As a Financial Planner, I’ve had the opportunity to do life with a lot of people. From the birth of a child through the passing of a loved one, and everything in between. Throughout the stages of our lives, we have to make a lot of financial decisions, and our emotions influence every financial decision we make. We may like to think that logic and reason rule where money is concerned, but people’s actions say otherwise. The emotions that most often influence our financial decisions are Fear, Greed. Love and Envy.
Fear is an emotion that keeps us safe. It keeps some of us from jumping out of a perfectly good airplane, or at arm's length from spiders, snakes, and rodents. Fear causes our attention to peak when things go bump in the night. Our fear response is ingrained in our DNA; it's what helped our ancestors survive. We fear the unknown, or things we think may harm us. Where money is concerned, fear is the emotion that may make someone more risk-averse with their investments. If a hot stove burns us, we keep our distance in the future. People who have experienced an investment loss may be apprehensive about investing. There is also a recency bias with fear. The more time that passes from physical, financial, or emotional pain, the less we fear it, and the less it influences our decisions. Waning fear is probably a good thing without it; most of us would be an only child.
Fear can also cause someone to become too aggressive with their money and take more investment risk than is prudent. Fear motivated investment risk-taking is called FOMO or the Fear of Missing Out. We often see this later in a business or economic cycle, when time has passed since the last recession, and the fear of loss lessens. People recognize that their fear of investment loss may have caused them to miss out on gains, and they may take additional risk to try to compensate. Someone who is later in their career, may not feel financially prepared for retirement and might also experience the Fear of Missing Out. They may feel compelled to take on more risk than they would otherwise in hopes of making up for lost time.
Greed is the emotion that keeps Las Vegas in business. People who are sensitive to greed have described it as an intoxicating or euphoric feeling. Greed is the emotion that is most likely to be rationalized or justified. A form of greed is that financial decision we make that we tell ourselves we "need" when it’s really that we really “want.” Greed can cause us to take on more investment risk, business risk, and more debt than is prudent. Greed is the emotion that is most likely to lead us to financial regret.
On the other hand, in the words of Gordon Gekko from the 1987 movie "Wall Street." "Greed, for lack of a better word, is good." He went on to make the point that greed is a clean drive that "captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.” It is often greed that motivates people to start a business. Greed can drive the desire to improve our financial or social status, causing us to work harder or be more productive.
Love has driven more financial decisions than any other human emotion. Consider just the purchase of life insurance. People buy life insurance because they love someone and want to provide for that person at their death. Consider the money parents spend on their children's education. Parents will sacrifice, even go into debt, to fund their children's education in hopes that it will give them a life advantage. The examples of love motivated financial decisions are countless. Though usually considered a noble motivation, these decisions can be just as positive or negative as a financial decision made for any other reason.
If love is a noble emotional drive, envy would be considered it's opposite. But envy influences us none the less. Some make bad financial decisions because they covet what others have, “Keeping up with the Joneses." I don't know who the Joneses are, but they've been blamed for a lot of bad financial decisions. Other times people make bad financial decisions to impress and create envy in others. “We buy things we don't need, with money we don't have, to impress people we don't like." - Dave Ramsey The Total Money Makeover: A Proven Plan for Financial Fitness
The important take away is to recognize that we are all human and influenced by our emotions. When making a financial decision, consider what role your emotions are playing in shaping your decision and try to balance your emotions with objectivity.