No matter how much knowledge you have about wealth management and investment, everyone is capable of making irrational financial decisions. Many individuals approach finances for themselves, their families, and their business with a set of preconceived notions that they may not be aware they have. This may lead to investment choices that are a poor fit for the investor.
In this “Wealth Matters” radio show, we sat down with Jeff Bernier, President and Chief Investment Officer at TandemGrowth Financial Advisors; Andy Avera of Journey Beyond Wealth; and Taylor Stanfill at Verisail Partners. They discussed some of the vulnerabilities everyone faces when making financial decisions and how individuals can combat their own bad instincts.
Why We Make Irrational Financial Decisions
Regardless of how much knowledge an individual has, their actions are driven by their beliefs. This is equally true when considering finances; the study of these influences is termed Behavioral Finance. Decades of psychological studies have been conducted with the goal of understanding the assumptions and biases that individuals have about money. Andy Avera says that “every client has different past experiences. We uncover what those experiences are to help them avoid those irrational decisions and try to make them as rational as possible, given the fact that we are irrational people.”
Ultimately, changing a person’s behavioral habits may be more beneficial than trying to change their financial decisions. Jeff Bernier says that “I believe investor behavior has more influence in the long-term success or failure of an investment strategy than the investments themselves.”
Some hindrances to making rational financial decisions can be underlying feelings of entitlement, overconfidence, or a false assumption of expertise. Andy Avera says that the biggest emotions hidden under irrational investment decisions are fear and greed. Understanding the nuances of Behavioral Finance can help individuals uncover and process those emotions.
How to Avoid Making Irrational Financial Decisions
Have a Plan: Rules-based investing consists of guidelines that people can set for themselves to combat their desire to make snap decisions. Andy Avera advises, “we want to have a plan for the future that is not emotional because it’s easy for us to say ‘we’ll wait until that stock goes up 10% and then we’ll sell it,’ or ‘if it goes down 5%, we’ll sell it.’ But in the moment, you may make different decisions.” Rules-based investing creates safeguards against emotional decisions.
Recognize Psychological Fallacies: Recognizing harmful patterns in one’s thinking can help combat emotional decisions ahead of time. Loss aversion means that the loss of a dollar will make a bigger impression on an individual than the accrual of a dollar. Andy Avera mentions that the thought of losing money can paralyze people, and that knowing ahead of time that things will go up and down can prevent them from overreacting to a temporary price change.
Look at the Big Picture: Looking at the big picture can help people weather financial storms. Taylor Stanfill observes, “long-term planning is a great way to weather these short-term storms. Folks on the other side that have not been implementing the plan — it’s harder to talk them off the ledge because they’re not in a great place to sit back and let things work themselves out. They’re wanting to make faster, more dramatic, more drastic changes because they’re not in the situation to take a deep breath and let the plan work itself out.”
Building these guardrails can aid an individual in making healthy financial choices.
Financial and Business Litigation
Gaslowitz Frankel LLC are experts in business litigation. When you contact our law office at 404.892.9797, you’ll be in touch with the premier fiduciary litigators for the state of Georgia.
Fill out our contact form for free consultation.
Gaslowitz Frankel LLC is the Southeast’s premier fiduciary litigation law firm. Our legal team specializes in all aspects of fiduciary disputes with over 30 years of experience representing individuals, executors, trustees, and more in complex fiduciary disputes involving wills, estates, and trusts.
