When it Comes to Decisions, Emotions Lead
Have you ever made a financial decision and felt one way about it at the time but felt differently about it a few days, weeks or months down the road? In a research study published in the Harvard University Annual Review of Psychology, this type of a flip-flop is common and scientifically supported as part of the human condition.
Framing our Thinking to Make Better Decisions
"Decisions serve as the conduit through which emotions guide everyday attempts to avoid negative feelings (e.g., guilt, fear, regret) and increase positive feelings (e.g., pride, happiness, love), even when we lack awareness of these processes. And, once the outcomes of our decisions materialize, we often feel new emotions (e.g., elation, surprise, and regret,). Put succinctly, emotion and decision making go hand in hand."
Daniel Kahneman, winner of the Nobel Prize in Economics, has found that there is a dichotomy between two manners of thinking. "'System 1' is fast, instinctive and emotional; 'System 2' is slower, more deliberative and more logical". His research suggests that framing how we come to making our decisions in a context which caters more "to people's tendency to want to replace a difficult question with one which is easy-to-answer" can help them arrive at the more logical and better decision without forcing them to operate out of character. Developing a plan, with a set of goals and clear path to get from point A to Z, is one way of framing something that, on its face appears confusing and perhaps impenetrable, especially during times of transition in our lives.
When it comes to major life transitions like the loss of a spouse, a major career change, loss of a family member, inheritance or even retirement (though not often considered), many of us are overcome by a variety of emotions that are, in some cases, extremely intense. So, what happens to our decision making when we are confronted by something that sends our emotions into over-drive? In some cases, as the Harvard study suggests, we may make decisions based on our current emotions that we end up regretting in the future.
It's not all bad news for emotional decision making. In higher levels of thought, depending on the situation, a solely rational decision might never be made because it is bogged down by too many options, too much data, and an overabundance of choices. At a certain point, a person might decide, based on all variables, that from the "good" choices, he/she was going to have to go with gut instincts. Shifting your attention to the expected emotion you might feel in anticipation of the outcome, might allow you to cut through the details, focus on what is important, and get on with the decision.
Emotions also provide a human element for financial decisions that cannot necessarily be accounted for in a statement or a spreadsheet. If we base all of our financial decisions solely on facts without taking into account the emotional response to that decision, it could lead to regret which, as we have discussed before can lead to diminished willpower and thus, poor judgement.
Make a Buffer
So, what is a person to do when it appears we are all led down the path of poor decision-making? The best thing that you can do to create a balance between rationality and your emotions is to create a buffer. A financial plan, when done right, is deeply rooted in your values, emotions and personal wants and needs.
A financial plan is dynamic and, when life changes it can change too. The role of a financial life planner is to help you determine your goals, develop a framework to get there and help guide you through the process of balancing reason and emotion when life gets in the way of your plan (which will probably happen from time to time).
The Two Sides of Money
Throughout our lives, we are confronted with choices we must make and the feeling that is conjured from the very nature of that choice is usually what will drive us to one decision and not another. Having an understanding of that truth can help us be more cognizant of the decision making process and may help us seek advice before making a big decision when there is a great deal of emotion involved. With proper planning, we allow ourselves an opportunity to lower our anxiety and gain clarity around our choices so we can lower the chances of having decision regret.