Being smart with money is easier said than done. Despite our good intentions, we overspend, bust our budgets, or derail our debt payoff goals—and we only have ourselves to blame. Here are five habits and biases that affect our financial decision-making. 

1. WE OVERESTIMATE OUR WILLPOWER.

“Most people believe they are better at many things than they actually are, from driving to investing,” Certified Financial Planner Benjamin Sullivan tells mental_floss. And when it comes to budgeting, we tend to be overconfident with our willpower. You vow to cut your restaurant spending to zero, assuming you’ll be able to successfully fight off your sushi cravings throughout the month. You know you can go a month without buying another pair of shoes online—if you could only block all of the ads for sales... This overconfidence can backfire when you eventually give in and wreck your budget.

In a study published in the journal Psychological Science [PDF], researchers put a series of volunteers to the test to find out how strong their impulse-control actually was. In one test, they looked at the "empathy gap." This is the tendency to underestimate our impulses (such as hunger), because while we can remember the circumstances and strength of impulsive states, we can’t remember how they actually feel. (For instance, you can remember that you were hungry because you skipped breakfast, but you cannot recall that growling sensation in your stomach.) So when we’re not experiencing a craving, it’s easy to overestimate our willpower.

In another test, the researchers convinced some heavy smokers that they had a strong control over their cigarette cravings, while members of another group were told that they had very little self-control over their cravings. They were then all given a test to win money that involved a cigarette—such as, holding an unlit cigarette in their mouths without smoking it in order to win €8. The subjects who were told they had high control had a significantly higher failure rate than those in the group that were told they had low control, largely because, as the paper says, “many of these smokers exposed themselves to more temptation than they could handle” because they felt that they had self control.

“Whether it's picking stocks or frequent trading, overconfidence leaves investors focusing on games they can’t win,” Sullivan says. “Instead, investors would be better served by focusing on what they can control—their own behavior, including their overall asset allocation, and their spending and saving habits.”

2. WE STICK TO WHAT’S FAMILIAR.

“In investing, our bias toward the familiar is why many people invest most of their money in areas they feel they know best rather than in a properly diversified portfolio,” Sullivan says. “The known feels safe; the unknown feels risky.” 

This behavior is also known as status quo bias [PDF]. We prefer choices that feel familiar and don’t disrupt our lives very much. Fear of risk is one thing, but sometimes we simply fear what’s not comfortable. If you’re used to living above your means, for example, it can be tough to change your spending habits and cut back on certain areas—it’s uncomfortable and unfamiliar territory.

Similarly, the bandwagon effect can impair our judgment, too. Instead of making decisions that are good for our own unique situations, we simply do what’s considered popular or socially acceptable. For example, your friends have nothing saved for retirement, so you figure there’s no harm in postponing your own retirement savings. (This is false; you should start saving today!)

3. WE ANCHOR PRICES.

Sullivan brings up another interesting habit: anchoring. Anchoring is our tendency to use a given figure as a point of reference for our decisions. For example, you’re at a restaurant and you see a $25 entree on the menu; this seems overpriced at first glance, but now the $15 entree seems cheap in comparison.

“This tendency to fixate on a point of reference may seem like an easy mistake to spot, but in practice, it can be hard to dislodge a perception that is anchored this way.”

Research from the Institute of Psychology at the University of Würzburg found just how effective the anchoring effect can be. Researchers approached mechanics with a used car that needed repairs, asking the mechanics to name the value of the car—but only after the researchers themselves gave an opinion as to the value. Half of the researchers posited the car had a low value (DM 2800) and half suggested it had a higher value (DM 5000). When the researchers gave a high anchor, mechanics valued the car DM 1000 more.

Advertisers use this tactic quite often (on restaurant menus, for example) but it can also come into play with negotiating. Let’s say you’re interviewing for a job and expect the compensation to be in the $40,000 to $50,000 range. Your potential employer throws out a figure that’s much lower: $25,000. Suddenly, your own expectation seems ridiculously high, so you're more willing to make a bigger sacrifice with your counteroffer.

4. WE MAKE DECISIONS BASED ON “SUNK COSTS.”

“Not only do we tend to cling to what we know and anchor to historical prices that are clear in our minds, but we generally avoid facing the truth of a financial loss,” Sullivan says.

Our aversion to loss results in the sunk cost trap, the pressure to follow through on a decision because you've already put a lot of time and effort into it. In practice, this might come up if you’re shopping for something specific, like a pair of jeans, and you can’t find the pair you want, so you impulsively buy something else at the store to justify the time and effort you’ve already spent (I couldn't find any jeans, but at least I have new sunglasses!).

“In Economics 101, students learn about sunk costs—costs that have already been incurred,” Sullivan explains. “Students also learn that they should typically ignore such costs in decisions about future actions, since no action can recover them.”

For starters, buying a new pair of sunglasses won’t make up for the time you’ve lost searching for your jeans.

5. WE SUFFER FROM BUYER’S “STOCKHOLM SYNDROME.”

You’ve just impulsively purchased a laptop you can’t afford, destroying your budget in the process. Maybe you have a bit of buyer’s remorse, but you justify the purchase by telling yourself you’ll use it all day, every day; it’s been a while since you’ve had a new computer; it was a solid, smart purchase.

This is post-purchase rationalization in action, also known as buyer’s Stockholm Syndrome: We tend to look for information that supports a choice we’ve already made. In other words, we justify a purchase to avoid dealing with the remorse of that purchase. It could be anything from a small splurge to a bad investment; either way, post-purchase rationalization keeps us from looking at our financial decisions objectively.