Christopher Zinn is a personal finance expert and Consumer Campaigner at Life Sherpa.
He works to replace the myths and mysteries we can all feel around money with more constructive beliefs. He believes that empowering consumers with reliable and understandable advice and information that they can implement now makes life’s goals more achievable.
For over two centuries, classical economists have considered humans to be fundamentally rational. They believe we think through all available options and choose the course of action that we expect to achieve the best possible outcome. Most of us consider ourselves rational and often encourage others not to make decisions based on emotions, especially when it comes to money.
Experiments around what’s called mental accounting describe how people treat money differently based on where the money comes from and how they’ve decided to use it. Rarely do they treat it purely objectively.
Seasoned investors often consider recent gains as disposable “house money” and use them for high-risk investments, losing sight of the bigger picture.
Treating ourselves as purely rational beings doesn’t consider the fundamental role of emotions in how we make decisions. We’re not always self-interested, benefit-maximising, and cost-minimising individuals with stable preferences. Our thinking is subject to a lack of knowledge and feedback, and an inability to process information and the surrounding context.
Simplifying Money Decisions
We have so many choices today – just look at the number of TVs or laptops you can choose. Even if we can access all the information, we have to compare dozens of options, research the specs and decide which one is best for us.
To overcome ‘analysis paralysis’, we try to make things simpler to come to a decision. For example, smokers don’t see the effect of their habit on their cells and internal organs, and they only notice a deterioration of their health over time.
Recent behaviour change programs have started to use smartphone apps to provide positive and personalised feedback. Smokers using these apps receive notifications about the number of cigarettes not smoked, the money saved, how their health is improving, and the diseases they’re avoiding. This positive reinforcement creates the emotions that support their actions towards a profound and long-lasting change.
3 Key Steps to Emotional Decision-Making
1. Embrace your emotional side
First, stop swimming against the tide and accept that we can all be irrational.
With this, we don’t mean that you should squander a lifetime of savings on the moment’s impulse—quite the opposite.
Humans outsmart every other species because we set goals, plan, think before acting, remember what works and what doesn’t, and update our behaviour based on that information.
We can also consider the consequences of our actions in our minds before playing them out in real life, which helps us to avoid future suffering. Start with discovering your ideal state, i.e. the emotional place where you’d be at your peak.
2. Find your core values
Values are deeply connected with emotions. Your values define how you view the world and your place in it. When your actions align with your values, you feel balanced and at peace and rainbows and unicorns come out of your morning coffee.
When you’re aware of what you truly want from life, you don’t need to rely on willpower to control your financial decisions. Your day-to-day choices naturally align with the plan you have chosen.
Take a moment to list your core values.
3. Set your life goals
You’ve now realised you are in the control seat, even if you’re not as rational as you thought before reading this article.
The process we’re taking you through doesn’t let others set your goals. Many people feel stuck on a global treadmill that pushes them always to make more money even if it’s not what they want or need. Well, it’s time to come up with goals that are good for you and yourself only.
To find your real goals, translate the list of your core values into life goals. For example, playfulness could take the form of a state-of-the-art music recording studio in your basement after retirement. Altruism might mean setting aside enough money or time to help others throughout your life.
Make sure your goals are measurable. Making your dreams tangible and specific will increase your chances of reaching them.
So if your goal is to retire early, think about when you want to stop working and how much you need to support yourself for the rest of your life. Once you have a clear picture, you can start taking action (such as saving or investing) to achieve your objective.
The Bottom Line: Be Human. Don’t feel wrong about being irrational. Emotions are the very thing that makes us human.