may only read articles that reinforce their bullish view, overlooking potential red flags.
  
• Sunk Cost Fallacy: This is the irrational tendency to continue a course of action because of the resources already invested, rather than making a new decision based on future prospects. In investing, it leads people to keep pouring money into a losing stock to avoid admitting a past mistake.
  
• Present Bias: We tend to prioritize immediate rewards over future benefits. This explains why many people struggle to save for retirement—spending today feels good and is concrete, while saving for the distant future feels abstract.

Our brains were evolved to survive in caves, not to optimize in financial markets.

How to Outsmart Ourselves?

The goal isn’t to erase emotion because that’s completely impossible. The goal is to build systems that work with our psychology, not against it so that we can mitigate it’s effect.

1. Create and follow a disciplined investment plan– Having a set of rules and a long-term strategy can help prevent impulsive decisions based on emotion or short-term market noise.
2. Automate your savings– I always in believe in this, set up automatic transfers to investment and savings accounts. This removes emotion from the decision and helps counteract present bias.
3. Keep an investment journal– Documenting your investment rationale and forecasts can provide a reality check. Reviewing past decisions, especially ones that went wrong, can help us curb overconfidence and hindsight bias.
4. Actively seek out dissenting opinions– Purposefully consuming information and opinions that challenge your existing beliefs can help you avoid confirmation bias and gain a more balanced view.
5. Diversify your portfolio– Spreading your investments across different assets and regions protects you from the emotional traps of herd mentality and familiarity bias.
6. Use robo-advisors or human advisors-These tools and professionals can provide a rational, rule-based perspective that helps filter out cognitive biases and keeps your focus on your long-term goals. 

The Human Side of Money

Behavioral finance doesn’t label us as foolish rather it explains us as human. It doesn’t shame us for our mistakes but it gives us tools to design better choices. Because in the end, money isn’t just about interest rates or markets. It’s all about emotions, habits, and hidden biases. So next time you’re about to splurge, panic, or follow the herd, pause and ask:

Is this my Thinker guiding me, or my Doer tricking me?

That one pause could change your financial future.

“Finance is numbers. Wealth is psychology. Get both right, and you win.”
— Smart Credit with Sangeeta

A Reflection for You

What’s the one money mistake you keep repeating and what small guardrail will you create to stop it this time?

Because the toughest part of money isn’t the math. It’s managing the person in the mirror.
–Smart Credit with Sangeeta

Frequently Asked Questions (FAQs)

Q1. What is behavioral finance in simple words?
Behavioral finance studies how emotions, biases, and psychology affect financial decisions. It explains why people often make money mistakes, even when they know the logical choice.

Q2. Why do people make the same money mistakes repeatedly?
Most people repeat money mistakes because of behavioral biases like overconfidence, present bias, herd mentality, and loss aversion. These are natural human tendencies not poor math skills.

Q3. How can I avoid common money mistakes?
You can reduce mistakes by automating savings, following simple money rules (like avoiding high-interest debt), pausing before big purchases, and visualizing your future self. Small guardrails protect you from impulsive decisions.