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How to make financial decisions efficiently

Have you ever wondered what it is that we really want when we take decisions?

How to make financial decisions efficiently-2-2

In this article I am going to explain what happen in our heads in the seconds just before we have to invest our money.

Believe me, it’s surprising!

Focus on financial decisions for a second now.

(Think about when you’re about to start an investment)

Do we only want the best outcome?
Is that all?

Are you sure?

I tell you because someone studied the subject and the real answer is …not so obvious.

In truth, the strongest push to our decisions could be “fear of regret”. 

Think about it.

We make decisions based on the data and experience we have at a given time so that the regret of a wrong decision does not wear us down. 

This, in the main, leads to a whole series of biases and cognitive distortions. (…I love this stuff)

We are “risk-averse” to avoid regretting not having chosen the safest choice (or rather, the one that seems the safest to us).

We “decide not to decide”.

Status quo bias is evident when people prefer things to stay the same by doing nothing (see also inertia) or by sticking with a decision made previously.

Regret theory states that people anticipate regret if they make the wrong choice, and they consider this anticipation when making decisions.

The regret can be of two types.

It can be the regret of something we did (regret of commission):

  • We sold a stock and then it went up. 
  • We bought a stock and then it went down. 
  • We gave the money to one and he fooled us.

It can be the regret for something we didn’t do (regret of omission):

  • We have not saved enough.
  • We have not invested enough.
  • We have not risked enough.

What’s the problem?

That the potential regret for something we did (wrong) is more painful than the potential regret for something we simply didn’t do.

Because we chose, we acted, and …we were wrong.
Unacceptable.

Between the two potential regrets, we tend to choose the one that will make us feel …less bad when it occurs. 
Normally the second.

This is then better explained by the prospect theory .

This is why, even when we are in front of a good (but new or unknown) opportunity we normally wait, we ask for some extra-time.

“…can I think about it?”
How many time did you you say that?
Many times.

Sellers hate this phrase because they know fear of regret is holding you back from the purchase (or whatever it is they want you to do).
…but you don’t want to decide because the fear of regret is just doing its job.

Between “do” and “not to do” we normally feel safer with the second option.

Feeling safe does not mean it is the right decision at all. It might be the wrong one in the long term.

How do I try to deal with this decision-making block?

I make mistakes (by doing something).

I try to learn from mistakes than to try to avoid them at all costs.

Deciding not to decide (I mean: to do nothing) is just as much a choice as the others. 

It may be the most dangerous option.

Why?

Because deciding “not to decide” will certainly consume a currency available in limited quantity.

What’s that?

Time.

Making the wrong investments in your 20s or 40s is not nice..but ..realizing at 65 that you have not saved and invested enough is much worse.

Money can be earned again, by learning from mistakes. 

Time?

No. That’s lost forever.

The trick is to avoid being ashamed of mistakes and avoid blaming ourself.

No shame for making bad decisions.
But learn from mistakes.

No shame for not having made decisions. 
But now that we know, let’s act.

That’s how we work, whether we like it or not. 

The financial industry of the last century has accustomed us to a terrible mindset:
“We tell you what’s good for you”
“Don’t worry, we will take care of everything, so that you don’t have to”.
“Set it, and forget it”

Do it once, think about it once, fix it once, decide once, and then forget it.

  • “Buy this, and you’re safe.”
  • “Sign here, and you’re done.”
  • “Set up this trading system, and then you’ll earn money.”
  • “Buy this house, and don’t think about it anymore.” 

That’s not how it works. Not anymore.

Investing is a sequence of intimate and personal decisions, to be taken with our brain, our belly and our money.

I don’t let others take such personal decisions for me anymore. 

I have fought so hard for this.
I am still fighting.

I don’t delegate the management of my hard-earned money anymore and I am very proud of this.

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