The two of us love watching our kids play hockey. They look adorable getting dressed up in their thick pads and helmets and skates. Off the ice, their movement is clumsy, but when they’re on the ice—all that padding is exactly what they need. They’re able to confidently go on offense against their opponents, and they’re protected against the hits that come their way.
Without that thick padding, our kids wouldn’t manage to get very far as hockey players. Imagine how senseless it would be for a hockey coach to drill in strategy, technique, and skill to their players—and then push them out onto the ice with no helmets or padding. If they’re not protected, then all the effort they’ve put into learning the game could be cancelled with one solid hit from an opponent.
It’s the same with your family finances. No matter how much your family understands financial technique and strategy, you still need some protective gear to stay safe. If you operate with an unchecked bias, you’re not able to evaluate an investment with a clear head.
Below, you’ll find some padding that will help protect you against three dangerous financial biases that could sabotage your family’s financial success. If you recognize that the dangers are real, then you’ll be able to take steps to protect yourself against them.
Imagine you’ve inherited a piece of land on a swamp, in a flood plain. The smart financial move would be to off-load it as soon as possible, but you won’t. Why? Let’s say this house is where your mom grew up, and she’s told you stories of exploring the grasses in the swamp. You value the connection to your family more than the appreciation or depreciation of the asset.
This is the Endowment Bias, and it shows up every time you’re unable to make objective financial decisions because of an emotional tie to an asset.
To make these emotionally loaded financial decisions a little easier, we recommend you recognize that the original value of the asset you’re dealing with came about during a different time. Market conditions were different; real estate conditions were different; family conditions were different. Your benefactor gained this asset by doing what he or she thought was best for the family, at that particular time.
Take that same spirit—doing what’s best for your family—and use that as your motivator for determining what to do with this asset. It’s possible that the best way to honor your parent or grandparent is to handle that investment in the same savvy way they might have, were they still alive to reckon with these new conditions. .
Status Quo Bias
The Status Quo Bias can show up in every area of life and can be summed up in a few words: you do what you’ve always done. Rather than make healthy, needed changes, you keep operating with the current state of affairs.
Sometimes, people fear that they’ll make a mistake if they make any changes. That’s an understandable fear—but unfortunately, not making a decision is, in itself, a decision! And quite possibly, one that could do you more harm than good in the long run.
The Status Quo Bias can impact many areas of financial decision making. Here are just a few examples of the dangerous ways it can play out:
● You make an investment in stocks but never scrutinize their status. You might wake up one day and discover that your investment has gone to zero.
● You have a collection of five 401(k)s from five different jobs. Through not monitoring or consolidating those accounts, you easily run the risk of wasting investment opportunities or even losing some of that hard-earned money altogether.
● You experience an enormous stroke of luck—maybe a stock you bought at $5 shoots up to $100, or a house you bought at the bottom of the market triples in value—and you can’t bring yourself to cash in on the investment. Your best window for selling ultimately passes you by.
Operating on autopilot can be a danger to your finances, estate, and family.
To overcome the Status Quo Bias, first consider what may be at the root. Is your issue one of fear? Busyness? Reluctance to deal with a sad topic? Once you determine the root of your personal Status Quo Bias, you might be able to determine strategies to deal with it.
Also, having a well-defined process and hiring the right team can resolve the Status Quo Bias because your team can bring the expertise and experience to help you make informed decisions.
Live for today and don’t think about tomorrow! That, in a nutshell, is the Self-Control Bias. When it comes to money, you act in the moment. Your decisions are directed more by impulses, than by discipline or self-control.
The Self-Control Bias can be an Achilles’ heel for children who have grown up wealthy. They might be used to living a luxurious lifestyle and expect to continue living large until they die. We fully endorse living a life you’ll enjoy, but we also endorse having enough to sustain your family’s needs for a lifetime and passing on wealth to future generations. Those three goals can coexist, provided you swap out the Self-Control Bias for disciplined goal-setting.
Several emotions can be at the root of the Self-Control Bias. Insecurity might be at play. If money feels tied to your self-worth, you’re going to spend money whenever you want a boost. The Self-Control Bias can also operate when you have a limited view of your contribution. If you have a stable job, you might feel like that’s “enough” of a societal contribution. You’re not thinking about growing your wealth, or contributing in a bigger way to your community; instead, you might just focus on retiring early and living it up.
If you would prefer to make a change in how you handle finances, but have struggled to bring your spouse or children along, consider having a conversation about your family’s values and goals. Getting on the same page about the purpose of money will be an important first step toward healthy change. Consider ways you can implement steps of accountability for changing behavior to better align with the vision.
When our kids have their protective hockey gear on, they have more confidence to play hard. They can take risks, because they’ve insulated themselves against getting hurt. When you protect your family against these three dangerous financial biases, you insulate your family wealth and allow yourselves to take confident, well assessed risks.
Be proactive about identifying and warding off these behaviors. Talk to your family about financial values and the importance of being good stewards of your family wealth. Work to instill healthy habits in yourself, your children, and generations to come. By protecting your family against these various dangers, you’ll help everyone have more fun and play a better game.
For more advice on financial biases, you can find Pass It On on Amazon.
Roger and Lori Gervais are proud parents of three wonderful children: Anna, Will, and Jack. Roger and Lori are also the husband-and-wife team behind The Gervais Group, named by Forbes as “Best in State Wealth Advisors” in Wisconsin. Lori, a CERTIFIED FINANCIAL PLANNER™ professional, has been recognized for her commitment to clients and to the profession by Forbes, which named her to its America’s Top Women Advisor List. Roger, a CFA® charterholder, uses his background in engineering to offer clients a unique set of problem-solving skills. Throughout their thirty years of combined experience in the industry, Roger and Lori have made it their mission to simplify the complex world of financial planning.