Behavioural Finance - Planning your holidays can open up new financial horizons!
March can be a good month for organising May’s long weekends – or even your summer holidays. Try basing your holiday plans on what you think you’ll want a few months from now: warmer temperatures? Hiking the great outdoors? Cultural activities? Lounging? These daydreams are actually a good time to focus on the tricky issue of projection and identify your “projection bias”.
Projection bias: when the warmer weather makes you want that house with a pool
Thinking about your future holidays can be fun – but it’s usually hard to anticipate what you’ll really be in the mood for come May or July. And besides, it’s easy to fall victim to “projection” bias, which is the belief that what we want right now is what we’ll still want in the (near or distant) future. The classic example is grocery shopping on an empty vs. a full stomach! How many times have you come home before lunch with far more supplies than you need? Many studies have been done on this, and the most comprehensive one(1) compares the amounts bid for a ham and cheese sandwich purchased before or after lunch and meant to be eaten either immediately or a week later. It won’t surprise you to learn that participants were ready to offer more (about +34% more) before lunch as opposed to after. But the real takeaway is how wide the gap grows (+61%) if that sandwich is supposed to be delivered and eaten a week later. Projection bias is reflected in how much someone overestimated their hunger and underestimated their fullness.
However, it might surprise you to know that this difficulty assessing our future needs can also affect the choices we make when we buy durable goods, which have a very long potential life cycle. A study(2) of the purchases of 40 million cars (4x4 or convertibles, black or white) and 4 million houses (with or without swimming pools, fireplaces, AC) analyses the impact of climate. According to the study, a temperature that’s 11°C (20°F) above the norm increases sales of convertibles by 8.5%, and a snowstorm drives 4x4 purchases up 6.5%. Even the car’s chosen colour depends on how hot and sunny it is. Homes with pools fetch higher prices if they’re sold in the summer. The list goes on...
All of this illustrates a type of irrationality that can affect our daily lives and how we manage our personal finances.
Want to make better choices? Be realistic!
Managing personal finances – allocating your assets, choosing your investments – requires you to focus on the present. Beyond the way things stand right now, you should consider the possibility of a future that you can’t control.
So it’s vital that you consider what will happen in the future in terms of:
Household income (don’t exaggerate), such as the impact of a job promotion on your income over time, the price you can sell your business for, your investment earnings (the impact of taxes or interest rates) and how much you make on the sale of your home.
Financial needs (don’t underestimate), including changes in your consumption habits, a jump in expenses due to inflation, the cost of your children’s education, and how long your retirement will last.
Projection bias often makes it harder to predict both, and this can result in inadequate planning for retirement (people don’t save enough because they have difficulty imagining how much their income will drop) or insurance (life’s accidents, by definition, don’t match the past).
Take the time to think about your current preferences, maybe in light of how those very preferences may have changed over the past few years.
We’ll leave you to organise your holiday now – much more fun!
(1) “Examining projection bias in experimental auctions: the role of hunger and immediate gratification”, T.Briz, A. Drichoutis et L. House, 2015
(2)“Projection bias in the car and housing markets”, M. Busse, D. Pope, J. Pope et J. Risso, 2012
GENERAL DISCLAIMER:
Societe Generale Private Banking is Societe Generale Group’s business operating through its head office at Societe Generale SA, as well as departments, branches and subsidiaries located in the areas referred to below, under the Societe Generale Private Banking brand, and is the distributor of this document.
This is an advertising document and holds no contractual value. It is not intended to provide an investment service. In addition, it does not constitute investment advice or a personalised recommendation on a financial product, or advice or a personalised recommendation on insurance, or any form of canvassing, or legal, tax or accounting advice from any Societe Generale Private Banking entity whatsoever.
The information contained in this document may be amended without prior notice, and is for illustrative purposes only to provide the reader with information that may be of use in making decisions. Any information on past performance, even repeated performance, does not under any circumstances guarantee future performance.
The private bankers of the Societe Generale Private Banking entities can provide potential investors with more detailed information on the offerings, within their Societe Generale Private Banking entity, in the theme presented in this document. This document is confidential and intended solely for the recipient. It may not be made public or disclosed to any third party, nor reproduced in whole or in part without the prior and written agreement of the Societe Generale Private Banking entity concerned.
Under no circumstances shall any Societe Generale Private Banking entity be held liable for any decision made by an investor on the basis of this information alone.
