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Emotions can cloud our financial judgment from "summary" of A psicologia financeira by Morgan Housel
Our emotions play a significant role in how we make financial decisions. When we are feeling anxious, fearful, or overly optimistic, our judgment can become clouded. Instead of thinking rationally and logically about our financial choices, we may be swayed by our emotions, leading us to make impulsive or irrational decisions. For example, when the stock market is experiencing a downturn, many investors panic and sell their investments out of fear of losing money. This knee-jerk reaction is driven by emotions rather than sound financial reasoning. In reality, selling during a market downturn often locks in losses and prevents investors from benefiting from a market recovery in the future. Conversely, when the market is surging, investors may feel overly optimistic and make risky investment decisions based on greed. This behavior can lead to taking on too much risk, overleveraging, or investing in speculative assets without properly assessing the potential downside. Our emotions can also influence how we spend and save money. Impulse buying, retail therapy, and emotional spending are all examples of how our emotions can cloud our financial judgment. Instead of making informed decisions based on our financial goals and priorities, we may succumb to the immediate gratification of emotional spending.- It is essential to develop self-awareness and emotional intelligence. By recognizing when our emotions are driving our financial choices, we can take a step back, pause, and make more rational decisions. Creating a financial plan, setting clear goals, and sticking to a long-term investment strategy can also help mitigate the impact of emotions on our financial judgment. Ultimately, understanding the role of emotions in financial decision-making is crucial for building a solid financial foundation and achieving long-term financial success.
