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Why do people make "bad" financial decisions?

"Bad decisions" often make good sense to people who make them - it is important to understand this and try to see the logic.

Photo of Jared Bybee
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Sorry for the image - I couldn't resist the expression of disappointment and disbelief from Kim and Kanye. :)  But I think sometimes I feel that when I see someone make a financial decision that seems dumb. 

Through work and life I have had several deep conversations with people who make "bad" financial decisions.  Here are a few that really helped me recognize my middle-class lens and find an increase of empathy. 

1 - Robert was a high school student, grew up in a poor family, urban environment.  His family lived in a government subsidized apartment.  His mother worked constantly to provide for him and his brother.  He always dressed well and I teased that he should give me fashion advice.  One day we met up and he was wearing Prada sneakers.  I asked how much they cost and he said $250.  I asked him to help me understand why he would spend that much on sneakers when he could either use it to buy other things or just save the cash. 

He asked me if I heard that Eddie, another boy, had been jumped (beat up by several kids).  I had heard.  He told me Eddie gets jumped and picked on because he looks poor, looks weak.  But fancy and nice sneakers project swagger, authority, strength.   Living in a world with a constant threat of violence, that you may get jumped any day, spending "too much" money on clothes and shoes makes complete sense.  If all that it took to avoid getting jumped (and the humiliation and fear that resulted) was expensive shoes - I would do the exact same thing. 


2 - Crystal paid too much for a junky car.  She bought an old Buick for $3000 that was probably only worth $1700 and was constantly having to fix it.  She bought on credit given her by the lot where she pays 20% interest on the loan.  She also lives in government subsidized housing, works cleaning houses across the rural county where she lives.  Ask her why she got that Buick with too many miles, and she'll say it's just what the lot had available. "Sell that junky car and you can get a better one for the same price" I say.  "Where?" she asks.  I tell her about craigslist online classifieds - and there are indeed more reliable cars on there for about the same money, I even show her some. "But who will finance it?" she asks.  I tell her that banks will finance a used car for 6% interest.  She doesn't have a bank account, can't get one because of a couple bounced checks several years ago.  

She needs a car to work, the only way to get a car is on credit, the only place she can get credit is from a used car lot that charges 20% interest, the only cars she can choose from are those on that lot.  And so she drives and repairs and makes payments on a junky old Buick.  Given her options, it makes sense. 


The tendency to SMH is strong when we see something that doesn't seem rational, but reason is not always shared, logic is not a universal truth.  

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Photo of Meena Kadri

Great angle to explore our challenge question from Jared. And certainly highlights potential opportunities for our upcoming Ideas phase. Perhaps financial literacy tools need to focus more on help that people actually want rather than trying to give broad overviews on lots of things that seem overwhelming. Could be interesting to explore how information might be conveyed in order to meet real human needs – which you've highlighted well here.

Photo of Vladislav Dimitrov

I think this is a good idea and approach to explore in the next phase. The only challenge I see with focusing on "what people want" is that often times they don't really know themselves. A common example is that many young people my age are scared of investing and opening retirement accounts etc. So most won't even believe they need help in that area. They'll just ask for help for other things like monetizing side projects, or how to make more money in general. But the reality is that investing is a huge area where we need education and help.

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