There are certain times when I make buying choices for terrible reasons. I have occasionally walked into a place and bought something that I didn't particularly like or want because I felt pushed and was uncomfortable saying no. That is probably not unusual. What is more odd is that sometimes I will buy something because a salesperson did not give me enough attention and I wanted to prove something to them. The results are the same: I end up with something with which I am not totally comfortable.
No financial planning decision happens in isolation. All involve some sort of group — a family unit, a work environment, or a peer and societal group. The problem is that group decisionmaking can be expensive.
In their book, "Wiser," Cass Sunstein and Reid Hastie say that "a cascade occurs when people influence one another, so much so that participants ignore their private knowledge and rely instead on the publicly stated judgments of others." When you ignore your doctor and take medical direction from your Florida cohorts, you are the victim of a cascade. In financial planning, clients often describe what friends are doing and ask whether this strategy makes sense for them. It may involve the purchase of a second home, an investment choice, or what they should be doing for their children. Often people know the correct decision for them, but they reject their private knowledge for the (lack of) wisdom of crowds.
But cascading often occurs even within couples. We see this with handling gifts to family members. One person feels that they should provide more support for their adult kids or siblings while the other may not state their objections out of concern about being perceived as cheap or insensitive. The issue itself does not have a clear answer, but through fully discussing it, options can be determined. For example, both may be comfortable providing a certain amount of help for a limited time period. If one party doesn't share his or her opinion, it will inevitably lead to bigger issues later.
Creating options is an important step in making good decisions. Once various options are developed, you can then use analytical thinking to make a choice that is consistent with your values. For example, our clients were contemplating buying a vacation home. We went through a variety of issues — do they like going to the same place all the time, are they comfortable with upkeep and unexpected costs, are they planning to buy a place for themselves or one which they expect their children to visit? After discussing the various aspects of owning, we explored alternatives such as vacation clubs, and vacation rentals by owner. As we weighed the pros and cons, they decided that vacation rentals through VRBO or Airbnb met most of their current criteria. If they eventually want to own directly, they have not made a decision with extrication costs that make them feel stuck.
"For almost any problem-solving system, it is better to separate selection, with its emphasis on critical evaluation, from identification, which is best served by an uncritical, open-minded attitude," write Sunstein and Hastie. If the brainstorming, open-minded approach is not fully explored, then some potential great outcomes are being ignored.
Consider the stakes when you are making decisions. For low-consequence choices, a formal process is not necessary. But for issues that may conflict with your values (usually around family and philanthropy) or have long-lasting impact or ongoing costs (housing, work, education), a process for making wise decisions should be employed.
Here are some other things to consider:
