Understanding finance doesn’t prevent irrational decisions—it makes them easier to recognize after they happen.
Studies of events Dot-com bubble and the financial crisis of 2008 show that even large institutions still make financial mistakes driven by psychological biases. For instance, a survey by State Street states that about 60% of institutional investors admit that they felt under pressure to follow market trends due to the fear of missing out, regardless of ‘red flags’ about the market.
This suggests that understanding the risks doesn’t make them avoid them. Behavior still influences decision-making.
This realization doesn’t necessarily come from a market crash or any crisis; I realized this through a simple action: buying a domain name.
-
Observation
A domain is a rival and excludable good- limited of amount and require money to approach. When I started building Heralpha and hesitated about buying a domain, I overlooked the possibility that it could be bought by someone else, and missed a chance to buy the domain ‘heralpha.com’. Because of hesitating in the first opportunity, I immediately found another domain to buy, and that’s how I made my first decision where emotion and behavior overrode my logic.
-
Decision moment
After skipping the first chance, everything seems to be messed up and confusing to decide the next step. As I quickly change the name of the domain I want to buy and find it is my second chance, I buy it without logical analysis. This comes from obliviousness and unconsciousness about what we are going to buy. When urgency overrides conventional criteria, people tend to convert from cerebral mode to emotional mode and foster quicker action.
-
Psychology breakdown
Under urgent conditions, people tend to rush, especially in financial situations where products are perceived as scarce goods. Similarly, the domain in this situation is sorted as ‘private goods’, which promotes the urgency that forces customers like me to buy faster than expected. This phenomenon is known as the Fear of Missing Out effect in psychology; it appears whenever people feel rushed or are being pushed to act faster than normal. Fear of Missing Out (FOMO) is one of the effective tools in marketing. When companies use terms like ‘only one left’ or ‘few left’, they build a perception with the client about its scarcity, which pressures people to action. This is fostered by ‘Prospect Theory’, which indicates that people tend to have stronger feelings when experiencing losses than when gaining something of the same amount. It’s part of the reason why people will rush and decide to buy faster rather than skip the opportunity. All of these elements elevate the stronger feeling about this fear and secretly manipulate customers’ actions.
Turning point
After buying the domain, when emotion dominated my brain instead of rational logic, I realized I had just fallen into a trap. The domain I just bought can’t be used directly with the website and requires me to pay more money to connect it. This realization turning my investment into a sunk cost. I immediately found another place where they sell cheaper domains, and I bought a new domain. I spent a little extra money, gave up on a product that no longer brought value or benefit to me and rebuilt my website. After all, I started over by redesigning my website on a new platform that charges less money and uses my new domain, which is ‘heralpha.co‘ that you are reading right now.
Most people usually do not dare to cut the sunk cost because of the investment they have already put in, like money, time, or effort, which is unrecoverable. Due to the fear of wasting resources and regret over what they have already done, this phenomenon shapes human behavior known as the ‘sunk cost fallacy,’ where people continue to endeavor because of cumulative investment rather than current benefits.
In conclusion, I don’t regret the mistake I just made; instead, I view it as a valuable lesson about sunk costs and how psychology and behavior can lead to poor decisions. Understanding how people react during challenging times is advantageous in the finance industry and helps me quickly identify my behavioral patterns to enhance my decision-making.
