By now, you’ve likely heard the idea of the “left brain versus right brain”—the notion that one half of our brain focuses on facts and logic, while the other half houses emotions and imagination. At this point, it’s probably become a cliché. But there is truth to this idea, and the constant tug of war between emotions and logic forms the basis of every decision we make—including our financial decisions.
In fact, learning how to control this tug of war is at the heart of Behavioral Wealth Management (BWM), and it’s an important part of portfolio construction and management. But before you can bridge the gap between the emotional and the rational, you first need to understand that the gap exists.
“The Elephant and the Rider” Analogy
In his book, The Happiness Hypothesis, New York University psychology professor Jonathan Haidt describes the human brain using the metaphor of the elephant and the rider. In Haidt’s analogy, the elephant represents your emotional brain, and the rider represents your rational brain. The elephant is far more powerful than the rider, and it drives our hopes, fears, concerns and desires. Our inner wisdom about what is right for us—what is best for us—resides within the elephant. The challenge is that we can only access that wisdom when the elephant is feeling calm and centered.
The rider, on the other hand, cannot hope to “control” the elephant. It simply serves as the elephant’s advocate. The rider uses its rational thought process to help steer the elephant in the direction the elephant wants to go.
When we’re in highly emotional states, our elephants get spooked, and they start to charge—making it more difficult for the rational part of our brain to help us make centered, contextual and confident decisions. The goal is to keep the elephant focused on what’s really important to us and to draw on the logic of the rider to figure out the best way to get us there.
Is Your Elephant Charging?
In 2020, it’s not hard to find things that may make your elephant charge. It’s been a highly emotional year for all Americans. We’ve experienced a global pandemic. We’ve seen the markets rise and fall. We’ve confronted social justice issues. And with a presidential election approaching, the trend is poised to continue. These experiences are ones that are largely out of our control. In times like these, it can be easy to let our emotions get the best of us and lose track of the important balance between the elephant and the rider.
You might be feeling this way when it comes to your portfolio. With such constant volatility in the markets, it can be difficult to stay the course. Based on some long-held money messages, you may feel like it’s time to make some changes to your financial plan—especially if that plan isn’t going the way you expected right now.
If so, then your elephant is likely charging at full speed. The internal desire to do something, to stop the bleeding, might be incredibly strong. But the goal isn’t to follow your elephant when it is spooked—it’s to help your elephant calm down so you can connect with your wisdom to take the best path forward.
The “Alternate Story” and the “Illusion of Control”
To help calm your elephant, let’s go over two of our emotional management tools: the “Alternate Story” and the “Illusion of Control.”
Much of what motivates all of us is not the facts of any given situation but the stories we create around those facts. The “Alternate Story” suggests that if we change our stories, we often feel differently and see the world differently.
For example, let’s say you are 64 and plan to retire next year. The market drops 40%, and your balanced portfolio is down 20%. Your story is that despite being a good saver and amassing a nice retirement nest egg, you suddenly don’t have enough to retire and will need to work a few more years. You feel frustrated, angry and sad that your long-anticipated retirement has been pulled out from under you.
Your feelings of frustration, anger and sadness come not from the market’s decline, but from the story you created around them. An alternative story is that you knew a market downturn would come eventually, and you prepared. You have set aside enough money in cash and bonds to sustain you during an extended bear market. Because you are prepared, you can retire as planned without worry. You feel confident, secure and excited about your future.
Additionally, the “Illusion of Control” helps us understand that there are always things that are out of our control. By focusing more on what we can control, and accepting what we can’t, we’ll have an easier time making peace with the world around us. In our prior example, we have no control over the markets, when they will recover or the yield on cash and bonds. We do have control over what we spend, how we spend our time and where we choose to focus our attention. As we shift our attention to what we can control, our fears subside, and our confidence expands.
Managing Your Money Effectively
Effective decision making, whether it has to do with financial management or something else entirely, is about bridging this gap between the emotional and the rational—about making sure your rider and your elephant are working together to create the life you desire.
This can be easier said than done, but that’s why the Behavioral Wealth Management specialists and other financial advisors at Wealth Enhancement Group are here for you. Using tools such as the Alternate Story and the Illusion of Control can help transform your fear into confidence as you figure out what path forward is right for you.
This has certainly been an eventful year, and it’s easy to let our emotions overwhelm us. But that does not mean you have to let your fear control you and lead you astray. When you allow your rational brain and emotional brain to work in unison, you can discover the choices that are best for your long-term financial success.
CFP® David joined Wealth Enhancement Group through the partnership with JOYN Advisors, where he acted as CEO and Co-Founder. He is the creator of the Behavioral Wealth Management™ model. A model that focuses on aligning wealth management with the integration of human emotions while taking into consideration an individual’s talents, wisdom, network and relationships. David has been featured in a number of prominent outlets including The New York Times, The Wall Street Journal and The...Read More