Trade-Offs--How We Cope and Often Prosper

Trade-Offs--How We Cope and Often Prosper

I have been waking up lately with a gnawing feeling that something is missing--kind of an empty feeling--an emotional ache that just won't quit. I finally realized that it's spring which is not as obvious to the senses in Florida without changes of season as it would have been in my second home, the southwest of France, where I spent the spring season for the last fifteen years.

We have had the pleasure of living in two wonderful worlds until last fall when we decided to sell our lovely French home as it was timely and financially fortuitous. The angst of that decision was that while we gained financially, we lost a great deal emotionally.

In my work as a psychologist helping others understand their attitudes and feelings about money and what they do with money as a result, it made perfect sense to me why we were feeling as we were and how to get through it so we did the right thing financially for ourselves.

Psychologists have identified a phenomenon known as “cognitive dissonance” that helps to explain what people do and experience in making difficult choices. Your brain doesn’t like dissonance, so it does what it has to do to resolve it. In some cases, people make the decision with a lot of reflection and make peace with the choice; others impulsively take action to rid themselves of the angst of the dissonance or conflict while others may not take action at all putting it off so they don’t have to deal with it at the moment. In other words, you protect yourself from feeling any anxiety or discomfort from inconsistencies between any beliefs you have and any actions you take.

In my work, I’ve seen the powerful impact of this phenomenon in explaining why some people say one thing and do another like taking risk when they say they can’t tolerate it; live way beyond their means while they financially can’t afford to do so; spoil their children and give them a false sense of entitlement because they don’t want to discipline them. In other words, they don’t walk their talk and live the life they say they really want to live or behave in a way that reflects what they say they want and value.

These tough economic times are a great opportunity to successfully deal with cognitive dissonance and learn that the defense mechanism of rationalization can be both friend and foe. It helps us in allowing ourselves to resolve conflicts, make the tough choices which may not give us as much immediate satisfaction but will pay off in the long-run. On the other hand, it certainly can sabotage us in allowing us to deny and rationalize why we don’t have to act and face feelings of discomfort.

So it goes in life, we are confronted with a series of compromises and making difficult choices. Being aware of and resolving both the emotional and financial issues involved with the choices, helps to assure that we won’t allow our defense mechanisms to sabotage what is ultimately in our best interest. Bottom line: To thine own self be true.

What We Expect Shapes What We Do

What We Expect Shapes What We Do

The daily fluctuations in the marketplace only reinforce our feelings of uncertainty of what's real and what to expect. Is it a bull market or a bear market rally? If you listen to CNBC daily as I do, you're not alone in being perplexed as to how to answer that question.

Today the CNBC pundits had to admit that they believed there was a general feeling that things were looking rosier and more optimistic. As one of them stated "there is just something in the air that feels different". He followed his statement pondering the chicken and egg issue.

Psychologists ponder cause and effect all of the time--trying to look retrospectively about why a certain phenomenon exists. We look at events in time and try to link stimulus and response or cause and effect. We also look at trends, norms, habits and acknowledge the power of reinforcement over time for why they stick around.

What we know is that we're all driven and motivated by reward. The more we're rewarded for a particular behavior or attitude, the more likely we'll repeat it. So it makes sense that Americans are clinging to any good news and feeling like life will be a lot rosier.

Just think about how Americans have been conditioned to bounce back, to believe that economic times will be better. We have lived in these extraordinary times of prosperity and optimism--at least in terms of wealth and the ability for the average American to have a piece of the good life.

In retrospect, reality becomes a lot more clear as consumers can see that these perceptions were not based on reality but perceived subjective reality--or what they wanted to believe. So what are we to believe about what we see today to explain what's really driving the marketplace's upturn--valid reasons for being optimistic or the subjective yearning for feeling optimistic or wanting it to be true?

Why does it matter? If we look at today in perspective of a broader and longer-term view, it becomes more critical that we really understand what accounts for the expectations and how valid they are.

We can all be optimistic. As Warren Buffet said today "How can we bet against Americans? It doesn't make sense that our economy won't come back. But he put that into a longer-term perspective. He was optimistic that future generations will have even better lives than we know today.

So, we're reinforced to cling to our enthusiasm and positive perceptions for our future prosperity. That's a good thing as long as people can afford that perception. It backfires in the short-term because it is often used as a rationale to avoid making tough choices that all will be OK. However, if they use it as a rationale to defend their current unrealistic and unreasonable actions just because they're more rewarding then they are only postponing the inevitable.

I'm stunned by the multitude of people that I meet who refuse to perceive this truth as reality. They still cling to what was true before this bust. They are still holding on to real estate purchases that no longer make economic sense rationalizing that they'll double their investments. They won't give up their short-term rewards to assure their future financial well-being. Obviously, this is a short-sighted and unrealistic strategy.

