Be Skeptical Part 2: Understanding Your Emotions

published by:
AMANDA CLOUSER, CFA, CFP®
May 18, 2020

Be Skeptical Part 2: Understanding Your Emotions

In part two of this series, we'll talk about your emotional reaction to unfolding news and its impact on your financial well-being.

The Usual Emotions in Unusual Times

As fate would have it, we introduced this series earlier this year, before COVID-19 seized almost every headline around. If anything, current events have made this series even more important. Thoughtful, sober answers to our most pressing questions must now compete against a deluge of emotional misinformation that can be as virulent as the ailment itself.

First of all, there's nothing wrong with having emotions – even strong ones.

For example, many of us may be grieving the loss of the "normal" life we used to have just a few months ago. It's important to acknowledge these feelings. In a recent National Public Radio piece, behavioral counselor Sonya Lott explains how unattended grief can impair "every aspect of our being – physically, cognitively, emotionally spiritually …" and financially, we might add. Lott says, "We can't heal what we don't have an awareness of."

In other words, emotions are not only unavoidable; they're essential. But remember:

When you put your feelings in the financial driver's seat, they will steer you toward what your instincts would prefer, rather than what reason might dictate.

Behavioral Finance and Emotional Investing

There is an extensive field of study dedicated to understanding how our instincts and emotions often interfere with our ability to make rational financial decisions. This study is called behavioral finance. We've written a separate report describing critical findings from behavioral finance. Suffice it to say here; every investor faces strong, hardwired temptations to:

  • Chase illusory trends
  • Fear the very investment risks that are expected to generate our greatest rewards
  • Regret even our most sensible decisions in the face of minor setbacks
  • Disregard the most durable data
  • Overreact to breaking news and emotion-triggering language

On that last point, words alone can create a potent brew of emotions. Guns, abortion, climate change, and immigration probably generate a rise out of you, one way or the other. The same goes for financial catchwords: crashing, soaring, crisis, and opportunity.

Strong feelings, while natural, WILL create cognitive blind spots in your reasoning. Add the speed and omnipresence of the Internet, and it becomes even easier to lead with your emotions.

"There's no room for facts when our minds are occupied by fear." — Hans Rosling, Factfulness

Emotional Marketing for Better and for Worse

The power of people's emotional response is so reliable, academics like Wharton School's Jonah Berger have written books on how marketing teams can appeal to them – for better or worse.

In his book "Contagious," Berger describes six triggers companies can use to amplify their marketing messages, including playing to your emotions. In this podcast, he observes: "Companies recognize, 'Hey, if we can get people to feel emotional, we'll get them to talk and share.'… You need to design content that's like a Trojan horse. There's an exterior to it that's really exciting, remarkable and has social currency or practical value. But inside, you hide the brand or the benefit."

Emotion-triggering communications aren't inherently wrong or bad. Your favorite causes use them to nudge you into giving more generously. We use them in messages just like this one, to encourage you to embrace your own best investment interests. You may not realize it, but you probably use them to advance your own heartfelt beliefs.

Unfortunately, not every application is as well-intended. Profit-hungry wolves on Wall Street won't think twice about preying on your hopes and fears. Popular and social media alike are forever awash in fervent calls to action. Identity thieves are the ultimate masters of emotional trickery in their quest to rob you of your wealth.

Powering Past Your Emotions

So, as an evidence-based investor, how do you navigate past these and many other emotional traps? It can help to have an objective advisor point out your behavioral blind spots. But you can help yourself as well.

Has something you've seen, heard, or read left you "stirred up"? Again, we're not suggesting you should repress every feeling. But the more aggressively an appeal tugs at your emotions – in fear, anger, excitement, or elation – the more critical it is to avoid being consumed by it.

Especially if it involves your financial well-being, we strongly recommend hitting the pause button before making any next move. Take your emotional "temperature." Wait for the heat to subside. Most importantly, take some time to conduct extra due diligence before taking the bait.

What kind of due diligence? That's what we'll cover in part 3 of this series.

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At RCS Financial Planning, our mission is clear and straightforward: to provide personalized wealth planning and investment advice that minimizes our clients' financial concerns and maximizes their long-term peace of mind.. We firmly believe that a true financial partner shows you how to make the best choices for your future by always focusing on your needs first. And our fee-only service model ensures there is no conflict of interest.

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