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.
