Are
you looking for an intriguing topic? You
might find it in a report prepared by the staff of the Ontario Securities
Commission. This detailed and elaborate study was conducted to
better understand people’s behaviour when making decisions, primarily financial
decisions. The report
elaborates on Behavioural Insights gleaned from psychology, economic and
other research and had this to reveal in its executive summary.
There are numerous factors that influence the
decisions that people make. Behavioural
insights (BI) recognizes this and, through a combination of psychology,
economic and more recently other behavioural research, examines how people are often neither deliberate nor rational in their decisions in the way that traditional models, strategies and
policies assume.
We need to ask
ourselves these questions: “Are we like
this? Are we really non-deliberate and
irrational with our decisions?
Gaining a Better
Understanding
The primary focus
for this study was to offer consideration and clarity in the development of new
government and regulators’ policies.
When policy makers are able to better understand people’s actions,
choices, and thinking, they are more apt to design effective guidelines to
protect them.
This leads to
another question: “Do we believe we always make the best decisions for
ourselves?”
To gain a better understanding of
our own actions, choices, and thinking,
we could create a flowchart. This
method, which offers explanations for our “Yes” and “No” answers, may look like
this.
If the answer is “Yes”, I assume
we may do the following to support our decisions.
- All the options would be weighed
in favor of one direction or the other.
The costs are calculated. The
“what-if’s” are considered: “Can we afford to wait if we don’t do it now?” Most
importantly, have we considered whether this is the right decision for our
family? Is this a “gamble” or a “sure thing”?
Here are some examples: moving to a different province, trading a
less-than-a-year-old vehicle for a new one because of mechanical issues, or
retiring now or waiting two more years to receive the full-retirement benefit.
If the answer is “No”, I assume we would understand the
impact of our decisions. Perhaps we are
not prepared to make the best decisions, when…
- We are uncertain and a decision needs to be made. We likely
could make the wrong choice. We could
also be forced to rely on someone’s expertise but we would need to trust their
expertise.
- We are rushed and a decision needs to be made. We might feel backed into a corner and cave
into gut instincts.
- We are pressured and a decision needs to be made. A deal
might be on the line. Depending on our
response the deal may be a “make” or “break” situation…a sale, a commitment, or
a partnership agreement. We may be forced
into a “deal” or “no deal”.
- We are people pleasers and a decision needs to be
made. We are placed in the worst spot
because we are inclined to avoid offending.
For example, we could do the irrational thing and jeopardize our credit
by co-signing a loan for a family member.
And of course, we can always stand
on middle ground by being indecisive.
This approach really doesn’t get us very far with our decisions. We may
know someone who does this; and we would rather not act or react in the same
way.
When we find ourselves making
inappropriate decisions, then we may need to slow down and evaluate our
reasons. If the government
and regulators are concerned about people’s behaviour; and experts are digging
for explanations to examine and explain how consumers make decisions, then we
also need to take notice of how we make decisions. We need to evaluate…
How do we deliberately and
rationally decide to buy a new vehicle or to retire?
How do we deliberately and
rationally decide to change careers or build a new home?
How do we deliberately and
rationally decide to ___________ (Fill in the blank with a decision you
currently face.)
What affects our decisions today
that were not present a year ago, a month ago, or even a day ago?
Making Reasonable
and Logical Decisions
We may believe we behave
rationally until hindsight tells us differently, like my idea for a U-Pick
Raspberry Farm which was shared in the blog post,
Deliberate Thinking.
Recently,
someone pointed out that people often feel judged and criticized for their
actions. This negative view could apply to a number of things they do and don’t
do.
In all
sincerity, we need to notice whether we habitually question others’ behaviour,
especially when money is involved yet fail to look are our own shortcomings.
How can
they afford to take an expensive holiday?
I can’t
believe they traded their just-like-new vehicle for a newer one.
Why are
they spending money on new appliances when there is nothing wrong with the ones
they have?
From our
vantage point, certain decisions may not appear rational. There have been times as a financial planner,
when I tried to convince people not to withdraw money from their Registered Retirement
Savings Plan (RRSP) for other purposes than retirement. No matter what I said, they were determined
to do things their way. Nothing would
change their minds.
What does
it take to change our minds? We like to
think we are right when it comes to making a decision. The right decision fits
our circumstances and feels good. But I can attest there were times when I
lacked the confidence to finalize a decision.
I opted to confer with someone who had more expertise. I was grateful
for their opinion and help. Would you do the same? Do you trust a professional
to help you?
Considering Possible Influencers
Whether we concur with the report
that lays claim to how people are often neither deliberate nor rational in
their decisions, this report gives us a reason to examine our behaviour
involving money. I have observed that our behaviour is driven by many
influencers. I would be interested in knowing if you can relate to these seven influencers.
1. Emotions. Good, bad,
or otherwise. There are times our
decisions are based on fear. When the
markets tumbled in 2007 and 2008, some people were extremely fearful for their investments,
especially their retirement funds. They
panicked and transferred their money from a balanced fund to a money market
fund where they felt it would be safer.
They believed they were doing the right thing. Others were afraid but chose to watch and
wait for the market to recover. They
expected the value of their pension plan would return to normal. They believed they were doing the right thing. Their patience paid off.
2. Substantial Income. When we have a substantial income, we have the
ability to spend beyond our basic needs.
We can afford to travel more, buy more, and give more. We can lavishly spoil ourselves and others. Our decision to do so is based on our inflow
of income.
3. Social Media. Through
our social media channels, we see what others own, what others do, and where
others go. We are inclined to want to keep up with them. The notion of missing out on what others have
and do drives us to make decisions that might be contrary to the level of our
income. This peer pressure devises ways for us to find the money even if we
revert to using credit.
4. Financial Products. Sometimes
financial products, with their unique features and benefits, can influence our
decisions because they seem like simple solutions. The best examples are: loans set up at 0% for new vehicles, free
payments periods for the first three months on appliances and furniture, or the
all-inclusive mortgage loans for other purposes than for a new home
purchase. These loan products entice us. In some cases, they distract us from making
the right financial decision.
5. Time. The practise of shopping around for
the best deal doesn’t work if our time is on a budget. We simply don’t have the time to investigate,
probe, and assess whether our potential purchase is necessarily wise. The need is great and our time is limited.
This could be a deciding factor in making a rational decision.
6. Education. When we come face-to-face with decisions that we
don’t have the knowledge or expertise, we rely on experts to help us make the
right one. We need to trust the “sales
person” whether we are selecting one mutual fund over another because of its
past performance or one television instead of another because of its quality
sound and picture. Trusting someone
else’s authority is an important contributor to the decision-making
process.
7. Past experiences. Our present decisions can be based on our
past experiences. We can run into a brick wall and realize we never want to
face that situation ever again. We elect
to make smarter decisions based on our encounters. The ideal example is being laid off because
of a shortage of work in any particular industry. It is never a matter of “if I get laid-off”, it’s a matter of “when I get laid-off”. One
has a tendency then to stockpile money into a savings account to be better
prepared for the potential layoff from work.
Assessing
Our Actions
Whether we focus on investment or
insurance products, purchase our first home or retirement home, opt to travel
or buy a new vehicle, money will be required. Over a lifetime we spend a
significant amount of money. Wayne
Chirisa provides us with a thought-provoking view, “Money does not dictate your
lifestyle, it’s what you do to get it and how you manage your finances that
determines your lifestyle.”
Based on this, what conclusions can
you derive from your behaviour and decisions involving money?
Are you a
deliberate and rationale money manager? Tell me if you struggle with influencers which affect your financial decisions.
