Financial Decisions: Taming unhealthy habits

I’ve always been fascinated by how and why we continue with habits (behaviors) we know to be intrinsically out of line with what we want. There’s plenty of literature to explain the biology, particularly related to marketing and Artificial Intelligence (AI), that illustrate how our brains make decisions. I wrote an article some years ago on the science behind financial decision making (“Taming Our Irrational Brain,” Association for Women in Science Magazine, Summer 2009, Vol 39, No 3). If you’re interested in the science you may find it a good place to start. In summary, I think understanding how to change our decision making process begins with a deeper understanding of ourselves.

Choosing among competing options is a fundamental part of life. Historically cognitive processes or reflexive stimulus-driven automatic reactions. To deal with the massive and complex number of choices we face on an ongoing basis, individuals use multiple “systems” that offer tradeoffs in terms of speed and accuracy, but can optimize behavior and decisions under different situations. We shift quickly from “use your head” to “go with your gut” making daily decisions heart wrenching. This clutters the brain and adds uncertainty to decisions – making decisions stress-filled.

Ideally we would have automatic behaviors that keep us aligned with our planned (cognitive) objectives. I believe that sustainable change has to be linked to a simple consistent and believable process that can support you during stress-filled times. Though there are different approaches to creating these behaviors I will focus on Charles Duhigg’s three-step process for changing habits (he refers to them as CUE-REWARD-ROUTINE) and add my own thoughts as we go along. Obviously, my focus is on developing healthy financial habits.

  1. First, we need to acknowledge what it is that we want to change and what it is that we wish to attain. What financial behavior are we interested in changing? We need to visualize what we’d like to see instead of our current behavior.
  2. We must then identify the triggers for this behavior (or “CUEs”). Duhigg suggests that we ask ourselves what we were doing right at the time, who were we with, where we were, and, what we were doing just before the behavior. One of his best examples is when you get up to get a snack in the middle of your work – what were you doing just before you got up? What was your trigger? Some people have similar triggers for spending beyond their budget and, yes, even for making buy/sell decisions on their portfolio.
  3. Next, we must understand what “reward” we obtain from this particular behavior (habit). This step is essential because we need to find something equally rewarding to successfully implement a change in our reaction when we next experience the same trigger. The new reward must be one that is both doable and strong enough to replace the current reward but also in line with our plan. Was the reward for getting a snack really to satisfy hunger, or were we bored, or in need of social interaction or just anxious? For example, consider the person who checks their portfolio every time they feel the trigger. Their reward may be to talk to people about it (social interaction) or it may be boredom (interacting with a different software) or it may be something else. This individual will first need to identify the trigger that prompts them to check their portfolio often and determine what reward they receive for doing this action.To change a reaction to a particular trigger, the goal is always to identify a substitute reward that is aligned with your well-being and your plan. For example, going for a walk alone or with friends, taking up a mental or physical activity that is positive–anything that will actually yield the change you are hoping to make.
  4. Then lock it in, so to speak, by establishing a “routine” around both the triggers and reactions that will make the new habit permanent. If the reward is strong enough, over time it will seem less and less routine, even enjoyable. In our fast moving world more and more decisions are made quickly, even without thought. It doesn’t help that marketers are out to manipulate our choices at every turn even if it means deviating us from our personal wishes (after all that is their job). This imposes a degree of stress if not countered by healthy habits. Ultimately, a well-lived life is all about making daily choices that enhance our chances of achieving the goals we set for ourselves.

It is evident that establishing any new behavior (habit) needs a belief system and a support system that you can reach out to during stressful times to ensure that you don’t revert to the original behavior. I find that for some clients Aikapa has become this support system as they strive to adjust financial habits and align them with their financial plan. It’s our job to help clients remember the reason(s) why these behaviors are important and to help them visualize their financial rewards on an annual basis. We do this through client meetings and by examining savings, investment portfolio and retirement plans.

In short, attaining financial wealth and peace of mind are indeed possible when you can develop habits that work for you. It is our mission to educate and help you build a stress reduced financial life while maximizing your wealth. If you are working on building a new financial habit to support your dreams, don’t forget to include Aikapa as part of your support team.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Wealth with meaning – Keys to building wealth

A healthy work ethic is necessary to becoming wealthy, managing cash flow and savings are at the core of this strategy. But it is an ability to change and adapt that are key to staying wealthy, according to a recent survey by wealth management firm SEI (1).

An overwhelming majority (80%) of wealthy families say hard work was either the most important quality or a very important quality in their achieving financial success. SEI’s report was based on a survey of 100 families with more than $20 million in assets.

An even larger percentage (95%) agreed that innovation—an ability to adapt to changing conditions and reinvent business or financial strategies—is important to staying wealthy from one generation to the next. The results clearly suggest that innovation is important to sustaining wealth over the long-term, but survey respondents were divided on where they expect innovation to come from.

Professional advisors were credited with being the most likely source of innovation by 41%, while 37% say innovation will come from those in business. Thirty-six percent

“Wealthy families are craving new ways of communicating and collaborating with their advisors and new strategies for building and sustaining wealth,” said Michael Farrell, managing director for SEI private wealth management. “After everything that has gone on in recent years, they understand that sometimes it takes a different approach to be successful.”

The most innovation has been in investment products, according to 11% of respondents. However, investment advice was named as the area of wealth management that has seen the least innovation by 14% of respondents, followed by reporting (12%) and education and family communications (11%).

Advice is being tailored to individuals and individual situations rather than being based on just a simple number calculation, and investments are being designed to meet specific lifestyle, retirement and charitable giving objectives. Also, reporting is becoming all-inclusive, including all investments, progress toward goals and any overlap that might exist between portfolios managed by different investment managers.

This is nothing new to a comprehensive, fiduciary wealth practice like Aikapa – this is what we believe in.  Our role is to align our clients with their goal so that they can build and retain wealth that they need for their specific goals.  Total wealth is not as important as sufficient wealth to meet their specific goals.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Readings: Two is Enough

Edi’s Book Readings
Two is Enough
by Laura S Scott

I was fortunate to share an evening with seven wonderful women who had read and wanted to discuss this book.  We shared a drink and our thoughts.

I want to share and recommend this book for you to read or scan as a general education for everyone to understand different groups in our society.  I think it is particularly a good read for anyone starting or considering having children.  Children are a wonderful addition to a family that welcomes and is prepared to provide for them.  All agreed that having children should be a very conscious thoughtful decision for every couple.

What persists with me even today is that 20% of couples may be childless – sounds like a fairly large group. Do the individuals share enough in common?  They do if we consider their financial and retirement planning needs.

In the US singles and couples without children are not usually addressed as a group and I thought this book did a good job at educating all of us on why couples choose or don’t choose to have children.  For me it was enlightening to see that we’re past the idea that having children is a requirement to have a life well lived.

If you get a chance to read it  – let me know your thoughts.

Edi

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Habits and ruts encourage old age – Edith Wharton

… the deathly process of doing the same thing in the same way at the same hour day after day, first from carelessness, then from inclination, at last from cowardice or inertia. Luckily the inconsequent life is not the only alternative; for caprice is as ruinous as routine. Habit is necessary; it is the habit of having habits, of turning a trail into a rut, that must be incessantly fought against if one is to remain alive.

                                         — Edith Wharton

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com