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,


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.

Wednesday, October 31, 2012

Deciding With Limited Resources (The Resource Circle)

A frequent challenge I've run across when working with people is helping them make decisions in a world of limited resources. Intellectually the people I’m working with almost always understand that they have limited resources and grasp the notion that deciding on one option limits resources available for other decisions later. But sometimes the intellectual grasp of this doesn't translate to a practical understanding. This is particularly true when two seemingly independent decisions draw from the same pool of resources (time, money, ability to accept risk, etc.)

To combat this, I've come up with an exercise to help illustrate the point. The Resource Circle exercise provides a tool to help people understand that one decision impacts many other decisions. The Resource Circle exercise is very simple. You can try it yourself by printing the attached worksheet and following the instructions.

Using The Resource Circle worksheet, I ask people to write down their goals and objectives inside the circle. A goal of greater importance should be drawn larger and with a heavier hand. Objectives of smaller importance should be represented with smaller writing. The goals and objectives should include tangible items such as a new car and a retirement goal, but also intangibles such as lower comfort with risk and strong desire for tax avoidance.
After including only a few important goals written large, space quickly runs out. And that's the point. Resources are limited, and even unrelated goals draw from the same pool of same resources. Pursuing one goal leaves less time or energy or money to pursue another goal. Goals can continually be added, but they need to be squeezed into ever shrinking spaces in the circle.

The exercise can lead to a variety of discussions with clients. A planner can help a client identify goals and objectives that didn't make it into the circle, but have been discussed in the past. Completing the exercise can lead to a discussion about prioritizing certain goals over others. An important, but sometimes overlooked, conversation that may result is how to increase the pool of resources.
Improved decision-making requires a clear understanding that each decision impacts other decisions. The Resource Circle is an exercise that can help make this point clear. There's no magic here, simply a tool to illustrate one element in the decision-making process.

I love an exercise that can help drive a conversation with clients around making good decisions. I think The Resource Circle accomplishes this in a very understandable way.

Monday, October 22, 2012

A Super Simple Secret To Improved Decisions

Is it really possible that a pen and paper may be the ultimate tool to improve decision-making? When I began this blog, I thought it would take work to stumble upon ways to understand and improve decision-making. Yet, in only my third post (Bad Outcomes, Revisited), I bumped into the idea of a decision journal.

The idea is simple enough. When making major or notable decisions, write down the thought process leading up to how the final decision was made.  Really it's no different than any other type of journal a person might keep, but in this one you document your daily decisions. 

While it seems simple, the impact could be profound. The decision journal becomes a record of how we went about making a decision. The journal can be used to remind us in the future of what processes appeared to work out well and which rationale ended up in a poor outcome. The journal offers us reminders of how we have made decisions in the past.

And this could be very important in improving decision-making. Without some record of our decisions, we still look to past decisions to help make future ones. We scour our memories for similar decisions and rely on those experiences to guide us. The problem as, we're sort of bad at remembering the past clearly. Hindsight bias changes the way we view the past decision in the present. Confirmation bias helps us remember the decisions that support our current position while overlooking decisions that might offer an argument against that position.

A decision journal offers a layer of protection against the effects of these. I doubt that the protection is perfect or absolute, but I suspect it is very helpful.

I'm going to beginning digging into the decision journal more and look for research on the impact of decision-making record keeping on future decisions. In the mean time, I intend on maintaining a decision journal for myself. How about you?

Monday, October 15, 2012

Bad Outcomes, Revisited

In my last post Good Decisions, Not Good Outcomes I made the argument that a good decision doesn't necessarily result in a good outcome. Further, I argued that a bad outcome does not mean a decision was bad. I'm not sure how effective my argument was, but fortunately I can today share a much better take on the same argument.

Thanks go to  Susan Weiner (@susanweiner) for tweeting to me the article linked below from the Farnam Street blog. The blog post speaks to the issue of decisions versus outcome in a very effective way. I found the Decision/Outcome matrix to be particularly compelling.

What Happens When Decisions Go Wrong

If we can agree that the quality of decision and quality of outcome are not directly tied to one another, we have a new issue to deal with. Why bother with trying to make good decisions at all if the outcome is still a result of chance?

As stated in my previous post, I believe that good decisions and a good decision-making process should result in a higher frequency of good outcomes on the aggregate. Any individual decision may still turn out poorly, but the likelihood of bad outcome is lower than for decisions made with a bad decision-making process.

