In this episode of ThimbleberryU, Jon "JAG" Gay and Amy Walls discuss strategies for making better decisions, particularly focusing on financial decision-making. We delve into what influences good and bad decisions and how we can improve our decision-making processes.
We start by recognizing that emotions significantly impact our decisions. Amy shares a personal anecdote about her current dilemma in buying a new car, highlighting how fear and greed can influence our choices. These emotions, she explains, can cloud our judgment, making us second-guess our financial decisions even when we are financially capable.
Cognitive biases also play a crucial role. Overconfidence, anchoring, and confirmation bias can lead to poor decision-making. For instance, anchoring on a specific price point or seeking out information that supports pre-existing beliefs can skew our choices. Additionally, heuristics or mental shortcuts, like the outdated 4% rule for retirement withdrawals, can lead to oversimplified and potentially harmful financial strategies.
Amy emphasizes the importance of rational analysis and comprehensive data in countering these biases. She also stresses the value of delayed gratification, learning from past mistakes, and remaining adaptable. Jon and Amy discuss the benefits of having rational conversations, especially on polarizing topics like politics, to understand different perspectives and make informed decisions.
A significant point Amy raises is the concept of mental accounting, where people treat money differently based on its source or intended use. This can lead to irrational spending habits, such as splurging bonuses or inheritance money multiple times over.
On the flip side, good decision-making strategies include rational analysis, focusing on long-term benefits, and emotional regulation. Amy advocates for making decisions based on logic rather than impulse, and seeking the advice of experts to provide objective insights.
Amy shares practical tips to avoid common financial pitfalls. Panic selling during market downturns, chasing trends without proper research, and overconfidence in unfamiliar areas are major traps. To avoid these, she suggests having a long-term investment plan, staying disciplined, diversifying investments, and regularly reviewing one's financial strategy.
Finally, Jon and Amy conclude by stressing the importance of professional financial advice. Whether one is working with an advisor or managing finances independently, education, thorough research, and the use of technology for data-driven decisions are key. Balancing the science of financial data with the art of human behavior is essential for successful financial management.
Jon Gay (00:03):
Welcome back to ThimbleberryU, I'm Jon Jag Gay. I'm joined as always by Amy Walls, from Thimbleberry Financial. Amy, great to be with you.
Amy Walls (00:09):
Jag, it's great to talk to you.
Jon Gay (00:11):
Exciting for today's conversation. I feel like we're both going to get a lot out of it and well, hopefully, the audience does too. We're talking about making more and better decisions.
So, we'll start at a pretty basic level here. What contributes to both good and bad decision-making, because we all make a million decisions every single day.
Amy Walls (00:29):
Oh, we do. And Jag, I think right now, you and I have this perspective coming off of vacations that has given us probably a clearer mind for better decision-making. So, maybe this will be a better podcast, the things we choose to say.
But things that contribute are emotional influence. When you're relaxed, you can make better decisions because you don't have fear driving you. You may still have greed, which is emotional driving you, but fight or flight, basically, is not playing as big of a deal.
And so, I look at that, I'm actually in the process of looking for a new car. And I think I've narrowed it down. I may have even found the car I want. And so, I am in this fear of do I buy the car, not because I can't afford the car (I can afford the car), it is the, “I'd go back to payments,” or I wouldn't, and that changes things. Do I want to do that? That creates fear for me.
I am also emotionally looking at this decision-making and I'm like, “Am I just being greedy? This is more of a car than I need. I'm fine keeping my current car.” There are reasons I want this car. And so, I catch myself just in this car-making decision, constantly checking my emotional reasons for wanting to make this decision, and am I being impulsive about it?
Jon Gay (02:07):
Fear and greed, two big ones. They are kind of playing off each other. And a car buying decision is something we can all relate to.
Amy Walls (02:13):
I've got fear and greed sitting on each shoulder.
Jon Gay (02:15):
What else you got?
Amy Walls (02:17):
Okay, so cognitive biases. In the many years now that we've been doing this podcast, biases come up regularly.
I think here, around good decision-making, it's things like overconfidence. It's anchoring, meaning picking a specific thing that has happened, a specific point in time, especially a dollar figure for example, and saying, “When this is that number, I will do this.”
