Stories | November 6, 2018

How emotions can help you make better money choices

Feelings get a bad rap but are needed for decision-making. Ignore them at your peril.

If you’ve read a lot of personal-finance articles by well-meaning experts, you might be forgiven for thinking that emotions are bad when it comes to money and to be avoided.

However, this isn’t the full story. When neurologist António Damásio treated Elliott, whose brain damage reduced the ability to feel emotion, he discovered that Elliott’s decision-making ability was affected too.

You might think that having little emotion would help Elliott make better decisions. But in fact he struggled even to make relatively simple choices, such as scheduling activities or prioritising tasks.

As Damásio explains in this video interview: “It is emotion that allows you to mark things as good, bad or indifferent. It’s not just [about] the facts; we also remember what we felt was good or bad.”

To make choices, we need not only to respond to our environment but to actually make a value judgement: “Will the result of this decision be good or bad?” And we typically need our emotions to do that, he says.

You can read all about Elliott and other brain-damage cases in Damásio’s 1994 book, Descartes’ Error: Emotion, Reason and the Human Brain

Do you feel lucky?
Emotions are key to many everyday decisions – such as whether to seek a new job. A career decision might reflect how confident you feel about future earnings, based on past experience.

If your current income has not always covered the bills, you might feel apprehensive about your ability to pay in future – encouraging you to look for a better-paid job. If you have no feelings either way about your situation, deciding what to do is harder.

It’s just one example of how emotion can help us come to a rational “real world” decision.

As chartered financial adviser Shreenivas Kunte blogs: “It’s easy to forget that the complicated interplay among our emotions, thinking patterns, and actions is driven by a finely tuned 100-billion neuron network that has helped us to survive.”

The best thing is to have the right balance between a bright, optimistic outlook (based on reality) and overconfidence, he suggests. Even negative emotions (in the right amounts) can be useful, for everything from day-to-day choices to creativity, or investing, for example.

“Pessimists tend to behave as if the worst-case scenario is inevitable, a quality that has obvious downsides. But pessimists are often detail-oriented and can play constructive devil’s advocate roles in investment decisions,” Kunte explains.

Intuition, based on fact
A feeling that “something is wrong” can sometimes save you from a poor choice, without you consciously knowing why. Say you’re driving down the road and swerve slightly, managing to avoid – by chance, it seems – a large pothole.

You didn’t see the pothole, nor did you consciously see the car in front of you swerve to avoid it. But you reacted anyway. The car in front of you swerved, on some level you registered this, and your “predictive processing framework” swung into action.

The theory is that your intuition comes from tiny but real clues that you barely notice. When these match experiences you’ve had in the past, they can spark that gut feeling and prompt a rapid reaction.

Sure, rash emotional choices can derail our finances and our lives, as US-based management consultant Lisa Earle McLeod says in this article, but the very best decisions often take emotions into account.

When choices are level-pegging in other ways, a team will often achieve more if they go for the option they’re most excited about, she points out.

“Logic and emotion can – and should – be part of the same conversation. We’ve all seen organisations make poor decisions when they’re swept away by enthusiasm. Good due diligence can prevent that. [But] feelings are an important data point,” she writes.

Weighing up options
It doesn't end there: Harvard scholar Jennifer Lerner’s comprehensive 2014 review of the research adds to the evidence finding that emotion has a range of benefits for decision making.

And it’s not just about helping individuals to choose: the science shows that emotions help people understand each other. They can help people bond together to take action and make better decisions as a group, as well as punish bad decisions.

Whether we decide to cooperate or compete with others often depends on our beliefs about their intentions – and this information is typically communicated to us by their emotions. This can help people make difficult decisions when there are pros and cons on many sides, Lerner writes.

What do you really want?
We’ve already talked about how emotions can help you decide to whether change jobs. They can also help you choose a new one.

On paper, the job that pays more might seem the best option. But what looks like a “great job” based on cold, hard facts might not turn out well if you ignore your emotions.

The role just might not appeal. Even financially things may turn out for the worst - if you hate every moment of your day, how can you do your best? So next time you consider a career change, think about your feelings. Are you excited or afraid about the opportunity?

If it’s only fear of change, and you are in a good position to shift jobs, you can probably feel that fear and do it anyway.

If there are feelings of self-doubt, does this relate in any way to your actual abilities? This might be your cue to learn more about the job requirements and develop a plan to fill in any gaps in your skillset – boosting both your competence and confidence.

Feels so real
Our emotions are unavoidable. But we can learn from our feelings and have them inform our decisions in really positive ways, although it can take a certain amount of savvy, including an understanding of what caused the emotion, to know exactly how to do this.

As psychologist Mary C Lamia explains: “When an emotion is triggered in your brain, your nervous system responds by creating feelings in your body (what many people refer to as a gut feeling) and certain thoughts in your mind.

“Your emotions will drive the decisions you make today, and your success may depend upon your ability to understand and interpret them.”

eZonomics team
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