Are You Really in Control of Your Financial Decisions?

Yes and no. Let’s begin with when you are not in control of your financial decisions and end with three tips to improve your financial decision making—especially when under stress and times of uncertainty.

Out of Control Financial Decision Making

To be out of control, not of your life but of your capacity to engage in sound financial decision making, is to subject yourself and your loved ones to the worst aspects of human decision making. In this instance, you react from a heightened emotion. Or you may be relatively calm and grounded, but you don’t weigh the evidence.

You seek information to confirm what you already know. You only ask others for their input if they are going to agree with you. Or you wonder after making a decision and experiencing a negative consequence, “How in the world did that happen?” This “System 1” type of decision-making, is often speedy, which is good. It also feels automatic. Yet, it has problems particularly for consequential decisions. Many, but not all, of your financial decisions are consequential.

Controlled Financial Decision Making

To be in control of your financial decisions requires you to be alert, attentive, focused, and fully engaged with the question, issue, or decision. You may seek information from various sources ranging from legitimate news sources to financial professionals. After collecting this information, you weigh the information based upon relevant criteria.

Then, you make a choice (or decision) having thought through the consequences of the decisions in the short run and long run. When you are really in control of your financial decisions, you consider the outcomes of your decision, and their impact on not just your financial life but also your personal life, family life, career/retirement life, and physical/psychological life. This is referred to as System 2 decision-making.

Uncontrolled versus Controlled Financial Decision Making

What are the differences between System 1 (automatic financial decision-making) and System 2 (deliberate financial decision making)?

System 1 (Automatic)

  • Impulsive
  • Automatic
  • Emotional
  • Unconscious
  • Concrete

System 2 (Deliberate)

  • Analytical
  • Deliberate
  • Thoughtful
  • Conscious
  • Abstract

Imagine that you hear individuals you respect and trust tell you that drones will be a great investment. Later that evening, you hear a news report on the booming drone industry. Before you know it, you’ve just bought $5,000 worth of drone stocks or a drone mutual fund. When your loved one questions your decision, you respond somewhat defensively, “It’s a good idea and I had to act now.” As you review the elements of System 1 and System 2 decisions, it is obvious that this decision was impulsive, automatic, emotional, unconscious (to some degree), and concrete.

Imagine this scenario. You just turned 62 and you are wondering whether you should retire from your job and take social security since you have reached the minimum age. You go online and check out how much assistance you can get from social security by checking the benefits calculator. You talk it over with your loved ones. You consult with your financial planner to see what they think you should consider before making this decision. This decision, unlike the aforementioned decision, is clearly a System 2 decision. Why? You are analytical and data driven. Furthermore, you are deliberate, thoughtful completely conscious, and seeking to address an abstract question.

Path to Enhanced Financial Decision Making

The path to enhanced financial decision-making represents a combination of both System 1 and System 2 thinking. For financial decisions that are inconsequential, such as should you take a taxi or walk, it’s OK if you make this decision impulsively. For other decisions, such as what type of car you can afford, you need to do your research and make a concerted, deliberate decision. Here are three recommended steps you should take:

  1. Be Mindful and Present

Some of us, including myself, are a bit more impulsive than we should be. As such, you must be more present and mindful about what’s happening and know when you are about to make a decision. Mindfulness matters because it promotes a sense of relaxation which tames our reptilian brains (the part which some call the amygdala). If you find yourself making quick emotional decisions, then you know your amygdala is in charge and not your frontal cortex, which is the seat of reason.

  1. Match the Decision Making Process with the Consequences of the Decision

If a decision is consequential, that is, important, and the cost of making the wrong decision could result in you failing to achieve your goals or even cause you harm, use a controlled financial decision making process or System 2. If the decision is low-risk and reversible, allow yourself to go on “automatic pilot” to free up your mind to focus on decisions that are more important.

  1. Review the Decision

Always review both the outcomes of your decisions (which, more than likely, you cannot control), and how you made the decision—controlled or uncontrolled.

If the outcomes align with your desires and plans, then you are probably doing right by yourself regarding your financial decisions. Nevertheless, if you’re getting the “short end of the stick,” don’t automatically attribute the negative outcomes to others or to luck, fate or chance. Consider instead how you made that decision.

Conclusion

You make decisions all day long. Some decisions will be automatic and they should be. Other decisions should not be automatic but deliberate. Challenge yourself today to be a more intentional decision maker, and recognize that you cannot control every outcome. However, you are in complete control of how you approach decisions in not just your financial life, but in every aspect of your entire life.    


 

Marty Martin

Marty Martin, PsyD, is a Psychologist in the Chicago office of The Planning Center, a fee-only financial planning and wealth management firm.

Email him at: info@theplanningcenter.com.

 

 

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