Jeff Kreisler

Head of Behavioral Science for J.P. Morgan Private Bank

“Thinking, Fast and Slow,” by Daniel Kahneman, is the foundational book in behavioral science – the study of how emotion and psychology impact decision-making. When you relax, imagine the future and consider hypotheticals, you think slowly, rationally and idealistically. But in the heat of the moment, when the pressure is on, and you don’t have – or take – the time to reflect, you revert to our instinctive, fight-or-flight, highly-biased thinking. These fast decisions often undermine the long-term goals you set during times of thinking slow.

This a great lesson for all of us – clients and financial professionals – in the recent rising interest rates environment:

When rates rise fast, let’s make decisions slow. 

Over the past couple years, the Fed has raised interest rates and held rates steady at a pace and level not seen in a long time.  And over the last six to nine months, we’ve been swarmed with analysis, predictions and promises about imminent cuts to those rates – an ever-shifting landscape of how many, how soon, how much and how often.  No one knows exactly what will happen, but we all “know” it’s going to happen any day now!

As a result, many of us felt pressure to Act Now!, to lock in rates or do something, anything just to seize what feels like a fleeting opportunity.

It’s an example of how an economic air filled with urgency, anticipation, uncertainty and pressure impacts our financial decision-making. Making choices under pressure is when you’re most likely to think (too) fast. And there will always be something creating a pressure to Act Now!, such as rising rates, anticipation of falling rates, inflation, recession, debt ceiling negotiations, global conflict, or elections.

It’s like when you shop for airline tickets and the website says, “Only two seats left at this price!” or “Five minutes left of this sale!” or “Hurry hurry, yes, you, these items are limited, and these prices won’t last!” Urgency and scarcity makes us think fast and act impulsively.

It may be that refinancing or getting into certain savings vehicles or making strategic investments are the right thing to do. But you want to make sure you choose those things based upon rational thinking, long term planning and acting in service of your financial goals… not just based upon feelings. You want to take advantage of your resources and advice to act upon knowledge, planning and expertise. You want to be certain you’re doing the right thing. You want to think slow.

So, given the relentless coverage of economic changes – debt-ceiling, interest rates, market volatility, energy and supply chain issues – how do you get your mind right to embrace the opportunities in front of you? Behavioral finance offers some good ideas.

Ask yourself why

When you find yourself thinking, “Since X is about to happen, I should do Y right now,” take just a moment to ask yourself, “Why do you want to do that? What purpose does it serve? How would it support your long-term and short-term financial goals? Is it in line with your wealth strategy?”

Sure, a high-interest savings certificate of deposit (CD) might be better than it will be in a year, but if getting into that CD isn’t part of your plan, then that doesn’t even matter. While that might seem logical to us, you’d be surprised how often people get hooked by the prospect of a “great deal” and lose sight of whether it’s a necessary purchase at all. You don’t need to hurry to buy something, “Before It’s Too Late!!!” if you don’t need to buy it at all.

Maybe a decision spurred by changing rates does support your financial plans. Great! Wonderful! Pausing to asking ourselves why has served to reconnect us to our goals-based strategy and provides a framework to ensure you’re making the best decision for now and the future. There are, indeed, many opportunities provided by this rate environment. It’s our job as financial advisors – and your job as financial decision makers – to ensure that we pursue these opportunities in line with the well thought out, big-picture, long-term plan that has provided these opportunities in the first place.

Distance yourself from yourself

Have you ever noticed that you treat other people better than you treat yourself? That you are kinder, more likely to forgive, more reasonable when thinking of what someone else has done than what you have done yourself? That you give other people better advice than you give yourself?  This is natural – you’re most emotionally connected to your own decisions, so you’re most irrational about them – and, fortunately, it’s something you can flip and use to your advantage.

When making a decision with potentially large consequences – whether spurred by uncertain rates, sudden wealth or any number of catalysts – take a moment and ask yourself, “What advice would I give a good friend if she were in this same situation?” Imagine a trusted companion came to you and said, “Rates are in flux, I’m concerned about X, so I think I’ll do Y.” What would you say to her? Chances are you’d give her good advice – you’ve been working in finance long enough to pick up a few things – and, chances are, that advice is something you should give to yourself.

A similar technique would be to ask yourself, “What will me in 10 years think about this move?” Again, this adds distance – in time – and separates us from the pressure and speed of the current moment, to make choices that benefit us long-term. While these exercises might seem a little “silly,” research has shown these acts of “distancing” help people slow down and make better decisions.

Normalize this abnormal

This economic uncertainty and change does feel uncomfortable. While there is plenty of data to show that, historically, markets have been through these moments and came out fine on the other side, the truth is that most of us haven’t felt this environment in a long time, if ever. And everyone feels it; it’s normal. We are ready for it, and your advisors will help make sure you come out fine on the other side, but it would be dishonest to deny that there is a feeling of concern, uncertainty and apprehension. There is. That’s okay.

It’s not just one thing that weighs on us. There’s a cumulative stress that has been building up the last few years. COVID-19, the economic swings of 2020–2023, inflation, cultural challenges, war, politics, the inability to keep up with the latest TikTok dances… there’s a lot going on. Uncertain rates are just the latest “thing to deal with,” and it all adds up. We might be “just” your financial advisors, but we believe your money is meant to work for you and your life. So take care of yourself, take a break, take some deep breaths and we will be here to serve you when you’re ready.

Finally, pressure moments often seem like another time we’ve lost control. Someone else has set the conditions for our decision – be it the Fed, Congress or just “the market.” The need for control is powerful, and deploying your money wisely is a way to control your financial future. That’s why we build financial plans and wealth strategies in the first place: to help. And the wealth strategy you’ve built has been structured to anticipate volatility, uncertainty and rising-rate environment. You’re in a better position to handle this moment than most, because you’ve done the smart, competent and powerful work of building an informed and thoughtful wealth strategy.

You are in control. It’s time to show it by making sound decisions with advice tied to your intentions and goals.

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