Understanding your financial behaviour to make smarter decisions with your money

Estimated reading time: 2 minutes

In summary:

• Immigrants and refugees may have a solid understanding of their motivation for coming to Canada but not necessarily their financial motivators.
• Behavioural finance helps individuals identify what biases inform their decisions about money.
• Questioning your biases, enables better financial decisions based on evidence and data.

It is sometimes said that money can make you do crazy things.

While that expression may be commonly used by some people, Peter Ficek, a Certified Financial Planner® and founder of TERRA FIRMA Financial Inc., says many of your financial decisions, good or bad, are influenced by several factors.

Certified Financial Planner® Peter Ficek argues newcomers must question the biases and motivations behind their financial decision-making.

“Remember, your relationship with money was shaped by your family upbringing and early childhood, social messages, cultural norms and emotional factors, from the past to the present day,” says Ficek. “It’s a forgone conclusion that tomorrow will be influenced by the decisions you make today.”

Ficek, who immigrated to Canada with his family from Poland in the early 1980s, works with immigrant clients in his financial planning practice. He observes that newcomers often have a strong understanding of the motivations that drove them to come to Canada, e.g., greater career opportunities or a better life for their family but sometimes lack an understanding of their financial motivations and behaviours.

“Understanding what motivates you can help you make smarter financial decisions,” says Ficek.

As a certified financial planner, Ficek is well-versed in behavioural finance, exploring biases influencing our financial decisions and the resulting consequences we may face. He often helps his clients gain valuable insights and develop stronger financial strategies by supporting them in identifying the biases influencing their behaviour.

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Cognitive vs. Emotional biases

According to Ficek, there are two types of biases all human beings are susceptible to: cognitive and emotional. Some biases, more than others, can be corrected or moderated and adapted or left alone, depending on circumstances as long as they do not prevent you from being successful in achieving your financial, professional or personal goals.

Cognitive biases can be as simple as misinterpreted statistics, memory errors or mistakes while processing factual information. Meanwhile, emotional biases are mental states that develop over time but without conscious effort. These are impulses, intuitions, spontaneous emotions or physical expressions. They relate to feelings and form perceptions and belief systems. Ficek argues identifying and questioning your biases helps avoid mistakes and can make you smarter with our money.

Windmill Microlending asked Ficek to share some examples of cognitive and emotional biases that can help immigrants and refugees make better financial choices when recognized.

1. Overconfidence bias: An unwarranted faith in one’s abilities and financial knowledge. Someone with this bias may not understand the knowledge they possess or don’t possess and uses insufficient evidence to make decisions.
   
   
2. Cognitive dissonance bias: Someone with this bias might experience mental or emotional discomfort when presented with conflicting information. Because of the turmoil they’re experiencing due to the unclear data or information, they may make a hasty or irrational decision to get a place of mental calmness.
   
   
3. Mental accounting bias: In this case, a person with this bias might value money from different sources in different ways and not always rationally. Someone who values money from different sources in different ways may not the best decisions with those dollars. An example of this could be someone valuing a tax refund differently from their income and spending the refund on something irrational when the prudent choice might be to use the money for an emergency fund.
   
   
4. Framing bias: Responding differently given a context or choice. Someone experiencing this bias may respond differently to questions based on how they’re asked. Making a financial decision founded on how information is presented to you, and not on the facts or evidence, can lead to bad decision-making.
   
   
5. Self-control bias: This relates to the tendency to consume today regardless of the needs of tomorrow. It involves putting short-term goals ahead of long-term goals. Those with self-control bias might prioritize immediate satisfaction instead of considering their future outlook or needs. For example, they may spend to excess on their monthly entertainment budget and fail to save for professional development because it doesn’t provide gratification in the now.

There are other cognitive and emotional biases affecting financial decision-making, but more importantly than learning them all is beginning to question your deeply held beliefs regarding money, and assessing whether they are hurting or helping you as you establish your life in Canada.

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About our blog contributor

Peter Ficek is a CERTIFIED FINANCIAL PLANNER® incorporated as TERRA FIRMA Financial Inc., serving clients across Canada, mainly in British Columbia and Alberta. He immigrated to Canada, along with his family, when he was 14-years-old.