Being Emotional is Human

My son shared with me this exercise that his professor gave his money class. I found it very interesting so I thought I would share with you here. See if you can identify yourself in there.

Assuming that prices of goods and services stay the same, you are offered the following options. Would you rather choose:

A. Earn $50,000 a year while your peers make $25,000

B. Earn $100,000 a year while your peers make $200,000

Did you choose A? Well, you are not alone. Research shows that most people would choose to earn more than others rather than simply earning more. We don’t simply want to be better, we want to be better than others.

The same mindset often manifests in our investment decision. If your best friend tells you his portfolio earned 10% last year, even though yours earned a respectable 8%, it will probably erase your satisfaction on the return you have made in your own investment. Worst yet, some would abandon their invesetment strategy to chase what has been hot. We know that’s a recipe for disaster!

It’s often said “numbers tell, emotion sells”. Think about why you bought your life insurance. People don’t buy life insurance to give their families millions of dollars on their passing; they buy to gain the peace of mind that their families would be financially secure if they are no longer here to provide for them. That’s an emotion leading to a good rational financial decision.

So how do we prevent our emotion from leading us to irrational and potentially harmful behavior? I would like to recommend the following:

· Define your value, what matters, and have a vision of the life you want to live

· Have a plan to align your financial resources to your value and goals

· Commit to your plan and regularly review the progress towards your goals

· Admit that you and your friends live very different lives; comparing yourself against others will not make your life better

· Be content and grateful with what you have, and look at the possibility of what you would be able to do with it

Benjamin Graham famously said that “The investor's chief problem - and even his worst enemy - is likely to be himself.” Being emotional is human. But there are still things we can do to prevent it from leading us onto the wrong path.