Behavioral Finance: Everything You Need to Know!
Have you ever found yourself buying something you didn't need, just because it was on sale or because you saw someone on social media with that item?
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This behavior isn't just a matter of lack of control; it's deeply rooted in psychological processes that influence our financial decisions.
In this article, we will explore how behavioral finance explain why we spend more than we should, how impulses and social comparisons shape our consumption, and how the psychology of consumption affects our financial choices.
You'll see that understanding these mechanisms can be the key to making more informed and safe financial decisions.
What is behavioral finance?
To the behavioral finance is an interdisciplinary field that combines psychology and economics to understand how emotional, cognitive, and social factors influence our financial decisions.
Unlike traditional economic theory, which assumes we are rational agents, behavioral finance recognizes that our financial choices are often irrational and influenced by psychological biases.
To illustrate, imagine your mind as an internal GPS that doesn't always point you in the most efficient direction to your goals.
We often take emotional shortcuts, like impulsive spending to “feel better,” without realizing that we’re deviating from our financial destiny.
Understanding these biases allows you to adjust your internal GPS, making more informed and strategic decisions.
+ How Behavioral Economics Impacts Your Financial Decisions
Why do we overspend?
A recent survey revealed that 461,000 Brazilians have made impulse purchases to feel better emotionally.
Additionally, 54% admitted to accumulating debt due to emotional problems such as stress or anxiety.
This data highlights how our emotions can lead us to spend more than planned, compromising our financial health (BCG, 2025).
“Present bias” is a central concept in behavioral financeIt leads us to prioritize immediate rewards over future benefits.
For example, a person might choose to buy a new smartphone today, even though they know it will compromise their savings for a planned vacation.
This behavior is similar to choosing to eat a sweet treat now, ignoring the long-term benefits of a balanced diet.
| Behavior | Motivation | Consequence |
|---|---|---|
| Impulsive clothing buying | Emotion/Stress | Debts and regret |
| Spending on cutting-edge gadgets | Desire for status | Reduction of savings and debt |
| Multiple streaming subscriptions | Convenience/fear of missing out | Accumulation of unnecessary monthly expenses |
Impulses and emotions in consumption
Our emotions play a significant role in our purchasing decisions.
When we feel sad, anxious, or stressed, it's common to seek immediate relief through consumption.
This behavior is known as “emotional buying” and can lead to impulsive spending that isn’t aligned with our real needs.
Furthermore, modern advertising is designed to manipulate these feelings. Messages like "last chance" or "limited stock" exploit our instinct for quick action.
It's as if each advertising campaign activates an emotional trigger that pushes us to spend before we even think.
To deal with this, experts suggest self-questioning techniques: before each purchase, ask yourself: “Would I buy this item if it weren’t on sale?”
+ How to overcome anxiety caused by financial problems
Social comparisons and status
We live in a highly connected society, where social media amplifies the pressure to maintain a certain lifestyle.
We constantly observe the achievements and acquisitions of others, which can lead to social comparisons.
This phenomenon, known as the “social comparison effect,” can motivate us to spend more to maintain an image of success and belonging.
Imagine an invisible race: every post from a friend showing off a new car or an exotic trip makes us feel like we need to “meet” that standard.
However, these comparisons are often misleading as they only highlight the positive moments and hide sacrifices or debts that exist behind the achievements.
Understanding this helps reduce the emotional pressure that leads to unnecessary spending.
See also: What are commodities and why do they make headlines so often?
Consumer psychology
Consumer psychology studies how psychological factors influence our purchasing choices.
In addition to emotions and social comparisons, other psychological factors, such as the perception of scarcity, the need for instant gratification, and the fear of missing out, play an important role.
The "fear of missing out" (FOMO) is a classic example. It leads us to buy products or services we don't need, just to avoid missing out on a perceived opportunity.
Marketing strategies exploit this sentiment with limited-time promotions, flash sales, or exclusive editions.
Think of it as a tide pulling us in: if we're not careful, we can be swept away by the current of impulsive consumption.
How to change your financial behavior
Understanding the psychological factors that influence your financial decisions is the first step to changing your behavior. Here are some effective strategies:
- Recognize your emotions: Before each purchase, identify whether the decision is rational or emotional.
- Establish a detailed budget: Limit your spending and track every penny, avoiding unpleasant surprises at the end of the month.
- Avoid social comparisons: Remember that everyone has a unique financial background.
- Practice the delayed gratification: Wait before purchasing and evaluate whether the item is really necessary.
- Seek professional support: Having the support of a financial advisor or therapist can be crucial for sustainable changes.
A practical example: imagine you want to buy an expensive watch you saw on social media. Instead of buying it right away, wait a week and see if the desire persists.
Often times, the impulse subsides, and you avoid unnecessary expense.
Conclusion
To the behavioral finance offer valuable insight into how our emotions, social comparisons, and other psychological factors influence our financial decisions.
Understanding these mechanisms allows us to make more informed and strategic decisions, avoiding debt and strengthening our financial health.
Financial self-awareness is like cultivating a garden: it requires attention, patience, and deliberate action.
Removing emotional weeds and planting healthy habits ensures that resources grow sustainably.
Frequently asked questions
1. What is behavioral finance?
Field that combines psychology and economics to understand financial decisions influenced by emotional and social factors.
2. How do emotions affect our purchasing decisions?
Feelings of stress, anxiety, or sadness can lead to impulsive purchases and debt.
3. What is the social comparison effect?
Tendency to compare oneself with others, often leading to unnecessary spending to maintain status or image.
4. How can I improve my financial behavior?
Recognize emotions, set a budget, avoid comparisons, practice delayed gratification, and seek professional support.
