Making Financial Decisions
Making Financial Decisions
Making Financial Decisions: more than a numbers game
by Dr Kirsten Keown
We all have to make difficult decisions that affect our financial circumstances. Decisions such as:
- Should I choose the job that pays better, or the one that grants me more free time?
- Should I borrow money to buy a better car, or keep the old one and risk higher maintenance costs?
- Should I commit money to promoting my business, or keep my business account in credit?
There’s no magic formula that will suddenly produce clear answers to these types of dilemmas. However, you can certainly boost your chances of choosing the best option by following these 5 helpful procedures:
1. Put yourself in the right mental frame
Important decisions should be made when you’re in a calm, rested state. This optimises the functioning of your brain’s frontal lobes, which play a crucial role in weighing up options and integrating complex information. If you’ve ever had too much alcohol, you’ll know what happens when frontal lobe activity decreases… great decisions are rarely made in that state! To a lesser degree, being tired or strongly emotional can limit the brain’s ability to carefully weigh up options. The solution? Get into a rested, neutral state before making important decisions.
2. Take a helicopter ride
We’re talking metaphorically, of course. To make a sound decision, it helps to mentally “helicopter” yourself up and to view the problem from different angles. There are multiple ways of doing this.
A key “helicoptering” strategy is to talk it out. Discuss your ideas with a range of people – including those who view the world differently to you. Seek out people who have tackled similar dilemmas and learn from their mistakes and successes.
Another way to gain perspective is to mentally fast-forward 10 years and to think about what your older self might say about this dilemma.
Yet another strategy is to perform a “pre-mortem”. Here’s how it works: Let’s say you need to decide what percentage of your income you should put into a pension fund. Write down the answer that seems best. Now, imagine that your estimate turns out to be wrong; what were the factors that led to your over- or under-estimation? What did you overlook, or what information did you lack? Review your differing results and the logic behind them.
3. Review possible outcomes, then pros and cons
Start by looking at possible outcomes. List the different options that you have to choose between. For each option, write down the different outcomes (good and bad) that could eventuate. Then, on a scale of 1 to 10 (extremely unlikely to extremely likely), rate the likelihood of each occurring.
Next, turn to the pros and cons. List the pros (advantages) of a particular option, then the cons (disadvantages). Assign importance weightings to each of the pros and cons. For instance, you might assign a 1 to items that are not very important, a 2 to items that are fairly important, and a 3 to those that are extremely important to you. Repeat this process for your different options.
Give yourself time to reflect on these lists. Hopefully a preferred option will emerge. However, if it doesn’t, move onto our next procedure…
4. Recognise category mismatches
If you’ve followed the above steps and a clear decision hasn’t emerged, the problem might be that you’re trying to compare options that can’t be squared up against each other. Let’s return to the example of choosing between a job that pays better, versus one that promises more free time. The problem is that “more money” and “more time” aren’t the same sort of thing. Comparing them is like trying to decide whether a mile or an hour is longer. It’s impossible. They are different types of measures; different categories of things.
This sort of financial dilemma requires you to apply a different kind of reasoning. You need to start thinking about your values, your sense of purpose. This involves looking inside yourself and thinking about what it is that you stand for. What kind of person do you want to be? What decisions will make you feel proud or satisfied when you review your life in later years?
5. Give yourself permission to get it wrong
Try as you might, you can’t always guess the right option. Sometimes you just have to take your best punt. Decisive people recognise this fact and are good at accepting adverse outcomes. They tell themselves “I did the best I could with the information at hand”. Rather than multiplying the pain of adverse outcomes with self-recriminations, they accept what has happened, learn what they can, and move on. Adopting this approach can take much of the fear out of decision-making.
Interested in psychological tools to provide clarity and improve problem-solving? Talk to Dr Kirsten Keown from Mindset. As a registered Clinical Psychologist with a focus on the business world, Kirsten has worked with many hundreds of individuals, groups and organisations. Kirsten excels at helping people in business to identify pathways to growth and become peak performers. She loves nothing more than seeing people have those “aha” moments as they see problems in a new light and figure out ways to maximise their strengths.
Visit www.mindset.co.nz for further details.