Jul 14, 2023 / News
FInancial Awareness / Financial Planning
When you’re faced with a decision, do you trust your feelings or do you look at the situation objectively, making a careful list of pros and cons? Emotions exert a strong influence on our decisions, so it’s important to have a bit of balance between reason and emotion – particularly when it comes to the big decisions in life.
The decisions we make have the potential to steer our lives in vastly different directions. Good decisions can profoundly improve our situation in life, while a poor decision can have unpleasant consequences. Examining how emotions influence your thoughts and actions can equip you to make well-grounded decisions, including those relating to your financial affairs.
The influence of emotion
Even if you think your decisions are based on logic and common sense, the reality is they are often steered by emotion.
A study performed by Nobel Prize-winning psychologist Daniel Kahneman showed that emotions contribute around 90% to our decisions, while logic only factors in for around 10%.Kahneman’s position was that human reason left to its own devices is subject to emotional biases, so if we want to make better decisions in our personal lives, we need to be aware of these biases.
Awareness is key
Given that emotions and unconscious bias can cloud our judgement, some self-examination can help ensure that you are making the best decisions.
It’s been shown that people who could identify the emotions they were feeling were able to make better decisions, in part due to a greater ability to control any biases caused by those feelings.This is known as "making conscious the unconscious" and it involves examining your emotions and beliefs to so you can better understand their influence on you.
The goal isn't to be emotionless - it’s important to ‘feel’. The key is to understand how your feelings are impacting your choices. A good example might be how feeling particularly confident may cause you to take on more risk associated with an investment than you would ordinarily be comfortable with.
Hit ‘pause’ on reacting
Once you’ve identified how you are feeling, it’s time to hit ‘pause’ for a moment. Decisions driven by the unconscious mind generally happen faster than those we think about. Not reacting immediately gives you a chance to observe any biases without being controlled by them, allowing for improved and more objective decision-making.
Even taking a couple of deep breaths before responding to that email that’s made you angry will help you respond in a more rational way. Just think about how scammers use people’s tendency to react to fear, without thinking too much about what they are being asked to do.
Recognise patterns
Taking time to think also allows you to reflect on past decisions and the result of those decisions. For example, reflecting on past investment choices that were unduly influenced by a fear of missing out, can help individuals better manage future decisions.
Your subconscious can cause you to cling to outdated views you hold of yourself - and these can drive poor decisions. A good example is people managing their wealth according to how they did things when they first started out, rather than adapting their behaviours to their changed financial circ*mstances.
Get rational
Once you have acknowledged the part that your subconscious and past patterns of behaviour play in decision making, it’s time to get rational. Rational decision-making involves taking emotion and any unconscious biases out of making decisions and applying logical steps to work towards a solution. The process involves a series of steps that generally encompass: identifying a problem or opportunity then gathering the relevant information, developing options, evaluating alternatives, then finally selecting a preferred alternative on the basis of the research you’ve done.
It’s also a good idea to run important decisions by a third party who is not so emotionally involved. For your financial decisions that’s where we come in. While we respect and acknowledge how you feel in relation to your financial life, we can provide factual information and challenge any notions that no longer serve you, to help you make the best possible decisions regarding your finances.
Reach out to your Nexia Edwards Marshall adviser today to start these conversations.
About us
EMFS was formed in 2001 originally to service the financial planning needs of the clients of Nexia Edwards Marshall, Chartered Accountants. In addition, we now service clients referred by other accounting firms, lawyers and clients who are not serviced by Nexia Edwards Marshall. We manage funds totalling about $250m on behalf of clients.
Liability limited by a scheme approved under Professional Standards Legislation. Contents of this publication are general of nature and are not intended to be used for decision making purposes. Edwards Marshall Financial Solutions Pty Ltd ABN45 096 434 842is an Authorised Representative of Edwards Marshall Advisory Pty Ltd ABN18 600 878 555. AFS Licence No. 479 792.
