Trouble Deciding?

Before we get into the post today I wanted to give a little shout out to the Alzheimer’s Association today by sending you to a clip that my friend Kris was on for one of our local news affiliates. It actually has a little something to do with what we are talking about today. Take care of your brain!

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House has to be one of my all time favorite shows on TV right now. One of my favorite things about Dr. Gregory House is that he tries to make the best, most rational decisions he can given the amount of information he has at one time. Not including all the misanthropic tendencies he’s a pretty good example of a rational decision maker - in his medical practice anyways. What about you? Do you think you make rational decisions? We all learn in our intro economics classes in high school and in college to assume that everyone acts rationally. Do you remember what that means? Well a rational person is someone who always makes decisions based on the best available information that will provide them with the greatest amount of utility with the smallest possible cost. Still sound like you?

I like to think that we all have rational tendencies but it’s rare that you find someone who acts solely rational. Sometimes making irrational decisions is fun! What I want to cover today are a few hurdles that might stop you from making rational decisions about money. For what ever reason some of the smartest people I know tend to lose their minds when you start talking about finances. It was a real head scratcher until I started digging a little bit. Sit back and enjoy the list of look-for’s so that you can try to spot and curve your irrationalities!

1. Heuristics - Our brains are amazingly efficient little machines. We observe, diagnose, and solve problems within fractions of a second. Because our brains love to be efficient they tend to try to do the best work possible while consuming the fewest amount of resources. Thinking is hard! So we recall memories or past experiences to try to solve problems that we bump into on an everyday basis. For the most part that works out just fine. But what happens when there is a problem we haven’t ever encountered or even had any experience close to it? Well two things can happen: either we step up and attack the problem (that takes energy) or we put it on the stack and move on to the next thing on the list that might be easier to resolve. Money issues often gets tossed into a pile of things to come back to and then sits their for a while. The next time a problem comes up that an answer doesn’t just pop out at you for - take a second, engage it and see what you come up with. Even if that means spending some time in Google searching or picking up the phone and calling someone like me!

2. Fear and favoritism - You might not be afraid of the dark any more but when it comes to money and financial markets you might still get a little nervous. That’s ok! It’s ok to be a little unsure about what mortgage lender to choose or about a price to sell your car at. Don’t let that fear stop you though. The same with favoritism. We are all biased. We have our favorite bars, morning routines, and places we like to spend our money. Sometimes we get a little scared when our favorite retailer is out of our size so we pass on buying that sweater or paints somewhere else - or even the same ones on sale in a “Basement” type store. Try to be aware of your implicit favorites and evaluate them to see if where you choose to spend your resources. There might be better alternatives that you are overlooking because of some irrational favorites.

3. Groupthink - This one is always gets people a little fired up. No one likes to think that they are unoriginal - but sometimes we make decisions too late for us to capture any actual value. Best example of this is buying into a stock at it’s all time high. Now there’s no telling when the price will fall or that it may even continue to rise but the fact that you waited for the media and your friends to tell you to get in means it’s probably too late. Good old Efficient Markets Hypothesis. The same goes for not buying or using something. I’m a firm and fair believer that there are appropriate situations for all kinds of financial products out there. I’m sure that there are people out there whose situations are absolutely appropriate for reverse mortgages and immediate lump sum payment type annuities. Because it isn’t right for everyone and that you may have heard people have negative experiences with them because they were “sold” on it does not mean that those products are implicitly bad. Look for herds of thinkers and how they move. Take their premises and mentalities and measure it against your own situations. Don’t miss out on any opportunities that could help better your financial situations because someone told you that a friend of their heard from another friend that something bad was going to happen to you if you used it.

Whether it’s a new savings account, IRA investment, or you are selling your baseball card collection to earn a few extra dollars we all tailor our experiences with one goal in mind: what’s going to be the best for me. Along the way that goal gets colored through all kinds of lenses, like the ones I mentioned above. The trick is to be aware of when you might not be making the most rational decision and unwrap why. I’m not saying that acting rationally all the time is the best thing for you - because I make terrible decisions most of the time and I like to think that I have a little extra fun because of them :) I just wanted to give you some food for thought on your decision making processes. When it comes to planning for your finances surrounding yourself with great information, professionals, and keeping your eyes on your short/mid/long term plans will be your best bets for making good decisions.