Making Hard Choices

Something strange I’ve noticed while working with people, is that most people want others to make the hard choices for them. I work with grown ups. The main advantage to being a grown up is making your own decisions. Still, I too often hear phrases like: “I had no choice;” “What could I do?”; “I was forced;” or “What do you think I should do?” These are all a form of abdication of the individual’s opportunity to decide.

It seems silly to grow up wanting more freedom and, when we have grown up, to restrict the choices we allow ourselves to make. I think it’s a large part of the explanation for the market for professional advice (and charlatans). Most people who work with a financial advisor could probably write their own financial plan, develop their own investment strategy and follow through, all without outside help. I’ll be the first to admit that it doesn’t require exceptional brainpower (Willpower is another matter). I know that at least three of my best clients also invest a certain amount of their money on their own. Why do people who are able and willing to invest on their own hire a financial advisor?

I have found two reasons why people have such an aversion to making difficult decisions. The first is uncertainty. When the outcome is uncertain, it is not possible to know beforehand which choice will be “correct.” (To clarify, when I say uncertain, I mean that the probability is not knowable. When rolling a dice, there is a 1 in 6 chance of rolling a given number, the probability is known and decisions about dice are mathematical. Weather is unpredictable. Planning an event a month ahead cannot depend on the weather. This is what I mean by uncertain.) This is where people tend to look to others. We hope that an expert has a clearer view, and a better probability of being right. If we can rely on an insightful forecaster, maybe we can improve our chances of success. Especially when the outcome is important (eg. financial success versus failure), there is real pressure to be right. However, uncertainty cannot be avoided when we look to the future, and there is a very real chance of being wrong. Worse, studies have shown that financial forecasters have a poor track record, most being correct around 50% of the time; a coin toss is as likely to suggest the correct decision.

If we must suffer a negative outcome, it seems to be psychologically easier to have someone else to blame, which is the second reason people avoid making difficult decisions. We don’t want any of the blame to stick to us. If a person hires an advisor, and an undesirable circumstance arises, the individual can blame the advisor, end the relationship and start over. This way, the individual is able to maintain an illusion of control over their financial outcomes. I see spouses do this with petty decisions and blame, such as whether or not to carry an umbrella. I wouldn’t be surprised to learn that accumulating blame is the cause of most divorces.

Although grown ups are able to decide, making decisions under uncertainty is difficult. I have found a way to make these decisions and to feel good about the result. The first step is to outline the possible choices. The second step is to note the possible outcomes if we are right or if we are wrong. If it is a decisions with only two possibilities, there are four possible outcomes. The choice is made in a way that may seem backward, by deciding which of the four outcomes would be the most mentally painful and choosing to avoid that possibility. Notice that, because we are operating under uncertainty, probability must not enter into the decision. In this way, risk is properly accounted for and minimized. (Only if the successful outcome far outweighs either negative outcome would the decision be made based on the expectation of success.)

Here is an example. A couple met with me when the husband was offered the chance to join the pension plan at work. Normally, I would recommend maintaining control over your own investment choices and aiming for higher possible returns. However, this couple kept asking questions like: “What if the market does poorly?” “How bad could the investment returns be?” and “Aren’t the guarantees in the pension valuable?” I pointed out that they have two choices: join the pension plan, or make their own investment choices. They also had two potential results in each case: better returns or worse returns in comparison with the other option. Obviously, they would feel good if they chose the pension and it performed better, or if they chose their own investments and performed better. But which would be worse: choosing the pension and watching the market produce great returns, or investing in the market and experiencing poor returns compared to the pension? The pension will always produce some return, whereas a market investment could lose money and that would cause real regret. The couple expected they would feel less regret from missed growth, and chose to join the pension. (So far, they’ve been right.)

People seem to prefer not to make difficult decisions for themselves. Because of confusion and the potential for guilt, they prefer to hire an advisor. The advisor helps by making the hard decisions and, if the individual becomes unhappy, there is someone to blame and punish. This removes the mental anguish that accompanies decision-making under uncertainty. However, accounting for uncertainty and being clear about the reasoning that supports your decision allows you to make the decision yourself without confusion or guilt. What hard decisions have you had to make? How did you choose? What do you do when choices turn out “wrong”?

5 thoughts on “Making Hard Choices”

  1. I can’t help but think that this post basically nullifies any real need for someone in your position? You basically get paid to gamble with someones money, in which case if you succeed you get to continue and if you fail you get fired. You yourself claim that there is no certainty, which is true, so how do you sell this concept to your clients? It seems a financial advisers real purpose, psychologically, is to be the potential scapegoat should things go wrong in the grand gamble. It’s like paying someone to roll the dice for you at the casino so you can blame them should they fail to produce results.

  2. Adam, the aspect that you highlighted, the psychological scapegoat, probably does exist in the advisor relationship for many people. Most people probably don’t think of that, and I hope it made the article interesting.

    There should be more to the relationship, though. An advisor should be knowledgeable about tools, products and strategies that the client may not be aware of. The advisor should be an objective observer who can (help) determine the client’s individual situation and whether or not tools and strategies are appropriate. The advisor should also be able to share ideas back and forth, so that even better ideas are produced than by (either) one person alone. In my financial affairs, my wife plays this constructive debating role with me, but not everyone has that.

    It sounds like you’re bitter towards advisors. Have you had a bad experience?

  3. Hi Robert,

    I don’t have an adviser, I am self directed. I prefer to learn and apply as I am a bit of a control freak when it comes to my money. I am also completely ok with taking the blame should things go sideways. So no bitterness here. I just found it rather paradoxical, possible even refreshing, to read a post by a financial adviser actually stating that it’s really a gamble and an adviser is almost paid to simply be the scapegoat should things go wrong.

    Myself, I tend to compensate any mistakes I may make as a self directed investor with low – to no MER’s. That gives me a bit of a buffer over a traditional advisor\client relationship.

  4. I think the most difficult part about being an advisor (financial or otherwise) is when the client doesn’t want to hear objective advice, but would rather hear something that fits their preconceived notions.

  5. I think you’re on the right track when you say people would prefer to have an outlet to lay blame on if things go wrong. Although I would prefer this myself, I also realize that for the most part I am better able to advise myself, be it financially or otherwise, it just means taking responsibility, as a grown up.

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