Despite our best efforts to make good financial choices, it’s safe to say we all have a few financial regrets. This week, host Reema Khrais is joined by Hal Hershfield, a professor of behavioral decision making at UCLA, and Abigail Sussman, who studies financial decision making at the University of Chicago.
Sussman and Hershfield share some financial regrets of their own — yes, even financial experts make mistakes! — and offer advice on what we can do now to prevent regrets down the road.
It turns out this has a lot to do with how connected we feel to our future selves. “We often think of our future selves as if they’re other people,” Hershfield explains. “When it comes to making a decision that will have some impact on a future version of us, it could feel like an actual stranger.” For example, when we stay up late watching TV, we feel disconnected from the version of ourselves who is going to be exhausted tomorrow morning. Similarly, we make impulse purchases without thinking about the consequences that we’ll face down the line.
A few takeaways from this episode:
Have empathy for the version of yourself who made a financial mistake. Sussman suggests looking at the larger context surrounding that mistake: “You have to think about what else was going on and why did you make that decision.” Hershfield recommends taking five minutes to beat yourself up, and then figure out how to practice self-compassion.
We make regrettable financial decisions because of psychological bias. Sussman defines these biases as the “mistakes you repeatedly make in the same direction.” For example, we could look at a fancy vacation a friend went on and assume that they must be flush with cash, when in reality, that friend might be in credit card debt. Another bias might be assuming that we’ll be able to dramatically cut down our spending next month, when realistic budgeting and baby steps could be more productive.
In the short term, we tend to regret the things that we did, but in the long term, we regret what we didn’t do. Hershfield recommends asking yourself whether you’d regret not taking action: “If the answer is that ‘I'll regret it if I don't do it,’ it could mean that you should potentially go for that action.” So don’t let the fear of regret hold you back from something good, like switching jobs or starting a new business.
Regret can be a springboard for action. Hershfield says that instead of ruminating on your regrets, you can ask yourself, ”Wait, what can I learn from that? What does that mean to me?” Sussman adds, “Keep track of times when you have felt financial regret and think about, like, is there sort of a specific pattern? Are there specific types of decisions or outcomes? Do you want to try to make sure that you make the opposite decision when similar kinds of situations come up in the future?”
Also in this episode, we share a new segment of “Alice Gets Her Life Together,” where producer Alice Wilder takes on a personal finance challenge one month at a time. This month, she reports back on her challenge to build a budget for her summer vacation, instead of winging it and racking up debt.
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