Fix It Friday Ep. 26 - Why Even Smart People Make Bad Financial Decisions Under Uncertainty

• Emotional behavior—not intelligence—is often the biggest investing challenge
• Losses feel far more painful than gains feel rewarding
• Investors tend to avoid risk when ahead and seek risk when behind
• Fear and uncertainty can override rational decision-making
• Most investing mistakes happen during emotional moments

Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth LLC, Fusion, is intended for general information purposes only. No [00:00:05] portion of the podcast serves as the receipt of, or as a substitute for, personalized investment advice from Fusion or any other investment professional of your choosing. [00:00:10] Please see additional important disclosure at the end of this podcast.

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

Jonathan Blau: Welcome to another [00:00:20] episode of the Fix it Friday edition of the Crazy Wealthy podcast. Today I'm gonna [00:00:25] talk about something that is often misunderstood, which is why [00:00:30] smart people seem to make consistently bad decisions with [00:00:35] money under conditions of uncertainty.

So there's a reason for this, [00:00:40] and it has nothing to do with whether or not they're smart. It has something to do with something [00:00:45] much more dangerous, which is our behaviors. [00:00:50]

Voicover: Welcome to the Crazy Wealthy podcast with your host, Jonathan [00:00:55] Blau. Whether you're just starting out or are an experienced investor, [00:01:00] join Jonathan as he seeks to illuminate and demystify the complexities of [00:01:05] making consistently rational financial decisions under conditions of uncertainty.[00:01:10]

He'll chat with professionals from the advice world, entrepreneurs, executives, and [00:01:15] more to share fresh perspectives on making sound decisions that maximize your [00:01:20] wealth. And now, here's your host. [00:01:25]

Jonathan Blau: Today I wanna fix something that quietly causes good investors to make bad [00:01:30] decisions, especially during uncertain environments.

And when I say uncertain, [00:01:35] uncertainty is always present. What I mean is to say is perceived uncertainty. The [00:01:40] greater the perceived uncertainty, the worse our decision-making with financial, uh, [00:01:45] issues tends to be. So the difference between how we think we make [00:01:50] decisions and how we actually behave when money feels at risk.

Here's a simple [00:01:55] truth: when investors feel like they're winning, they avoid risk. When [00:02:00] they feel like they're losing, they actually seek out risk. Sounds [00:02:05] counterintuitive and backwards, but let's get into it a little bit. That's how we're wired. [00:02:10] So how we think we decide, most of us like to believe we're calm and [00:02:15] logical, that if we look at two reasonable choices, we'll pick the one that makes the most [00:02:20] sense and stick with it regardless of what markets are doing at the time.

In a [00:02:25] spreadsheet, that may be true. In real life, not true at all. Here's how we actually [00:02:30] decide. Here's what behavioral research shows and what I see constantly with real [00:02:35] people and real money. Losses hurt much more than gains feel good. In fact, [00:02:40] what, what research has proven is we feel the pain of a loss two and a [00:02:45] half times greater than we feel the pleasure of an equivalent gain is pleasurable.

[00:02:50] So our behavior flips depending upon how we feel in the moment. [00:02:55] Let's, let's take a look at a clear example. What I call the risk flip. When [00:03:00] investors are up, imagine your portfolio is comfortably ahead. You're feeling [00:03:05] great, and now markets get wobbly because of everything going on in the short term. [00:03:10] Most investors say, "I don't want to mess this up.

I don't want to lose my gains. I should [00:03:15] protect what I've made." So they become more cautious and even long-term [00:03:20] logic says staying invested makes sense. That's risk-averse behavior while winning. [00:03:25] When investors are down, we flip the situation. Their portfolio is below where it [00:03:30] was. That loss feels personal because they didn't do anything to prevent it, [00:03:35] and many people will now say, "I need to get this back.

