How to keep emotion out of managing your money
It's the oldest parenting trick in the book. Your child looks at you and says, "I'm hungry!", usually after seeing an ad for junk food. If you ask them what they want, they are unlikely to choose something healthy.
So instead, you say, "Would you like an apple or a banana?" If they protest at the choices you offer, you say, "That's all we've got right now, an apple or a banana."
They think for a second, and usually choose one and then go about things happily again. No fight, and they feel like they've made their own choice. But have they?
Clearly, they didn't come to us wanting fruit, but they've walked away feeling more in control of their choice than they really are. We wanted them to eat healthily so allowed only healthy options to choose from.
They didn't even think there might have been chocolate biscuits, cake, chips or any manner of confectionery in the cupboard; they just accept what is presented and then feel a sense of agency and control because they got to make a decision. We, as parents, have activated a hidden persuasion technique.
As we become adults, we're still susceptible to these hidden persuaders. Look at choosing a bank, for instance. The thought of losing money is painful and scary, so in a state of fear many people immediately exclude any brand that isn't big or immediately recognisable.
Your brain thinks, "A lot of other people have their money there, and this bank has been around longer so they're likely to do better with my cash."
But do they? If anything, as the royal commission proved, longevity does not always equal better outcomes - often the exact opposite.
But our brain doesn't want to know this, so it takes a mental shortcut, which reduces our options from 30-plus unknowns to four or five familiars. This feels much easier and safer. But at no point in the decision-making process have we asked, "Where is the best place to put my money?"
Scientifically, hidden persuaders are things that trigger mental shortcuts, that help bypass parts of our rational thinking brain to jump to a conclusion rather than think it through.
They activate different cognitive biases or rules of thumb that we have built up over time to make life feel safer and less complicated.
The process of jumping to a conclusion is so strong that even when we're researching something, we're often more attentive to evidence that supports the decision we've already made (confirmation bias).
Further, the more confirming information we gather, the stronger our initial position becomes, irrespective of the weight of information to the contrary (information bias). We'll even disregard options or evidence that advises against doing what we want, and hang our hat on any evidence that supports our initial snap judgement.
You also tend to find you make different decisions depending on where you are and who you're with.
This is partly because your identity shifts (am I a father, a professional, a mate, a lover of art, a sporting nut, a philosopher?), which changes what you think is important at the time, and because our immediate environment is often full of subtle cues pointing us towards different choices.
So, what can we do to help ourselves withstand the negative influences of these hidden persuaders?
After years of research, advising and personal practice, I think there are three things you can do that dramatically improve financial decision making.
Recognise and better manage your emotions, increase your rational awareness of different biases that might be relevant to you, and design your physical environment to prompt you to make better choices when the pressure is on.
How to fight the negative influences
1. Understand and manage your emotions
Recognise fear, impatience, frustration, excitement or loss, put them in a mental box and leave them there.
Highly reactive emotions are not helpful when trying to make responsive rational decisions.
2. Learn more about decision influences
Try to make the implicit explicit.
By knowing more about what makes you tick, and by increasing awareness of how you make choices, you help your brain focus on influences that might be leading you up the garden path.
3. Design a better environment for making financial decisions
I call this the chocolate cake rule.
Remove temptation from your environment and make the right choices as easy as possible. This way when you're tired or under pressure the right choice becomes the easiest one.
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