Confirmation bias. That's the idea that you're looking for the things that support your opinion, and all of those cloud our judgment. Could also say, given we're in the season of politics.
Jon Gay (02:54):
As soon as you said confirmation bias, I was thinking about my own echo chamber that is my Facebook feed, absolutely.
Amy Walls (03:00):
Absolutely. But I think all of those cognitive biases: overconfidence, anchoring, confirmation, politics, all of those. Then heuristics and shortcuts.
So, what this really means is the idea that we can just apply a fact pattern that has been examined to a situation and say it's going to be good. So, replying on a simple rule and readily available information that may or may not be accurate.
So, in financial services, there is the 4% rule that many people have heard about. That you can take 4% off of your accounts each and every year and continue to have the same purchasing power forever, and you'll never run out of money. So, this is, I said “The 4% rule”.
Jon Gay (03:50):
It's been disproven in recent years, right?
Amy Walls (03:52):
It has been disproven, and so it does not work, but it can work. So, it just doesn't necessarily work all of the time, but this is one of these-
Jon Gay (04:03):
Shortcuts.
Amy Walls (04:04):
Exactly.
Jon Gay (04:05):
We talked about, off the top, we all make thousands of thousands of decisions every single day, whether we realize it or not. So, the idea of not having to make a decision and just being able to use a shortcut, like a mathematical formula, takes that decision off our plate for the day. And I can see why it’d be so tempting as we talked about risk in it for sure.
Amy Walls (04:24):
Yeah, I mean there's clarity and some confidence in ballpark that passes the smell test. But does it actually map out properly, is the next thing.
Then the fourth thing I'm going to say is just mental accounting. And really, here, what I'm getting at is the idea of treating money differently based on where it came from or its intended use.
So, let me use this example: salary versus bonus. Some people. if bonuses come in pretty regularly, maybe quarterly bonuses, and they're very consistent, they may treat that more like salary. But if it happens once a year, it's always sporadic in the amount, it may be treated as, “Hey, this is just splurge money, let me do whatever with it.”
Jon Gay (05:16):
And as you and I have talked about on this podcast before, it really stuck with me- sometimes that bonus money, that splurge money, we spend it three or four times: “Oh, I can do this because that bonus is coming, and then I can do this because I just got the bonus, and then I can do this because I got this bonus last month.” And before you realize it, you've triple, quadruple spent the one bonus you got.
Amy Walls (05:35):
Yes, the same is true of inheritances.
Jon Gay (05:37):
Yes.
Amy Walls (05:38):
It's very easy to have that spent multiple times.
Jon Gay (05:42):
Fair enough.
Amy Walls (05:43):
And basically, through the idea of you spend it and then your goals change as you sit and adjust and absorb the fact that this is coming to you.
Jon Gay (05:52):
So, that covers some pitfalls, things that lead to bad decision-making. What about some ideas on the other side, Amy, about good decision making? What strategies can you share with us on that?
Amy Walls (06:02):
Really, a lot of the opposite of what we've talked about, but rational analysis, using comprehensive data and evaluating risk and reward. So, I think right now, especially because we brought up politics, what's comprehensive?
And in that, really making sure that you're being objective, you're getting all of the facts and doing your homework to ensure you look at both sides, whether or not you want to, in order to know that your facts really are facts and make sense.
Jon Gay (06:37):
It's so funny you say that. About an hour and a half ago, I was talking to a friend who sits on the opposite side as me politically. And we had a very rational conversation and he asked me questions to understand where I was coming from, and then I asked him questions to understand where he was coming from. And it was a really insightful conversation both ways because, well, we weren't screaming at each other.
Amy Walls (06:58):
Absolutely. Separate from that (I love the point) is delayed gratification. Focusing on long-term benefits rather than short-term gains. We have become a society (and we've talked about this before), where we want what we want, and we want it now.
Jon Gay (07:18):
Instant gratification.
Amy Walls (07:20):
Absolutely. And that makes it hard because we also look around and say, well, everybody else is getting what they want, I should get it too.
Jon Gay (07:28):
Because people are only posting the good things on their social media accounts.
