Managing Emotions During Financial Uncertainty
Hi, thank you for tuning into today’s Emerald GEM, which stands for Get Educated in Minutes. I’m Jerry Inglet, a family legacy advisor for Wilmington Trust’s Emerald Family Office and Advisory and your host for today’s podcast. In today’s GEM, I will answer a series of questions that include: What are the psychological underpinnings connected to emotions and financial decisions? How are these emotions manifested in financial behavior? And last, what kind of exercises can you practice to help mitigate and balance emotions with constructive action?
Researcher Daniel Kahneman postulated that 90 percent of financial decisions are made emotionally—and these emotions are often impacted by financial flashpoints or highly charged, financially significant moments that we encounter as children, as young adults, and well into our adult life.1 These flashpoints manifest in the form of a subconscious, decision-making driver where pending financial decisions are often layered against bias that shapes and plays a role in how we feel, think, and ultimately act around money, resources, and finances in general.
Some examples of individually unique flashpoints could include:
- the childhood experiences related to the failure or success of a family business
- the material downside of a family divorce
- a failed or successful attempt to time the market
- the loss or gain of a significant job by a parent or spouse
- or even a one-time family windfall or liquidity event that temporarily or permanently changes family consumption patterns
Many times, flashpoints can be connected to memorable macroeconomic experiences—what comes to your mind when you think of your financial and business decisions related to:
- the dot.com bubble
- the mid-80s inflation environment
- the 2000s real estate meltdown
- and even our recent experience with the ups and downs of Covid, supply chain woes, and inflation
These individualized and macroeconomic conditions imprint us all differently and can subconsciously impact our financial decisions for years to come by building bias that we may not realize exists. And bias and unconfronted emotion can impact financial decisions when individuals are open to the possibility of behaviors that are:
- overly impulsive
- overly conservative
- risk averse
- overly confident
- mired in regret
- impacted by a fear of losing everything or a fear of missing out
- Or, in a place of decision paralysis, where we shut down and avoid any financial decisions altogether (which is not unusual if your fight/flight/freeze response has been triggered)
Imbalanced behaviors, as described just now, do not have to be the norm when faced with high stakes financial choices. Our ability to negotiate these moments depends, in part, on our ability to recognize our bias through risk and panic. Stephen Wendel has summarized this conundrum by describing two sides of an equation as we reflect on our financial and business choices within a continuum that requires our personal negotiation. On one side of the scale, we are concerned with the risk necessary to achieve our financial and business goals, and on the polarized position we contemplate decreasing risk to minimize our panic.2
None of this is easy, especially in volatile financial times. And if these worries are top of mind for you in this moment, you are not alone. The American Psychological Association maintains that 72 percent of Americans are stressed out about money issues in general.3
So, what are some thoughts and exercises to ponder as you work to recognize bias and temper emotion when engaging finances, markets, and business decisions?
Some of these measures are a practice of reflection:
- Consider listing and critically evaluating what you would deem as your last few poor financial or business decisions or circumstances that you practiced and endured. Are these downside results because of something you did or didn’t do? Is there a pattern here? What about the inverse—for the quality results that were achieved, was it a factor of something you did or did not do? With this self-evaluation in mind, you can consider engaging a wealth advisor, a business merger and acquisition consultant, or even crafting an independent board of advisors to review and decompress how these patterns could be fine-tuned to better serve your business or finances.
- If you and your spouse or business partner have differing levels of risk tolerance, one variable to consider is whose health and mental state is more vulnerable in the moment when making these business and financial decisions. You may contemplate trending closer to more fact-based conversations and lean away from more emotionally based exchanges as these decisions are debated. If you struggle to complete these conversations, a family legacy advisor could be beneficial as an intermediary to enhance communication.
In addition to exercises that promote financial reflection, there are activities that help define or improve moments of action or status quo:
- Professor Lyle Sussman recommends that we also keep in mind the notion of HALT before making any financial or business decisions. HALT is an acronym for avoiding important financial and business decisions when you are hungry, angry, lonely, or tired.4
- Consider re-examining your risk tolerance levels, investment policy statement, and withdraw rates if you haven’t done that in some time. Are your asset allocations and business practices in line with your base line risk tolerance levels? Are they in line with the overriding theme and objectives of your investment policy statement? Have you expressed these thoughts with your wealth advisor recently?
- If you are contemplating buying, selling, or rebalancing your portfolio, consider contacting your wealth advisor about exercising these movements in staggered tranches instead of one-time transactions can put some comfort to the risk side of the equation.
- Do you find yourself examining your account balances and price updates multiple times in a day? Maybe a reduction in the volume of looking at balances earmarked for long term use can provide some emotional temperament. Often a wealth advisor can facilitate automated and recurring reporting that meets these timetable considerations.
- Author Samantha Lamas recommends creating speed bumps for decisions. This could be in the form of a wait rule over a few days before executing a move or checking in with a spouse or advisor before any business or financial decisions are finalized. These speed bumps can serve as a check and balance and your investment and wealth advisor are quality possibilities in this process.5
All of these financial decisions connected to uncertainty can impact our general well-being, and in these moments we can:
- Keep in mind that the stress of financial and business decisions can change brain chemistry and the overall health of a person. Methods of stress relief—in whatever form that works for you—should be considered.
Volatility and markets have always been in play, business decisions will always present challenges. Your awareness of the personal bias and associated emotion derived from some of the tools presented here hopefully can help you build a method to manage these matters in a constructive fashion.
Thanks again for joining us today. Please contact your Wilmington Trust advisor if you have any questions related to navigating challenges presented by emotionally charged financial decisions. We would be glad to help you. See you next time!
1 Kahneman, Daniel, and Amos Tversky. 1979. Prospect theory: An analysis of decision-making under risk. Econometrica 47, no. 2:171–85.
2 Wendel, S. (2018). Using a behavioral approach to mitigate panic and improve investor outcomes. Financial Planning Association. Retrieved from https://www.financialplanningassociation.org/sites/default/files/2020-05/16%20Using%20a%20Behavioral%20Approach%20to%20Mitigate%20Panic%20and%20Improve%20Investor%20Outcomes.pdf
3 American Psychology Association (2015). Speaking of Psychology: The stress of money. Retrieved from: https://www.apa.org/news/podcasts/speaking-of-psychology/financial-stress
4 Sussman, L. & Dubofsky, D. (2021). Your total wealth: The heart and soul of financial literacy.
5 Lamas, S. (2020). Checklist: Behavioral techniques to help clients tackle financial stress. Morningstar. Retrieved from: https://www.morningstar.com/insights/2020/05/19/behavioral-techniques-to-help-clients-tackle-financial-stress