On a positive note, I've also met many people who got the wake-up call and took the action to make radical changes. The ability to listen and take information and advice to heart is a key difference. Education has a lot to do with it--self-education.

Feelings of Loss vs. Gain

On CNBC’s “Squawk on the Street” show today they discussed investors’ short-term memory and how it can trip them up. It was a good show in explaining how investors feel about the pain and pleasure associated with losses and gains in their portfolios. I’d like to add and explain the dynamics of facing a likely gain vs. a sure loss.

The theory known as "Prospect Theory", originally described by Daniel Kahneman and Amos Tversky, says that individuals are much more upset by prospective losses than they are pleased by equivalent gains. Therefore, the loss of $100.00 would be twice as painful as the pleasure received from a $100.00 gain.

In my work with both consumers and financial advisers, I've found that people are willing to take more risk to avoid losses than to realize gains. In other words, when faced with a likely gain, investors are more likely to be risk-averse, while when faced with sure loss, they turn into risk takers. You can see how this pattern could affect average investors. It's a spiraling effect with one bad investment decision threatening them with a sure loss, which will lead them to take more risks in order to avoid this loss.

I’ve seen this theory in action with some of my private clients in the last six months. Their worry about loss had become unmanageable and they no longer felt in control. All they wanted to do was sell and stop their losses. If they had sold, their timing would have been impeccable being right at the bottom.

Even The Wealthy Can Feel Financially Insecure

Yesterday I spoke to a client who sounded very different from a year ago. She no longer has the sense of optimism and joy about her recent retirement. She, like other high net worth individuals who lost a significant percentage of their wealth, are feeling insecure. In a recent national survey, high net-worth consumers were much more concerned about their sense of security than their quality of lifestyle.

This makes sense as there is a hierarchy of needs that we all relate to in life with our need for security at the very base and foundation of other higher needs. Unless that security need is fulfilled, human beings are not interested in seeking to fulfill higher needs such as achievement or self-actualization.

Once our security needs are fulfilled, we can then focus our energies in fulfilling our other needs with a sense of optimism and confidence. Meanwhile, most consumers are playing it safe and doing whatever they can do to feel more secure--even the wealthy.

Everyone is looking for some reassurance that they'll be OK--financially and emotionally. The important point is for all of us to get in touch with our individual financial situations and definitions of security and then be deliberate in achieving and maintaining it. Only then will we be able focus and realize higher needs, take some risks and venture beyond our comfort zone.

Can Money Emotions Be Controlled?

I watched a CNN segment today on the potential of controlling the emotions of traders on the floor so that they could make rational vs. emotional decisions while trading. Dr. Lo of MIT is working on such an experiment trying to ultimately improve their performance. If his experiments proved fruitful, he would propose a central risk manager on the floor of the exchange who would monitor the levels of trader distress so that some coaching intervention could identify and then control the distress response trying to manage and eliminate any irrational decisions.

While this intervention may ultimately prove to be a fruitful plan, a less intrusive approach that would heighten self-awareness can be effective and would be preferred in my opinion. By helping people in all walks of life, not only the financial industry, discover and manage their money personalities--the attitudes and feelings which make an impact on money management--they have been able to make better use of their money as a result.

My first real experience and proof that this approach could be effective in helping traders and brokers control their money emotions was prompted by Black Monday of October 1987 when the market plummeted. It created havoc for traders, stock brokers, financial advisers and their clients.

The first branch of a national brokerage firm I worked with proved to be a challenge because the majority of their clients were retired, wealthy and conservative. The first step was to give the brokers insight into their unique money personalities via the Moneymax Profiling System so that they would understand how their attitudes and feelings about money may be projected in their consultations and work in managing money. Second, it was important to give the questionnaire and review the results with all of their clients. Not only was it a meaningful way to reach out and communicate at a very stressful time, but it was an effective way of documenting and assessing in an objective way what their clients were thinking and feeling about their money at the time.

In that particular economic climate much like today, it is extremely important to understand what is most suitable and how to gauge and manage comfort levels to avoid feelings of distress. Moneymax makes it possible to assess and manage feelings of anxiety, emotional feelings, lack of trust, impulsivity and other important traits.

That program was highly effective and many subsequent programs have been equally successful in helping people discover their money personalities and how to profit from them. If you have any interest in learning more about the subject and services that may be available to you personally and/or professionally, go to www.kathleengurney.com and www.financialpsychology.com if you'd like to explore using any of the information or services in your work with clients.

What's Your Money Personality?

The following feature is posted on health.com under “mind”. I thought that you would enjoy it.

The 9 Money Personalities

Do your friends call you a cheapskate, or is shopping a form of therapy for you? Do you invest conservatively, aggressively, or not at all? "Becoming aware of your money style motivates you to take steps in the direction of financial health," says psychologist Kathleen Gurney, PhD, author of Your Money Personality: What It Is and How You Can Profit From It (Financial Psychology Corporation), and the subject of our interview in "Mind Over Money," page 102 in our April 2005 issue. Pick the profile below that best describes you and note the action Gurney recommends.

