My F&M

Better Decisions, Better Outcomes

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Are we hard-wired to make bad decisions?  The answer to that is yes, according to behavioral psychologists and economists who study this field.  And I agree; what they say rings true.    

There has been at least one session on behavioral finance at every conference I have attended over the past several years.  The purpose of this article is to share some of what I have heard and read from books like Thinking Fast and Slow by Nobel-prize winning psychologist Daniel Kahneman, Predictably Irrational by Daniel Ariely, and Decisive by Dan Heath.  By the way, I would recommend all three for further reading if this interests you.  Decisive is the easiest read, while the Kahneman book gets pretty deep.  And why are they all named “Dan”?  

To say that I have perfected my decision-making would be a wild overstatement.  Even the most diligent among us is still naturally wired to get it wrong sometimes, but knowing our bad habits is a good place to start the lifelong process of consciously attempting to make better choices.

I don't have the space to delve into the many facets of this broad field, but I will hit two of the more prevalent pitfalls.  Perhaps in future issues of “Review & Outlook” I can dig deeper.


This is the term used to describe how getting a number (or some other bit of information) stuck in your brain impedes the decision-making process.  An example I see often, is the top price your home was ever worth.  Everyone has that permanently tattooed somewhere in their skull (or so it seems from discussions I have had with otherwise rational people).  I hear folks say, "I really don't want to sell the house for X.  We are losing money - just a few years ago it was worth Y".  OK, but….the fair market value of something is what a willing buyer will pay a willing seller.  Just because 7 years ago somebody was willing to overpay your neighbor for their home does not mean you are "losing money".   

If you really want to sell your home, you may need to remove that "anchored" number from your brain.  Otherwise, it might keep you from accepting a fair offer, or at a minimum, make you feel bad about a reasonable financial transaction.  Let it go....and you are likely to make better financial decisions.  I use the home example to make a point, but think about other things that are anchors, and be aware of how they can weigh down your decision making.


This might be villain #1 in your battle for good decisions. Study after study shows that we believe we know more than we actually do.  We believe the future is much more certain than it actually is.  That overconfidence can cause us to get lazy with our analysis and decision making.  We will seek out affirming opinions and ignore disagreeable ones.  This works against sound decisions, likely causing you to miss the full range of potential outcomes. You may fail to honestly assess the likelihood of success or failure.  It creates a blind spot. 

One process to deal with this is to invite disagreement. I know it doesn’t sound like fun, but for important decisions find someone who will play “devil’s advocate” and talk through your decision with them.  At a minimum, ask yourself, “Where am I likely to be wrong in my thinking about this?”  

To be fair, pros or “experts” are likely to fall prey to this hubris as well.  We can sound awfully sure of ourselves when we need to.  So let’s agree to help each other with this “overconfidence” problem.  First, we promise not to just be “yes-people” to your financial decisions; we may challenge you to think about other alternatives, or be more realistic about the prospect of success or failure of a particular path.  In exchange, you agree to challenge us when something isn’t clear, or doesn’t ring true to you.  We welcome open and honest discussion.  The evidence is strong that it leads to better decisions and better outcomes.  Isn’t that what we’re all shooting for?