How to Be a Skeptic—the Right Way: Part IISubmitted by Bernhardt Wealth Management on August 17th, 2020
A couple of weeks ago, we shared a blog post introducing the concept of how to be “positively skeptical,” i.e., adopting a mental attitude, not of closed-mindedness, but rather openness to new information that is accompanied by a bias toward careful verification. We discussed the importance of separating fact from fiction when it comes to making investment decisions, noting that all too often in today’s internet -and social media-driven world, falsehood and exaggeration circulate more widely than truth and reliable information.
In this post, we’ll examine the interplay that occurs in each one of us as we struggle to balance our decision-making processes between logic and the pull of our emotions. More and more, we are bombarded each day with a deluge of headlines and claims, each of them calculated to provoke an emotion-driven reaction. Whether it is an email from a political organization (especially prevalent during this election season) expressing outrage at the latest statements by an opponent—quickly followed by a request for a donation—or a headline from the financial media proclaiming the imminence of the next market meltdown, we are slammed daily by information that plays on our emotions. Being too quick to follow our emotional instincts can often get us into trouble, with investing and in other areas of life.
Now, we should remember that there’s nothing wrong with having emotions—even strong ones. As human beings, we’re wired for emotion. And especially now, during the extraordinary circumstances we are living through in the age of COVID-19, we are feeling many emotions, some of them quite strong. For example, many of us may be grieving the loss of the “normal” life we used to have just a few months ago. It’s important to acknowledge these feelings. In a recent National Public Radio piece, behavioral counselor Sonya Lott explains how unattended grief can impair “every aspect of our being—physically, cognitively, emotionally, spiritually . . .” and financially, we might add. Lott says, “We can’t heal what we don’t have an awareness of.” In other words, emotions are not only unavoidable, they’re essential. But remember: When you put your feelings in the financial driver’s seat, they will steer you toward what your instincts would prefer, rather than what reason might dictate.
Behavioral finance, an extensive field of study dedicated to understanding how our instincts and emotions often interfere with our ability to make rational financial decisions, becomes an important consideration here. Research in behavioral finance tells us that every investor faces strong, hardwired temptations to:
- Chase illusory trends
- Fear the very investment risks that are expected to generate our greatest rewards
- Regret even our most sensible decisions in the face of minor setbacks
- Disregard the most durable data
- Overreact to breaking news and emotion-triggering language
On that last point, words alone can create a potent brew of emotions. Guns, abortion, climate change, and immigration are terms that probably generate a rise out of you, one way or the other. The same goes for financial catchwords: crashing, soaring, crisis, and opportunity.
Strong feelings, while natural, will create blind spots in your reasoning. Add the speed and omnipresence of the internet, and it becomes even easier to lead with your emotions. The problem, as Hans Rosling states in his book Factfulness, is that “There’s no room for facts when our minds are occupied by fear.” The power of people’s emotional responses is so strong, academics like Jonah Berger at the Wharton School have written whole books on how marketing teams can appeal to them—for better or worse.
Emotion-triggering communications aren’t inherently wrong or bad. Your favorite causes use them to nudge you into giving more generously. We use them in messages just like this one, to encourage you to embrace your own best investment interests. You may not realize it, but you probably use them as well, to advance your own heartfelt beliefs. Unfortunately, not every application is as well-intended, as slick salespersons, manipulative scammers, and identity thieves know all too well.
So, as an evidence-based investor, how do you navigate past these and many other emotional traps? It can help to have an objective advisor point out your own behavioral blind spots. But there are things you can do to help yourself as well. Has something you’ve seen, heard, or read left you “stirred up”? The more aggressively an appeal tugs at your emotions—whether fear, anger, excitement, or elation—the more important it is to pause long enough to allow logic to kick into gear.
Especially if it involves your financial well-being, we strongly recommend hitting the pause button before making any next move. Take your emotional “temperature.” Wait for the heat to subside. Most importantly, take some time to conduct extra due diligence before taking the bait.
In our work with clients, we routinely counsel with them to temper the effects of strong emotion on financial decision-making. As professional, fiduciary financial planners and counselors, we know that emotions—whether ours or our clients’—are not a reliable basis for sound investment or financial planning decisions. If we can help you in your quest to make more informed financial decisions, please contact us. And if you’d like to read our recent article, “Taming Your Emotions: The Key to Better Investment Returns,” click here.