Societe Generale Group maintains an operational administrative organisation taking all necessary measures to identify, verify and manage conflicts of interest. To that end, the entities of Societe Generale Private Banking have established a conflicts of interest management policy aimed at managing and preventing conflicts of interest. For more details, clients of Societe Generale Private Banking may refer to the conflicts of interest management policy available on request from their private banker.
Societe Generale Private Banking have also established a policy to address any complaints filed by its clients. Clients may request this policy from their private banker or on the institutional website of Societe Generale Private Banking (www.privatebanking.societegenerale.com).
DISCLAIMERS BY JURISDICTION
France: Unless indicated otherwise, this document is published and distributed by Societe Generale, a French bank authorised and supervised by the Autorité de Contrôle Prudentiel et de Résolution (French Prudential Supervisory and Resolution Authority), located at 4 place de Budapest, CS 92459, 75436 Paris Cedex 09, under the prudential supervision of the European Central Bank (ECB) and registered with ORIAS as an insurance broker under number 07 022 493, orias.fr. Societe Generale is a public limited company (société anonyme) under French law, with capital of €1, 003, 724, 927.50 as of 17 November 2023 with its registered office at 29 boulevard Haussmann, 75009 Paris, France, and registered with the Paris Trade and Companies Register (Paris R.C.S) under the unique identification number 552 120 222. Paris. More details are available on request or online at www.privatebanking.societegenerale.com/.
Luxembourg: This document is distributed in Luxembourg by Societe Generale Bank Luxembourg, a limited public company (société anonyme) under Luxembourg law, registered at Luxembourg’s companies house under the number B 6061 and registered credit institution regulated by the Financial Sector’s Surveillance Commission (CSSF) under the control of the European Central Bank (ECB), and whose registered office is located at 11 avenue Emile Reuter – L 2420 Luxembourg. More details are available on request or online at www.privatebanking.societegenerale.lu/. No investment decision should be made solely on the basis of this document. Societe Generale Luxembourg accepts no responsibility for the accuracy or otherwise of information contained in this document. Societe Generale Luxembourg accepts no liability or otherwise in respect of actions taken by recipients on the basis of this document only, and Societe Generale Luxembourg does not hold itself out as providing any advice, particularly in relation to investment services. The opinions, views and forecasts expressed in this document (including any attachments thereto) reflect the personal views of the author(s) and do not reflect the views of any other person or Societe Generale Luxembourg unless otherwise mentioned. This document was prepared by Societe Generale. The CSSF has neither verified nor analysed the information contained in this document.
Monaco: This document is distributed in Monaco by Societe Generale Private Banking (Monaco), a joint stock company (SAM) under Monaco law registered at 11 avenue de Grande Bretagne, 98000 Monaco, Principality of Monaco, governed by the French Prudential Supervisory and Resolution Authority (ACPR) and the Financial Activities Supervisory Commission (CCAF) of Monaco. Financial products sold in Monaco may be restricted to qualified investors under Act no. 1339 of 07/09/2007 and Sovereign Order no. 1285 of 10/09/2007. More details are available on request or online at www.privatebanking.societegenerale.com/.
Switzerland: This document may constitute advertising within the meaning of the Swiss Federal Act on Financial Services (LSFin). It is distributed in Switzerland by Societe Generale Private Banking (Switzerland) SA (SGPBS or the Bank), whose registered office is located at rue du Rhône 8, CH-1204 Geneva. SGPBS is a bank authorised by the Swiss Financial Market Supervisory Authority (FINMA). This document may under no circumstances be considered as investment advice or recommendations from SGPBS. The Bank recommends obtaining the advice of an expert before acting or not acting on the basis of this document, and accepts no responsibility in relation to the content of this document. Financial instruments, including shares in collective investment funds and financial products, may only be offered in compliance with LSFin. More information is available from SGPBS on request or online at www.privatebanking.societegenerale.com.
This document is distributed neither by SG SG Kleinwort Hambros Bank Limited in the United Kingdom, nor by its branches in Jersey, Guernsey and Gibraltar which operate collectively under the “SG Kleinwort Hambros” brand. Accordingly, the information provided and any offers, wealth management and financial businesses and information do not concern these entities and may not be authorised by these entities nor adapted to these regions. More information on the activities of Societe Generale Private Banking entities located in the United Kingdom, the Channel Islands and Gibraltar, including supplementary legal and regulatory information, is available at www.kleinworthambros.com.
N° ADEME : FR231725_03IVZM |