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Wednesday, November 28, 2012

Emotionally Neutral Language - An Open Letter

To all who speak and write about financial matters,

In my years of helping clients make financial decisions, I've often had to work with clients dealing with strong emotions. Often these emotions came from internal sources, money scripts and beliefs that create fear or euphoria or some other emotion. Almost as often, these emotions are driven by something the client read in a newspaper, magazine, or website or heard on the radio or TV.

These media reports often rely on emotionally charged language to convey ideas and opinions. 2012 has been a banner year for emotionally charged language in media reporting, much of it driven by the Presidential election. Now it continues as we discuss the sequestriation set to occur at the end of the year.

FISCAL CLIFF! It's a big, bombastic phrase. It creates an easily identifiable visual cue to describe the sequestration process. Most harmfully, it creates tremendous emotion. Fear, anger, outrage, anxiety are few of the emotions that come up frequently. And these powerful emotions have a way of harming good financial decision-making. Emotions can short-circuit our ability to think long-term, instead compelling us to make decisions based on that big, ugly boogeyman (real or imagined) right in front of us. Financial decisions based on short-term thinking have this odd habit of not being very good.

GOLDILOCKS ECONOMY! Remember that one? The financial media loved it circa 2005 to describe the wonderful way the U.S. economy was going to gently slow down and settle in to a never-ending cycle of full employment and moderate growth. Again, an emotionally charged phrase, but this time designed to elicit positive emotions. I suspect more than a few poor financial decision were made while impacted by those positive, flowery emotions.

I could toss examples out all day, but the story doesn't change. Real people make real financial decisions with your words in their minds. They draw emotions from the way you write about financial matters. Your sensationalism can lead to their poor financial decisions.

I implore you to consider the impact you have and to think about presenting these critical issues in emotionally neutral language. Your readers and viewers have enough personal financial beliefs to draw their own emotions from. They need your help to understand the facts, to understand what lies ahead and to get good information.

Financial decision-making is hard enough when dealing with our own biases and behavioral foibles. Being bombarded with emotionally charged language only magnifies this difficulty.

Help people make good financial decisions. Help us (financial planners) help people make good financial decisions. Take the challenge to fulfill your vital role in a functioning democracy in a manner that helps, not harms, people's ability to decide well.

With deep appreciation,

-Nathan-

Monday, November 26, 2012

Stuffing, Cranberries and Great Decisions

For years stuffing and cranberries have shared my Thanksgiving plate. They've lived close to each other on the plate and some of the cranberry juice even trickled into the dressing, but they always remained independent food elements. This year, in a moment of pure inspiration, I made the decision to pour the cranberries over the top of the stuffing. It just made sense.

And it turns out that the combination was sublime! It took the dressing from great to gourmet. The sweet/tart flavors of the cranberries combined with the salty/savory flavors of the stuffing were incredible! You'd be hard pressed to find a better combination in a nice restaurant. I had to make sure everyone at our Thanksgiving table tried the combination. In retrospect, it makes perfect sense that these flavors would combine so well, but for years I never thought of it.

I wonder what caused me to make that decision. Where did the inspiration come from? Why, after years of sitting next to each other, did my mind finally make the connection that these two elements needed to be combined? Are the inspiration and the decision driven by nothing more than chance?

I'm very curious about the process that went in to making this decision. I recall listening to a discussion about why the Apple headquarters was designed with one restroom in the middle of the building. Steve Jobs indicated that he designed this intentionally in order to increase the "friction" between employees. The more often they passed one another and came in contact with each other, the more potential to share ideas that might spark a moment of genius.

I think my stuffing/cranberry decision might have been nothing more than years of "friction" finally resulting in that spark. I made the decision, but only because the environment was set up for that decision to occur. If I had kept my cranberries in a separate bowl all those years, the idea may never have hit me and the decision never been made.

It makes me wonder how else I need to design my environment to make great decisions. What do I need to change to make good financial decisions?

Thursday, November 15, 2012

HOV Lanes and Tax Cheats


My daily drive to work takes me up Interstate 95. Every day I watch an odd thing happen. I'm passed by individuals driving 85-90 MPH, despite the speed limit being 65MPH. Oddly, if I happen to be in the farthest left non-HOV lane, they generally don't move into the HOV lane to pass me, choosing instead to sit behind me until I get the opportunity to move over.

There seems to be some very unusual decision making going on. Driving significantly over the speed limit is against the law and has been cited as one of the leading causes of traffic accidents. Driving in the HOV lane with only one occupant is also against the law. I doubt it causes nearly the same safety risk as speeding, however. So why the very different decisions? Why chose the legal risk and safety risk of speeding, but not chose to illegally use the HOV lane even if it helps you get where you’re going more quickly and possible more safely? Why is one bad decision deemed acceptable while the other is determined to carry too much risk?

Socially Acceptable & Anonymous

I think there are a couple critical factors. Speeding is a socially acceptable choice. Virtually every car is speeding by some small amount. Speeding a bit more than the group may feel less bad. Speeding is also anonymous, especially when speeding among a flow of traffic also driving fast.

Using the HOV lane inappropriately is very different. Drivers generally honor the rules by only using the lane when their vehicles have more than one occupant. Using the HOV lane also isolates you. You drive on an island where people can easily see you breaking the rules. This choice is neither socially acceptable nor anonymous.

Socially Acceptable, Anonymous Financial Decisions

I think certain parallels can be drawn between this faulty traffic decision-making and personal financial decision-making. We certainly see poor financial decisions being made all the time that are socially acceptable.

One such example is paying taxes. There are plenty of examples of this, many you can probably identify with. Whether it’s a family member discussing how they write off 100% of the use of their personal vehicle for business use or a handyman asking for under-the-table cash payments for doing a side job, we hear and accept these stories all the time. They are socially acceptable, so much so that people are willing to discuss them!

Both are socially acceptable financial decisions, and both run afoul of tax law. Both can be done in relative anonymity and can be rationalized with no more logic than "everyone else is doing it!" They are poor financial decisions, yet people make them because there is a feeling many people cheat a little on taxes and it’s easy to do so without drawing attention to oneself. It's no different than speeding with the flow of traffic on the highway.

Small Gets Big

But this faulty decision making process can lead someone from small poor decisions to much larger ones. Like the driver that decided speeding at 90 MPH is really not that different than speeding at 70MPH, a small socially acceptable poor financial decision can become a larger one. What was a few dollars paid in cash for some work on the side might grow into keeping large pots of income off the books when filing taxes. A small bit of fudging on a vehicle use deduction could morph into phony charitable deductions or made-up business expenses.

The same process and rationalization that went into the small poor financial decision works in the bigger poorer financial decisions. Cheating a little on taxes is still socially acceptable (now a little is just being redefined) and it is still anonymous. This rationalization tells you to fire away!

It’s a bit frightening. There's not much effort needed to rationalize increasing speeding from 70 to 90MPH. Likewise, not much is needed to move from small poor financial decisions to very large high risk ones.