The Hunter
You could be one if

You're highly educated and hold a well-paying job.
You've been known to dip into your 401(K) account to "invest" in a pair of Jimmy Choos.
You have a recurrent nightmare of becoming a bag lady.

Action: Your confidence will soar once you learn to manage, and not just earn, your money. Forget taking a class; you're smart and educated enough to learn the basics on your own.

The High Roller
You could be one if:

Investing is an extreme sport for you: It's all about the thrill.
You own a vintage Porsche and/or diamond stud earrings.
Your friends call you scatterbrained.

Action: Focus, focus, focus. If you have six items on your to-do list, pare it down to three. Set realistic goals, and you'll feel less frustrated.

The Producer
You could be one if:

You're too busy earning a living to make money.
Your idea of investing is buying a weekly lotto ticket.

Action: Boost your financial I.Q. by taking a course at your community college. Financial education can be tremendously empowering once you understand the basics.

The Entrepreneur
You could be one if:

You make a mint, but what really drives you is passion for your work.
Everyone you know considers you a workaholic.
You have a taste for wine and food, drive a great car, and pay for it all in cash.

Action: You need balance, not money. Take time out for a well-earned massage, or rent a DVD.

The Optimist
You could be one if:

You're nearing retirement and eager to enjoy your hard-earned savings.
You let your accountant make all your financial decisions. "Out of sight, out of mind" is your philosophy.

Action: Reality check: If you're 65, you could live to be 90. You may need to invest more aggressively, curb your spending, or consider other tools to generate more income.

The Safety Player
You could be one if:

Risk makes you queasy.
You don't trust the stock market.
You consider financial planners to be one step above plankton on the evolutionary tree.

Action: You may be averse to risk, but you're actually taking a huge chance by not keeping up with inflation. Visit a financial planner who can answer your questions at an hourly rate. (Write to us at: kgurney@kathleengurney.com or visit http://www.kathleengurney.com/ and click on Advisor Match.

The Perfectionist
You could be one if:

You're astute and analytical.
You're so afraid of making a mistake that you avoid making financial decisions at all—even small ones.

Action: Use your analytical skills to assess a financial decision quickly. Haul out the old yellow pad and divide it into plus and minus columns. More debts than assets? Your decision is clear. Now act.

The Achiever
You could be one if:

You're married and a high earner.
Emerson's Self-Reliance is your manifesto.
Monitoring your portfolio is like watching grass grow.

Action: Curb the control freak in you and get a second opinion—perhaps from your spouse, who may be feeling left out.

The Money Master
You could be one if:

You accumulate money quickly.
You're not afraid to seek advice from a financial planner.
You invest for the long term.

Action: You're on the right track to financial security, but sometimes life calls for a little spontaneity. Allow yourself to splurge now and then.

Note: Because the money personality you most closely identify with is determined by 13 personal financial traits, you may find yourself in more than one profile. For more information on your money personality and the traits that drive your money management style, visit www.kathleengurney.com.

What is Financial Psychology?

Have you ever wondered why money seems to work so well in some people’s lives and so destructively in others? Why some people control money while others allow it to control them? Or why some of us can manage it so effortlessly to fulfill life’s plans and goals, while others never stop to question how they want it to serve them?

Questions like these are not typically explored. Why not? I believe it’s because the answers do not lie in cold financial facts. One must look at both the financial and psychological factors involved in money matters to make sense of why people do what they do with money. This column will do just that.

For most of us, money and our feelings toward it tend to veer to extremes. We love money or we hate it, we fear it or we worship it—but we certainly never ignore it. And yet, we know so little about why we experience these emotions toward money and the effects they have on our very existence.

As a psychologist specializing in money-related issues, I confront these money emotions every day. I have worked with hundreds of men and women from all backgrounds and income levels: company presidents who make million dollar-decisions in the board room but make disastrous personal financial decisions; couples who never cease arguing over “my”, “your”, and “our” money; parents who know better but spoil and indulge their children, never giving them a chance to enjoy the connection between effort and reward.

I’ve learned that most of us fail to realize how our feelings about money affect our financial habits and the degree of satisfaction we get from the money we have. There is an inseparable link between our unconscious attitudes about money and the way we relate to money in our lives. Like it or not, money can enhance happiness and prosperity, or it can destroy them. No one simply drifts to the pinnacle of success—you have to climb.

Not only do we have a physical self, an emotional self and a social self, but we have a financial, or money self. This money self influences the way we interact with our money. You have a healthy money self-concept when you know how you affect money and how money affects you. You have a healthy money self-concept when you like how you deal with money more than you dislike how you deal with money. If you have a negative money self-concept, you can alter your attitudes and formulate a new money style that provides richness instead of deprivation.

To learn more go to www.kathleengurney.com