3 Ways Emotions Affect Our Financial Decision Making
by Ande Frazier
October 9, 2018 .2 min read
The worst time to make an important financial decision is when we are at our most emotional. Our emotions sacrifice accuracy for speed because we feel pressure to make a decision quickly. This typically makes our responses very wrong. When emotions intrude, our decision-making behavior becomes very much at risk. Then, our financial expertise is not enough to carry us through. So, how do we prepare for the certainty of uncertainty?
Manage Emotions & Decision Making Around Money
We need to make decisions around preparing for the future when we are not in the middle of a crisis. Since many people procrastinate, it's not uncommon for people to only make decisions when a sudden event forces them to do so. When we are in these emotionally charged situations, the feeling of anxiety often clouds our judgment and we make unfortunate choices. Our desire to eliminate the stress we feel very often overtakes our ability to think rationally. The result is that we often don’t take our time to figure out the best solution. You can avoid this problematic response by planning in advance of an emotionally tense situation. Then, if a crisis comes up, you can focus on dealing with the emotional aspects of the crisis without compounding the stress by also having to make critical financial decisions.
Change Our Hardwiring
Our brains are wired to reflex before it reflects. It takes 12 milliseconds to respond to an emotion but it takes up to 40 to have a cognitive response. If we are constantly just reacting, we are usually reacting the wrong way. That’s why we need to be proactive rather than reactive. We need to be aware that this is the way our brain responds to things, and we need to slow down and take our time to figure out the appropriate response. Ask yourself...is this something I need to act on immediately or can I take the time to make sure this decision is in my best interest? We can evaluate if our need to respond is equivalent to the totality of the situation at hand. Very often, we jump too quickly, which can lead to poor choices.
The Certainty of Uncertainty
There are two things that are certain in our lives. The first is that we will die and the second is that we don’t know how or when. These things provoke a very emotional response from people, and because we are uncertain about the second certainty, we tend to ignore the first. This is when planning comes into play. When we plan ahead, we are better able to ensure our values will be put into action and we have better access to our rational brains. This means we are less likely to make an emotionally driven decision, and we are able to better plan for the long term. If we ignore this certainty of uncertainty, most people will be put into a position at some point where they are faced with a stressful, even catastrophic financial situation that they must face head-on. If we embrace the truth of uncertainty, we are more motivated to create financial security for our lives. We can reframe uncertainty from a negative thing to a positive one.
Help take the stress out of uncertainty by finding a financial adviser that has your best interests at heart.
Ande began her 20+ year career as an adviser and quickly realized that many people weren’t taking into account was how emotions play a huge factor in financial decision making. Leaving behind her practice to focus solely on educating both advisers and consumers alike, she became an expert in behavioral finance. Author, speaker, thought leader, and money educator, Ande is helping women to take control of their money.