You've probably heard someone refer to shopping as "therapy" -- an exercise some people do to cheer themselves up. The truth is though, shopping when you are sad may be more like bad medicine than therapy. A study published in the journal Psychological Science found that sadness causes people to make poor financial decisions. Harvard scientist Jennifer Lerner and her colleagues Ye Li and Elke U. Weber of Columbia found that sadness sometimes leads to overly short-term thinking. Study subjects who were sad tended to value future rewards between 13 and 34 percent less than subjects in a neutral emotional state.
Short-term happiness, long-term regretThat kind of bias towards instant gratification can be seen in people who use a shopping spree in an attempt to cheer up. It could also explain other financial mistakes, such as taking on too much debt or failing to save for retirement. These behaviors are not just financially destructive, but they can lead to a vicious cycle emotionally. If sadness leads to poor financial decisions, then the results of those decisions may well lead to more sadness. Whether it is choosing to go splurge at the mall, planning your budget or evaluating an investment opportunity, try to avoid making financial decisions when you are upset. Here are four strategies you can try to help you make those decisions in a clearer frame of mind:
- Discuss. Bounce the pros and cons of your decision off of somebody before you make up your mind. You might get some good advice, and sometimes just having to articulate the case for or against a course of action can clarify how strong your argument is. Just be sure you are turning to someone wise and responsible for advice -- the last thing you need is to be aided in a poor decision by an enabler who leans toward bad financial habits themselves.
- Delay. There are very few decisions that can't be put off for a day or two. In fact, the worst decisions are often those people have been rushed into making, which explains why retail marketing is so oriented toward creating a sense of urgency. In general though, if someone is trying to hurry you into something, it is probably a sign they don't have your best interests at heart. Delaying a decision gives you a chance to get in a calmer frame of mind, and you may find the extra time allows you to gather more information or think of other aspects of the question.
- Create a context. In a sense, all your financial decisions are interconnected, so when you make a financial decision, you should start by putting it into the context of your overall budget or investment portfolio. You should have a sense of how this decision will impact the rest of your financial condition, and how it fits in with your long-term goals.
- Compartmentalize. While it's good to create a financial context for your decision, you also should isolate that decision from anything that's going on in your life emotionally. Don't let something you are upset about become a rationalization for an irresponsible decision about money.