Good decisions and good decision-making remains important even though chance plays a large role in final outcome.

The linked article explores another topic I want to dive into more, the Decision Journal. I've long been interested in the benefits of journaling and often speculated that a client/planner journal could be beneficial in the financial planning relationship. A decision journal sounds particularly compelling. I will be exploring that more in the near future.

For now, I'm glad to have had a well laid out agreement with my position shared with me. I think breaking the decision/outcome link is an important starting point for this blog.

Wednesday, October 10, 2012

Good Decisions, Not Good Outcomes

I have spent quite a bit of time thinking about how we make financial decisions and I have some opinions about what the decision-making process looks like in action. As a starting point for this blog, I'm going to share some these personal opinions over the next few weeks before diving into the reading and exploration of others' work and research. This will get my own biases out in the open so that you can better judge my future writing.

So, let's begin with one of my most unconventional beliefs about decision-making: good decisions are not determined by the outcome of the decisions. In fact, a great decision could result in a terrible outcome! I say this to people and they are ready to write off anything else I say. How could the outcome not be somehow related to the whether a decision was good or not?

As an example, consider the following.

You are deciding whether to take a vacation or not, and where to go. You save for a vacation within the framework of your overall budget. You put hours in researching locations that will be suitable for the type of vacation you want to take. You talk to people who have taken similar trips to get their input. You spend time finding the best prices and most convenient travel arrangements. You've done all your research and you make the decision to take a vacation.

Decision made...hotel reservations are set and airplane tickets are booked. Time off from work is arranged. You have arranged for someone to take care of your pets while you're gone, and you've set up systems to make your house appear not vacant. You've notified family and friends that you'll be traveling. You've made a good, well-considered decision about this vacation.

Your departure date arrives and you head to the airport. You breeze through security, having planned your trip at a low traffic time, and everything is going super smooth. Seems like you've made good decisions about this vacation

As your plane lifts off, a large goose flies into one of the engines sending the plane crashing to the ground killing everyone on board. Pretty crappy vacation!

But was the decision to take that vacation a bad one? Absolutely not! Just because you fall to an untimely, fiery death doesn't mean getting on the plane was a bad decision. You did everything you could to make sure you made good decisions. There is simply tons of stuff that goes into the outcome of your vacation decisions that you don't have any control over. This is just as true when planning a vacation as it is when making financial decisions, some that don't fully play out for months, years or decades.

We don't have much control over many factors that determine the outcome of our decisions. Therefore, we can't judge our decisions by their outcomes. Good decisions can result in disastrous outcomes. Good decisions can also result in good outcomes. The point is, there isn't a high direct causal link between the quality of decision and the quality of outcome.

I do believe that good decisions increase the likelihood of good outcomes, however.  Good decisions should result in more consistent and more frequent good outcomes. Further, consistently bad outcomes may be a sign that there is a flaw in a person's decision-making process. Patterns of outcome results do have a link to quality of decisions.

Point is, any individual decision cannot be judged by its outcome. To judge each decision as good or bad by its outcome is not an accurate measure.

Monday, October 8, 2012

Getting Started

It's been some time since I last ran a personal blog, and it is something I've missed. I enjoy blogging. Nah, I love blogging and I love writing and I love sharing my sometimes zany ideas. It is high time I get started again.

I strongly believe that personal financial planning is about helping people make good financial decisions. There's a lot of other stuff we do as financial planners, but guiding people through the decision-making process is where the most profound value of financial planning lies.

And that's why I decided to start this blog. I've been making my argument about decision-making for some time, but now I want to begin exploring what it means to actually help people make good decisions.

There are many questions I want to explore. How do we make decisions? What factors impact our decision-making? When do we make a wise decision and what leads our decision-making astray? How do we decide if a decision was good or bad in the first place? And how do we improve this process, both as financial planners and as people?

I'm not sure the answers are out there, but I think it will be fun to look for them. I look forward to getting started, although my initial posts may flow out slowly for a while. One of my own largest major financial decisions (a move to Florida from Wisconsin and new job) still consumes a huge amount of my time. But things will pick up.

So join me on this journey as we explore financial decision-making. I bet there will be some surprises and some shocks. Maybe we will even change the world! Then again, I'd be happy just to improve the way financial planners help people a little bit.

Who knows where we might end up.