Question

Why is it important to try to make financial decisions without emotions?

Please be detailed with this answer.

Answer 1

Because if one uses their emotions to make a financial decision, they might not be making the best economical decision. For instance, let’s say you’re saving up for college and it’s really expensive, but it’s your best friends birthday in a week. You may want to cut down on the cost of your friends party to help you with your college fund.

Does this help?

Answer 2

When someone is trying to make a financial decision, the worst thing is to be too excited about a potential investment or too depressed about the possibility of losing your money.

Everyone has experienced emotions that alter our behavior, a lot of people even deliberately take substances that alter their behavior (e.g. smoking, drinking, using drugs). But many times after we have settled down, we might regret what we did while we were either angry, upset, thrilled, excited, etc.

Imagine if we regret arguing with a friend just because we were upset one day, how much can we regret to make a bad financial decision just because we were angry, afraid or extremely happy on day. Emotions are not your best business partners, e.g. the value of certain stock starts to lower, and we are afraid that the decrease will only get worse and decide to sell our stocks. That type of behavior will make our initial fears turn into a self-fulfilling prophecy.

Good business people have ice flowing through their veins.