I’ve done some pretty dumb things with money. Maybe you have too. What I’ve come to realize is that those dumb actions were controlled by my money blueprint. And maybe you’ll agree with me that how our money blueprints affect the way we think and act toward money is a key factor in achieving financial freedom.
Most people know that they should be saving more. And they’re well aware that they should be spending less. The average person knows that credit cards are rigged against consumers. We know this stuff, so why do so many people struggle to make ends meet (let alone save for early retirement or other goals)? How can we learn to be smarter with money?
The emerging field of behavioral economics can give us some insight.
Two Lines and Two Minds
In Daniel Kahneman’s book, Thinking Fast and Slow, he describes two systems in the brain responsible for thought. They are called, unoriginally, “System 1” and “System 2”. (Evidently, Nobel Laureate economists aren’t the most creative when it comes to naming things.)
- System 1 functions automatically. It’s quick and emotional. There’s very little effort involved, and we don’t have voluntary control over it. System 1 includes things like impulses and intuitions, which can protect us from danger.
- System 2 is logical and methodical. It involves mental activities that require effort, such as calculations. It’s typically associated with things like making choices and concentrating on difficult tasks. System 2 can help us to make good decisions — but it can also paralyze us with options.
When you think of your “self”, you’re probably thinking about System 2. It’s the system that we’re most familiar with. But System 1 is always there, lurking in the background. It’s hidden but powerful. It can influence System 2 and cause you to do some foolish and counterintuitive things.
Let’s look at an example. [Read more…]