Amy Walls (07:33):
Absolutely. I just took those off of my phone while I was on vacation, and I was so much happier.
Jon Gay (07:41):
Maybe don't put them back.
Amy Walls (07:42):
That's what I'm thinking.
Jon Gay (07:44):
Excellent. Okay, what else for good decision-making, besides not putting social media apps on your phone?
Amy Walls (07:50):
Learning and adaptability is the heading that I would say this goes under, but being open to and learning from past mistakes, and also being open to new information. So, it goes a little bit along with rational analysis in that sense.
So, an example with money that we can tie this to that we've talked about in prior podcasts, and I think we have a podcast coming up on this topic, is lump sum versus dollar-cost averaging. Lump sum being when you take all your money or that you want to invest, and you put it in all at once versus putting in a little bit each week or month, or the way you contribute to a 401(k) or 403(b).
Jon Gay (08:28):
We are talking about the difference between those two strategies in our next podcast in two weeks, so excellent call ahead there.
Amy Walls (08:34):
And then emotional regulation, this goes back a little bit to what I was talking about the car and how I am debating. I'm playing fear and greed and am I falling into this? It's making those decisions based on logic rather than emotions and really calling out what is the logic in this decision-making or not.
So, an example here that we've talked about in the podcast previously too, is for those who have equity compensation, selling employer stock using a pattern to sell it or a process to sell it, versus maybe saying, “Oh, this cool thing's going on at our company, so this time, I'm just going to hold onto the stock because I think it might really drive the stock price” rather than having a plan and pattern as to how you're going to execute.
And then good decision-making, consulting experts. Obviously, I'm a financial advisor, but since I've talked about the car, I called my good friend who's a financial advisor and bounced the whole thing off of her, because I wanted to make sure I was making a sound decision.
Jon Gay (09:40):
Absolutely. And that really ties into all the good decision-making. Speaking with a professional who isn't going to have the same emotion tied to your money, they can look at it more factually, that takes care of the emotional regulation, learning and adaptability, rational analysis. All those things kind of fall under the guise of that last point: the experts.
So, in the few minutes left we have, Amy, let's turn to an application of these concepts related to money. So, let's talk about bad financial decision-making and how people can avoid those pitfalls regarding their money.
Amy Walls (10:10):
Yeah, there are a few common bad decisions and there’s tips to avoid them. The first is panic selling; don't do it. This is selling your investments during a down market out of fear. So, the way to avoid it is to have a long-term investment plan and to stick to it to avoid reacting to the short-term fluctuations.
A couple other things is if you're working with someone, talk to them about what the consequences of you having a short-term reaction are so that you know ahead of time.
If we have a client that comes to me wanting to sell because they're scared, maybe it's politics, for example, we're going to have a conversation about where they're coming from and why, and what the facts are. It's always their decision on what they want to do.
But I have a policy, as do many advisors I know, that if a client asks us to sell everything based on that short-term fear, rather than the long-term investment plan we have, it's going to be the last trades that I place for them.
Jon Gay (11:21):
They're no longer a good fit if they're investing on emotion as opposed to a plan.
Amy Walls (11:25):
Yes. And because we can't work through it to get us back in line with the long-term plan.
Jon Gay (11:31):
I mean, honestly, if they're not willing to take advice from an advisor, there's no point of having the advisor, just by definition.
Amy Walls (11:37):
This is true too. So, another thing to avoid is chasing trends. Investing in the latest hot stock or trend without proper research. And Jag, I think we've talked about this before, and I kind of laugh about this one with my husband being a tech guy.
Women – and off the top of my head, I don't remember the study, but there have been studies done that women's investment performance outperforms men's. And the rationale behind that finding is that women tend to, when they make an investment decision, get more emotionally invested in the reasons why they're making the decision than men do.
So, when something new and shiny comes up, it's not as appealing because they've emotionally attached to that long-term decision that they've made. Whereas the newfangled stock or investment can be a lot like, “Oh, the new phone,” the new – whatever the new shiny gadget is. And obviously, both men and women can be attached to the new shiny object and want to chase it.
Another thing to avoid is overconfidence. Especially, because I work with a lot of professionals, they need to be confident about the things they do. And sometimes, confidence in what they do for work can contribute to feeling confident about other areas of their life that they haven't really dug into, or they don't have an interest in.
