Mar 31, 2008

Prediction Abilities and Personal Budgeting

How accurate are people in predicting the things that will make them happy? How accurate are people in predicting their own future behavior? These kinds of questions underlay some of the most interesting research in contemporary cognitive psychology. In general, the findings indicate that people are much less accurate in predicting their futures than they think they are. Regarding personal finance, your ability to predict your own future behavior is an extremely important component of eventual financial success. Part of that ability might be learned but much of it is most probably a matter of innate temperament. Later posts will examine this more closely. In general, when we talk about the big picture, short range predictions - say, about the economy - tend to be more accurate than long range predictions. The billions of dollars spent in Iraq this month will continue to be spent next month. The hardships people suffer from the mortgage meltdowns this month will continue next month. The loss of middle-class jobs we suffered this month will continue next month. For your personal finances, the opposite might be true. Long range predictions might be more accurate than monthly predictions. This is something that must be considered as you do your taxes, review your finances and make plans for your future. Predicting long-range financial conditions for yourself might be more accurate than short range predictions as you do your budget! The key to effective budgeting is looking at the big picture over the long haul!

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