Our emotions affect the way we perceive the world, a fact we need to appreciate in our paraplanning, says Dan Atkinson, head of Technical, Paradigm Norton Financial Planning.
I was once told that before starting to write I should consider what I wanted my audience to Know, Feel, and Do as a result of what I share. It’s logical that we want them to gain some knowledge and do something with it. But feel?
When we prepare recommendations and reports we tend to think in rational terms. How can we ‘solve’ to generate the best return in the most tax efficient way. We prepare clear instructions on the steps that need to be taken in order to achieve success.
A recent podcast from the Stanford Graduate School of Business suggests that it’s not ‘enough’ to have a logical, rational, plan. We need to go further and be emotionally committed in order to stay the course. They need to feel.
Why are emotions important in decision making?
In this podcast Professor Baba Shiv (the Sanwa Bank, Limited, Professor of Marketing at Stanford Graduate School of Business) explains that our rational brain is only responsible for about 5-10% of our decision making. It’s important, but we really need to engage our gut feel to make solid committed decisions.
Shiv explains that our emotions have a huge influence on our decisions. One study involved subjects tasting wine. Despite being poured the same wine, when they were told that the price was higher, they were convinced that it tasted better. In the study they watched the brain activity of the participants, and it showed that the brain was indeed showing greater activation for pleasure when the price was higher!
Our perception of the world is profoundly impacted by our emotions. With this in mind if we are making a decision which requires action, we need to make it ‘feeling’ fully confident and ‘bought in’ to it. Otherwise, when the going gets tough we will give up!
Connecting emotions with goals aids action
Suitability reports communicate our understanding of a client’s goals and the actions they need to take to achieve them. They highlight the cost (this might be fees and charges, but also potentially delayed gratification or compromises) and risks involved. We might think about them as a point of reference in the client’s financial journey. If we can connect the emotions attached to their goals with the rational actions being set out, they are more likely to take action.
Feeling in advance – the premortem
In the podcast they discussed the concept of a premortem. This involves finding the things that could go wrong in advance. It helps us put together a rational plan (which Dr Greg Davies from Oxford Risk describes as ‘Decision Prosthetics’) to manage our actions, outcomes, and behaviours.
By imagining how we might feel in these situations, we can make better decisions about the risks we are prepared to take. How might we deal with the consequences of poor outcomes?
The premortem offers us the opportunity to really appreciate the risks which we are looking to highlight. We might still have the same feelings, but we will go into the decision with our eyes wide open. Our decisions will be more confident, and we are more likely to follow through when the going gets tough.
How might we apply this?
Risk warnings in reports has been a bugbear of mine for years. Over the years best practice has developed into highlighting risks throughout the recommendation, but it’s still common to have a risk warnings appendix. They tend either to be quite generic, bland, and often disconnected from the client’s goals.
For example, we will often warn that investment returns are not guaranteed, and the value can go down, as well as up. This is important, but does it really help the client understand the risk? Perhaps we should connect this to the client’s goals and set out what this would really mean for them? At what point will their plans be changed and how much? Will their lifestyle drop from 5 star to 1 star, or is the impact much less? How might this make them feel?
I’m not advocating for catastrophising, but let’s enable clients to understand the impact on their goals and process the emotional impact of the decision (both the good outcomes and the poor). As Professor Shiv tells us:
“If you emerge from the decision with doubts, you’re more likely to give up too early and not persist in the course of action that you adopted,” he says. “You need to emerge from the decision feeling absolutely confident. It’s not making the ‘right decision’ but making the decision right.” (More Than a Feeling: The Keys to Making the Right Choice)
