All Things Financial Planning Blog

“I see things as they are.” I was disappointed when the workshop participant said that. Others may not see clearly but this gentleman did. His perspective and experiences did not color his view of the world—except, perhaps, to clarify his “correct” view of events. I was sure it would be hard to change his thinking.

Then I started wondering about my own thinking. At an old employer, everyone was tested for the Myers-Briggs Type Indicator. My boss was a “J” for judging and I was a “P” for perceiving. However, I had trained myself to be more action oriented. I found my boss constantly reminding me that there may be alternative ways of perceiving situations where I had already judged and was ready to act. The perceiver was quick to judge and the judge was looking for alternative ways to perceive the situation.

Sometimes speed and action are necessary to get things done. (I suppose action is always necessary to get things done; speed is sometimes necessary also.) Sometimes deliberation is necessary to get the right decision made. Acting with deliberation can sometimes get the right thing done.

In personal finance, action can be damaging. Chasing investment trends can lead you to buy high and sell low. Repeatedly making impulse purchases can waste money on items that do not provide value. Allowing paper increases in home and investment value to fuel additional spending can lead to trouble if the home or investment drops in value.

In personal finance, inaction can be just as damaging as action. Failure to sign up to contribute to your 401(k) or to start an automatic savings program reduces the tremendous lift time provides savings programs. Postponing that conversation with your lawyer about a will or with your insurance representative about life insurance may cause tremendous hardship if you die first, adding to the anguish of your loved ones. 

Of course, deliberation and inaction are not the same thing. Waiting until next week, or even tomorrow, to make that impulse purchase allows you to see if you still want it. Taking a weekend to decide how much to contribute to your 401(k) is not the same thing as failing to sign up for your first ten years of employment. Deliberation gives you a chance to reconsider your initial reaction to the situation.

In the book, “Nudge,” Richard Thaler and Cass Sunstein identify seven biases and blunders that lead people astray as the people make decisions. These biases and blunders often help us make quick decisions in a fast-paced world. Unfortunately, they can lead us to make the wrong decision also. Becoming familiar with the biases can help us to identify when we are using the biases and should take a moment to consider alternatives. The biases and blunders they identified and defined include:

Anchoring: start with something you know (the anchor) and adjust from there.

Availability: assessing the likelihood of a risk by asking how readily examples come to mind. For example, homicides are more readily available than suicides, so people tend to believe that more people die from homicides.

Representativeness: similarity; can cause people to confuse random fluctuations with causal patterns.

Optimism and Overconfidence: the tendency to be unrealistically optimistic when predicting the future.

Gains and Losses: losing something makes you twice as miserable as gaining the same thing makes you happy.

Status Quo Bias: people have a more general tendency to stick with their current situation.

Framing: how a question is posed or a situation is explained can significantly influence the choice people make. Ask the question differently and you may get a different answer.

It is difficult to recognize these biases when you are in-the-moment. With practice, you can learn to reflect on alternative solutions to help you identify when you are leaping too quickly to a decision. A few questions you might consider include: 

1. What is the best possible outcome if I am correct in this decision?
2. What is the worst possible outcome if I am wrong in this decision?
3. Who else does this decision impact?
4. What other alternatives seem possible?
5. What are the facts and what are my assumptions that I am treating as facts?
6. How am I feeling emotionally? Are those emotions effecting my decision?

Additionally, you can find a partner to help you. Your partner might be your spouse or life partner. Your life partner probably has different biases and may be able to help you identify some of your biases.

You might also use your financial planner as a sounding board and third party to help you consider your options for financial and life decisions. Your financial planner has been trained to help you make many of the decisions that come with emotional ties and biases. Your planner can help you to identify and separate your emotions from the decision process.

It is not always possible to eliminate emotions from the decision-making process, and not always desirable either. Many times, a decision made with the heart is preferable to a decision made with the head. However, it is helpful to know when you are using your heart and when you are just using incorrect information and making a poor decision with your head.

 It is helpful to know whether you are seeing things as they are or seeing things as you are. Like our friend at the workshop, you may want to know whether you are going into the training open to the training or just to reinforce what you already know.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN