Why We Focus On Behavioral Finance
Have you ever noticed that people who are in shape and healthy very rarely, if at all, discuss dieting? They could care less about the latest eating plan that will “help you trim inches off your waist.” Financial wellness is similar. People who handle their money well don’t need restrictive “no spend months” or fancy apps to help them achieve financial wellness. Just like with those in shape, they consistently make healthy decisions when it comes to how they spend money.
Why does staying in shape and managing money seem so easy for some whereas next to impossible for others? On paper, it is pretty easy to be skinny and rich. Eat less than you burn and spend less than you earn – that might be a great t-shirt saying! Yet, a majority struggle with being healthy and managing money. Why is this? It’s because we are all humans and have difficulty with being disciplined.
How Mentoro Changes This
At Mentoro, we focus on the individual. In fact, we put the “personal” in personal finance. Most of us have unique hopes and dreams we wish to accomplish. Mentoro places an emphasis on human interaction and we meet all of our participants where they are. We focus on each person’s overall financial situation and empower them to be the hero of their financial wellness journey.
To do so, we focus a lot on behavioral finance. Behavioral finance looks at the reasons why we make certain financial decisions even if they don’t seem rational. One area of behavioral finance is called loss aversion. Loss aversion is when we focus on avoiding losses rather than gaining something. For example, if I gave you the option of being handed $25 no questions asked or the possibility of getting $50 by flipping a coin and having it land on heads (if it landed on tails you would get nothing), you would probably take the sure thing and walk away $25 richer. However, if I offered you the choice of either automatically giving me $25 or flipping a coin and, depending on what side it landed on, either owing me $50 or nothing, you would probably flip the coin.
In both of these situations, the odds of the coin landing on the side you want are the same. However, rather than taking the sure loss in the latter scenario, you would more than likely look at the possibility of regaining a loss as more important than the possibility of a greater gain. Loss aversion is important for us to analyze because many make financial mistakes and try to right these wrongs. This can lead to disaster!
Once again, saving money is pretty easy – on paper. It is usually behavior that gets us into trouble. By taking a look at the behaviors that shape the way a participant views and handles money, Mentoro implements a financial wellness plan that will stick.