So, here, we want to avoid believing we know more about a certain topic than we do, and as a result, taking excessive risks. So, the way to avoid this is to regularly review and question assumptions and seek second opinions.
Jon Gay (13:28):
It is very easy to be overconfident in one area because you have a high competence in another area. A good friend of mine worked security in emergency rooms for probably 10, 20 years. He will be very quick to give me medical advice because he's been around it.
You may be great at diffusing a difficult situation, I am not going to take my medical advice from you, I'll be going to my doctor. Thank you very much.
Amy Walls (13:53):
Great, great example.
Jon Gay (13:54):
So, before we wrap up, Amy, those are some ideas of bad financial decision-making. Let's end on a better note with some good financial decision-making tips.
Amy Walls (14:02):
So, there's a few strategies or habits that people who are successful with their money use. First, is they conduct thorough research. They make sure that their information is not biased in one direction or another.
They either do or have people that give them comprehensive information. They stay disciplined. They follow an investment strategy and don't react impulsively to market changes.
They diversify, they spread their investments across different asset classes. They also look to diversify taxes. And we've talked about both of those quite a bit.
They stay long-term focused. We've talked before about the idea of future me, and me today, they're staying focused on that future me.
Jon Gay (14:53):
They're avoiding that meme that says, “Oh, that's a ‘future me’ problem.” They're taking care of future me, not short-changing them down the road.
Amy Walls (14:59):
Exactly. And then they seek outside help. They consult experts in order to have a sounding board and get advice maybe about their ideas or to get ideas they didn't think of.
Jon Gay (15:13):
So, the key here, Amy, as we talk about every time we chat, is having a professional to help you with your finances. But whether you're working with a professional or on your own, what are some action steps that our listeners can take right now to help themselves make better financial decisions today?
Amy Walls (15:28):
Yes, great question. Education is everything in my opinion. So, if we're talking about money decisions, it's markets and financial principles. Understand the ideas, develop a plan, create and adhere to a clear strategy not only for your investments, but for saving and for budgeting.
Diversifying, spread out the taxes, the investments, and possibly, income streams to manage risk. Now, I do want to put a little caveat on that. Sometimes people say, “Oh, to diversify my investments, I need five or six different advisors.” No, you don’t.
Everybody, if you take something away from this, even though it's not the topic, you don't need five or six advisors. You're actually potentially doing more damage that way because it is not likely to be diversification. They're probably duplicating things.
Jon Gay (16:26):
Duplicating or conflicting at the end of the day, having too many cooks in the kitchen.
Amy Walls (16:30):
Yes, you can consult experts. Seek advice from financial advisors for objective insights. Now, this does not mean the talking heads on television, or the talking heads on YouTube or through podcasts. I say that with my podcast being a little podcast, so I'm not a talking head.
Use technology. There's lots of tools out there and apps that can help you make data-driven decisions. Now, here's the trick, and this is what the consultant's going to be able to do more than just take the, “Oh, here's the absolute best way for you to do this financially.”
All of what we're talking about is a combination of art and science. The data is science, but we are humans that act emotionally. And so, the science has to be paired with behavior as the art to get a good outcome.
Manage emotions as we've talked about consistently, and then review your progress regularly. Are you doing and getting what you thought you were going to get.
Jon Gay (17:35):
All incredible tips again. And one of the reasons I love talking to you a couple times every month, Amy, is just the marriage of psychology and behavioral finance with the ability to manage your money. It is such a fascinating topic to me. And a lot of this behavior can be taken to a level beyond just personal finance, but it all applies in this field as well.
So, if one of our listeners wants the professional help that you and your team offer at Thimbleberry Financial, how do they best find you?
Amy Walls (17:59):
Online at thimbleberryfinancial.com, or by giving us a call at 503-610-6510.
Jon Gay (18:08):
Great stuff, Amy. We'll talk in a couple weeks.
Amy Walls (18:10):
Sounds good. Look forward to it.
Jon Gay (18:12):
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker-dealer, a member of FINRA/SIPC, advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker-dealer, a member of FINRA/SIPC, advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.