I'll take a shot if it [00:03:40] gets me back to even." Now they're willing to take more risk than they normally would, [00:03:45] often at exactly the wrong times. That's risk-seeking behavior while losing. Same [00:03:50] person, same intelligence, but completely different behavior just because we're looking [00:03:55] at a loss case in one situation and a gain case in the other, and human beings [00:04:00] prioritize avoiding loss more than making [00:04:05] gain or making money.

And simply what's changed is the emotional starting point. [00:04:10] That's not someone being stupid, that's being human. So why does this matter in markets? [00:04:15] Markets don't just test portfolios, they test behaviors. There's no clear timelines. [00:04:20] There's constant noise, and uncertainty never gives us closure. So [00:04:25] most investing mistakes don't come from bad analysis.

They come from bad moments. Moments when [00:04:30] fear, regret, or urgency override patience and lead us to poor [00:04:35] behaviors. That's when people sell after losses, chase risky ideas to [00:04:40] try and make their money back, or abandon solid plans at the worst possible time [00:04:45] in response to economic, uh, news or short-term market fluctuations.

So what's [00:04:50] the fix? Fix is let's plan for humans, not for robots. At Fusion, we [00:04:55] don't build plans that assume perfect decisions. We assume people will feel fear, stress, [00:05:00] and doubt because they're human. So we build structure, cash, and liquidity [00:05:05] for three years of spending in retirement, so investors aren't forced to sell their [00:05:10] equities or stocks during temporary declines, and they can switch their spending to that [00:05:15] liquidity position.

Clear rules instead of emotional reactions. We, we [00:05:20] teach people that, uh, markets will decline fifteen percent a year on average. Since [00:05:25] nineteen eighty, that's been the historical average every year, and about thirty-three percent one year [00:05:30] in five or six. So what we do during those declines is we will simply [00:05:35] switch spending if we're retired to our cash position.

That's a rule, so we don't [00:05:40] have to react to the emotional stress during the decline. And then long-term [00:05:45] strategies don't require perfect timing. The goal isn't to remove uncertainty. That's [00:05:50] impossible. The goal is to make uncertainty survivable, so one bad emotional [00:05:55] decision doesn't undo decades of smart planning.

In a closing thought, I want to say that smart [00:06:00] people don't make bad decisions because they lack intelligence. They make them simply because [00:06:05] uncertainty triggers fear, and fear influences behavior. Great investment [00:06:10] plans never rely on willpower. They rely on structure. So that's today's [00:06:15] fix. Thanks for tuning in, and we look forward to catching you on the next version of Fix It [00:06:20] Friday.

In the meantime, all of our podcasts, Crazy Wealthy and Fix It Friday, are available on the [00:06:25] crazywealthypodcast.com website, as well as Fusion Family Wealth and all your [00:06:30] favorite podcast venues.

Voicover: Thank you for [00:06:35] tuning in to another episode of the Crazy Wealthy podcast. For more [00:06:40] insights, resources, and to sign up for our newsletter, visit [00:06:45] crazywealthypodcast.com.

Until then, stay crazy wealthy. [00:06:50]

Disclaimer: The previous podcast by [00:06:55] Fusion Family Wealth, LLC, Fusion, was intended for general information purposes only. No portion of the podcast serves as the receipt of or [00:07:00] as a substitute for personalized investment advice from Fusion or any other investment professional of your choosing.

Different types of investments involve [00:07:05] varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy or any non-investment related or planning [00:07:10] services, discussion, or content will be profitable, be suitable for your portfolio or individual situation.

Neither Fusion's investment advisor registration [00:07:15] status nor any amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Fusion is [00:07:20] engaged or continues to be engaged to provide investment advisory services. Fusion is neither a law firm nor accounting firm, and no portion of its services should be [00:07:25] construed as legal or accounting advice.

No portion of the video content should be construed by a client or prospective client as a guarantee that he or she will [00:07:30] experience a certain level of results if Fusion is engaged or continues to be engaged to provide investment advisory services. A copy of Fusion's [00:07:35] current written disclosure brochure discussing our advisory services and fees is available upon request or at [00:07:40] www.fusionfamilywealth.com