Diana Clement: The little spending lies we all tell

Our brains are more flawed than we think when it comes to finances. Photo / Getty Images

When it comes to misuse of our own money, Kiwis get the gold medal for self-justification.

We've just spent a small fortune on a new iPhone, a dinner for the family, a gleaming new bathroom. That's fine. Except we tell ourselves porkies.

If questioned by our partners, our workmates or others we'll justify the decision until the cows come home. I know because I have those conversations with myself when I buy another piece of high-tech outdoor equipment (one of my failings).

As desirable as it would be, there is no "banking module" in our brains, says associate professor Marc Wilson of the University of Victoria's School of Psychology.

Our brains are more flawed than we think when it comes to finances. The grey stuff between our ears is hard-wired for survival, not managing a budget.

Academics who study our financial behaviour have found all sorts of biases that make no logical sense.

We all fall into these biases. I do, and even the readers who swear black and blue that they don't, do.

I sidled up to a couple Simplicity KiwiSaver's accountants at their launch party and asked them some tricky questions regarding their own personal financial decisions.

Accountants should be pretty sensible with their money, but not always. One went to quite some extremes to justify why he'd spent $2600 on the suit he was wearing, although it fell on deaf ears as I don't judge men on their suits.

Financial biases that lead us to justify financial decisions include:

Framing: We create a frame such as "the market has been rising for five years" as a shortcut to decision making.

Confirmation bias: This is where we come to the conclusion first, then look for "facts" to match.

Mental accounting: We put money in different buckets and treat them differently. So your bonus doesn't need to go to pay off debt because it's somehow different.

Bias blind spot: This is the icing on the cake when it comes to chucking your cash down the gurgler. This failing in our brains means we can't even identify that we have biases. The term was coined at Princeton University's Department of Psychology. Of 600 people studied, 85 per cent believed they were less biased than the average person. Go figure. It's a self-deception and a half when it comes to keeping hold of your money.

We fall into this bias because we need to feel positive about ourselves, says Wilson. When our decisions go wrong we look for explanations that don't make us look bad. That may mean creating a narrative with "facts".

When we make mistakes big and small with our money we try to pretend it hasn't happened for as long as possible, sometimes throw good money after bad, and blame anyone or anything we can for our loss.

An example of this type of justification is a finance company investor who, I was told by his father, did "all the right research", but still lost money. Had he really done "all the right research", he wouldn't have put all his money into finance companies that screamed risk.

The antidote to all this is to take the time to unpack financial decisions ranging from the $4 coffee, the new car, or the trendy investment.

Insights into our own financial behaviour can improve our financial situation no end.