Optimism Bias & Budgets
People have a propensity to shortcut anything they think will be too hard or take too long. With busy lives, we can always justify doing it more “efficiently.” But when it comes to making a budget, pulling numbers out of the air isn’t efficient since the budget will never work. Instead, it’s a classic case of how Optimism Bias works against us, and why it’s so important to base a budget on cold hard facts.
According to the experts in neuroscience and social science people are more optimistic than realistic. We underestimate our chances of getting divorced, losing their job or being diagnosed with a severe disability, which is why so few people have an adequate emergency fund.
Our optimism can lead to disastrous miscalculations. Just as it make us less likely to apply sunscreen or leap into an investment we don’t really understand, it can be the root cause of why our budgets, with numbers pulled from the air, never work.
“Ah, let’s see, groceries, I’m pretty good at keeping costs low so I’ll bet we never spend much more than $200 a month on groceries,” she says as she pens in “$200” on the budget. The reality is very different. But when at the end of the month having spent $300, $400 or $500 at the grocery store the budget is out of whack she’ll exclaim, “See! I knew it! Budgets don’t work.”
“So what do you spend eating out a month?” I routinely ask people on my shows. Never, NEVER do they guestimate correctly. You’d think, having watched countless episodes of my shows, people would accept that their mental math is not correct. (sigh) They don’t. Their optimism bias keeps them believing they’re “not as bad” as the people I work with on my shows.
Everyone can have a budget that works, assuming they’re ready to put in the work required to make a budget that isn’t based on Optimism, but rather on Cold Hard Facts. That means doing a spending analysis to see where they money has been going so you can make decisions about whether that’s working for you or you need to change some things.
If you have someone in your life who is crappy at math, unwilling to face their reality or shoulder deep in optimism bias, this year instead of taking them out for dinner or buying them yet one more whatever, offer to do a spending analysis with them so they can create a real, workable budget that isn’t based on the whims of memory and their wiles of optimism bias. Now there’s a gift worth giving!