Decision Tips
Recognize that emotions can influence decisions.
Don’t do something permanently stupid just because you’re temporarily upset.
—Unknown
The odometer on Ray Davis’s Toyota Camry turned 120,000 miles last week. Ray knew he was due for a new car. He figured it was now only a matter of time before he was overwhelmed with maintenance costs—something he definitely wanted to avoid.
This time around, Ray was going to treat himself to something sexier than his Camry. He had his heart set on a new BMW 428i—a red convertible. He’d seen one at a car show, and it was love at first sight. So two nights ago, Ray went on the Internet and did some research. He read reviews on the car. He checked out J. D. Powers for its quality ratings, and he liked what he read about the 428i. He also found a website that gave retail prices, dealer invoice costs, and what he should expect to pay. Armed with his pricing information, he went over to his local BMW dealer last night. On arrival, he saw the dealer had four 428i convertibles in stock—two white, one black, and one red. Each was similarly equipped and had the same retail sticker price on the windshield—$57,325.
Ray calculated that his dealer paid $53,275 for each of the convertibles. And from his research, he figured he should be able to buy a car at $700 over dealer’s cost or about $3,350 under list. After more than an hour of negotiations, Ray drove out in his new red convertible. But he paid $56,500. He was only able to bargain $825 off the sticker price.
This morning, a calmer and cooler Ray Davis realized that he paid too much for his car because he allowed his emotions to cloud his judgment. He wanted that red convertible, and his enthusiasm was evident as soon as he walked into the BMW showroom. Meanwhile, the car salesman played on Ray’s emotions—talking up the excitement of a convertible, the fun of driving a red car, and the joy of owning a BMW. After a test drive, Ray was putty in the salesman’s hands. In retrospect, Ray now realizes he probably paid almost $2,500 more than he should have because he allowed his emotions to get the best of him.
Emotions can have a powerful effect on decisions. They can influence both the process by which a decision is made and, as in Ray Davis’s case, the decision’s final outcome. We’re all human, and we all have emotions. As you see in this chapter, the challenge we face is to manage our emotions so they do a minimal amount of damage.
Emotions that most of us have experienced at one time or another include happiness, surprise, hope, fear, anxiety, sadness, despair, anger, and disgust.1 And everyone, at times, gets emotional. Some people, however, allow their emotions to overwhelm their decisions, especially when they’re overly excited or under stress. Take a second and look back at your test score for Chapter 10, “Can You Control Your Emotions?” Remember, low scores indicate you have trouble controlling your emotions. The lower your score, the more you need to aggressively try to control the negative aspects of emotions.
The rational decision process is assumed to be emotion free, and many of the decisions we have to make can be made by keeping our feelings on hold. But many can’t. For instance, you wouldn’t want romantic decisions—falling in love, choosing to marry, buying a special gift for a loved one—to be made without emotion. And sometimes decisions that you later recognize turned out well—quitting a frustrating job in the heat of an argument, buying a piece of art that you fell in love with, or tearing up your credit cards out of frustration with increasing debt—are largely driven by emotions. But we’re concerned with situations where emotions significantly undermine rationality and lead to unhappy outcomes. Negative emotions tend to narrow our attention, speed up the decision process, and lead to impulsive actions. This, in turn, often results in post-decision regret.2 Most of us have experienced situations where we got caught up in the heat of the moment, made a rash decision, and later regretted it.
Negative emotions tend to narrow our attention, speed up the decision process, and lead to impulsive actions.
One of the more troubling concerns with emotions is that they often trade off the long-term for the short-term. This is called emotional cascades.3 We make an ill-considered decision based on our mood at the moment and then find that it creates a long-lasting pattern. So before you say something to someone you love or buy something you can’t afford in the heat of the moment, think about its long-term impact as well as its immediate impact. Some things said or done are difficult, or even impossible, to take back.
The evidence indicates that rationality is most likely to be undermined when we allow emotions to direct us away from our long-term goals, when we have to make hard choices under stress, and when we’re overly excited.4
Negative emotions—such as anger, frustration, hate, and revenge—tend to surface when we’re faced with the need to make difficult and stressful choices between important goals. For instance, conflicts between career and family, maintaining the good life and living within your budget, or respecting the law when we see legal abuses can be a source of negative emotions. When a drunk driver kills an innocent child and then walks away with no jail time, it can take great emotional control by that child’s parents to refrain from taking revenge.
In recent years, many investors allowed their emotional impulses to override their rational thinking.5 They bought overpriced stocks in 2007 and 2008 in the heat of irrational exuberance. Then, when the market went into decline, they sold everything out of fear and frustration. While none of us can accurately predict the stock market’s future, one thing is certain: Making critical investment decisions with your retirement nest egg should not be based on impulsive mood swings.
The first step toward managing emotions is to recognize that they can influence your decisions. Whether that influence is positive or negative depends on the type of decision, its importance, your level of arousal, and your level of awareness. If you scored low on the test in Chapter 10, you need to be particularly vigilant so as not to let your emotions control your choices. Second, delay making major decisions when you’re stressed out or excited. Most decisions can be delayed for a day or two with minimal consequences. Third, if you can’t delay the decision, use others as a sounding board. Review your decision with friends or relatives who aren’t emotionally involved. Fourth, take the time to expand your options. You’re less likely to make an impulsive choice if you have to assess and weigh additional alternatives. Finally, keep focused on your long-term goals. If you must make a decision and emotions are involved, you’re less likely to take an impulsive action that you’ll later regret if you make sure it fits with your long-term plans.
Recognize that emotions can influence decisions.
Delay making major decisions when you’re stressed out or excited.
Use others who aren’t emotionally involved as a sounding board.
Expand your options.
Focus on long-term goals.