You will be able to explain why money decisions go wrong in predictable ways and why systems beat willpower.
Behavioural finance starts from one observation: people do not make money decisions the way the textbook model says they should. The textbook model says you weigh the chances and the outcomes, then pick the option with the best expected result. In practice you do something else, and the way you do it is predictable. That predictability is the useful part. If a mistake follows a pattern, you can plan for it.
The clearest example is loss aversion. In their work on prospect theory, Daniel Kahneman and Amos Tversky showed that people feel a loss more strongly than a gain of the same size. Losing $500 hurts more than finding $500 pleases. That imbalance changes behaviour. Picture an investor with two SGX counters. One is up, and she sells it to lock in the gain. The other is well down, and she holds it, because selling would make the loss real. Repeat that for a few years and the portfolio fills with losers and empties of winners, which is the opposite of what the arithmetic wants.
A second pattern is mental accounting, a term from the economist Richard Thaler. You sort money into separate accounts in your head and give each one its own rules, even though a dollar is a dollar wherever it sits. Take an example. Someone keeps a large sum in a savings account earning very little, while carrying a credit card balance that charges far more interest. The savings are labelled safety and the card is labelled spending, so the two never meet. Every month, the gap between the interest earned and the interest paid is money lost. The same person may spend a bonus or a red packet freely while guarding their salary closely, as if the money came with different rules.
The third pattern is the disposition effect, the tendency to sell winners too early and hold losers too long. It is loss aversion and mental accounting working together on a live portfolio. Each holding becomes its own account, judged against the price you paid for it rather than against what it is likely to do next. The price you paid matters a great deal to you and not at all to the market.
None of these are character flaws. Clever, careful people show them too, including people who know the theory well. They are default settings in how the mind handles gains, losses and reference points, and they usually work well enough in daily life. They become expensive when money is involved, because small repeated mistakes compound over years in the same way returns do.
That is why this course does not try to make you more rational by force of will. Willpower is weakest exactly when these patterns are strongest: in a market fall, at a sale, at the end of a stressful week. The aim is to notice your own patterns, then build systems that work without willpower. A standing instruction that invests every month whatever the news. A waiting period before any purchase above a set amount. A written rule for what you do when a holding falls. A habit of asking whether you would buy something today at today's price.
Over the course you will look at your own spending, saving, debt and investing for these patterns and others, starting with your own decisions rather than other people's. You will collect the evidence first, then write rules to match.
For this lesson, write down one money decision from the past year that you regret. Note what you decided, what you were thinking at the time, and how you felt. Then ask whether loss aversion, mental accounting or the disposition effect played a part. You will add this decision to your log in lesson 1.4.
Write down one money decision from the past year you regret and what you were thinking at the time.
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