How do you make the most important decisions in your life? Flip a coin? Draw straws? According to, well . . . science . . . your method may be just as random. Regardless of the weight or complexity of a decision, sometimes our intuition becomes activated before we have a chance to think through the issue, and we act out of reflex. We often make decisions on an unconscious level using stored emotional memories. It might be an okay way to buy a pair of shoes, but it could lead to disaster when it comes to building your wealth or creating a plan for retirement.
Here’s the tip of the iceberg when we talk about what affects our decision-making:
- Emotion
- Expectations and incentives
- Past experiences
- Cognitive biases (thinking patterns and generalizations)
- Age and socioeconomic status
- Individuality
- Level of commitment
Cognitive psychology can tell us even more about factors that go into making decisions. They’ve identified what they call heuristics (pronounced ‘hearistics’); or general decision-making strategies people make based on little information—mental shortcuts that your brain uses to streamline decision making. Like the notion that people tend to judge higher priced items to have higher quality than lower priced items. Or the likelihood that when you have a choice between two things and only one is recognizable, you’ll choose the option you recognize. Your brain uses this technique (in this case past consumer patterns and familiarity) to arrive at a decision with the least amount of input or effort. Using this method is surprisingly reliable, but not something to use in every case.
When the stakes are high, here are four important practices that will give you just the right balance of instinct, heuristics, and research to help you make the best decision:
- Realize how outside influences affect your decision. For example, you need emotion to make decisions (it acts as a bridge between rational and non-rational brain functions), but be aware of how that’s affecting you. If you’ve been burned by a money-making strategy in the past, you’ll automatically reject something similar presented to you now.
- Ask advice, but don’t follow blindly. It’s useful to gather outside information, but research tells us that the more we listen to what our friends say, we slowly begin to ignore our own instincts. Although we’re all for synergy and 1+1=3 when it comes to ideas, if you’re making important decisions don’t over-rely on the opinions of others.
- Expect the best outcome. Have you heard the saying, “Expect the best, and prepare for the worst.”? We rely on our expectations to help us make decisions, and if we’re expecting something to fail it will affect our bias and behavior toward that decision.
- Take time to gather information, but don’t delay too long. The longer you take to make a decision, the less confident you feel—that’s just the way your brain works. Additional time is only useful if it adds to your overall research. So after you’ve explored the pros and cons, don’t put off jumping right into your best conclusion.
When it comes to making decisions about building wealth, planning for retirement, and leaving a legacy to your family, we have you covered; because making the wrong financial decisions can cause more than buyer’s remorse. We respect good decision making, so we’re not going to tell you what to do. We’re going to offer you education, answered questions, and recommendations that help you make your own decision about a time-tested wealth-builder called the Perpetual Wealth Strategy.
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FAQ
Q: What are the four key ways to make better financial decisions?
A: To make better financial decisions, one should understand how external factors like emotions affect their choices, seek advice but trust their own judgment, maintain a positive outlook expecting good outcomes, and gather sufficient information without overly delaying decision-making.
Q: How does understanding emotions contribute to financial decision-making?
A: Recognizing the influence of emotions on decision-making helps in maintaining a balance between rational and emotional responses, ensuring decisions aren’t made impulsively or based on past negative experiences.
Q: Why is balancing advice with personal judgment important in financial decisions?
A: While seeking advice is beneficial, relying too heavily on others’ opinions can overshadow personal instincts. Balancing external advice with one’s own intuition and judgment is crucial for sound financial decisions.
