Is COVID-19 Affecting your Financial Decisions?
One of our favorite authors and researchers is Professor Shlomo Benartzi of the behavioral decision-making group at UCLA. He recently co-authored a Wall Street Journal article on this issue with John Payne, Professor Emeritus at Duke University.
Your behavior, they write, may be affected by “ambient emotion”, or background feelings. They state the impact of ambient emotions is especially relevant now for older people who might be making long-term decisions in the middle of this pandemic. Younger persons have longer to recover from unforced errors.
The three dangerous ambient emotions, they claim, are fear, anger and sadness.
Those who are fearful tend to become more risk averse. They may lower their exposure to assets with higher long-term expected returns, damaging their future investment pool. They may also claim Social Security benefits early, reducing their lifetime annuity payments from the government.
Angry investors should watch out for the opposite effect, researchers claim. They are likely to become more risk-seeking, an effect especially strong among men. For those in retirement taking more risk can lead to lower investment pools to fund their lifestyles.
Sadness makes people more pessimistic and impatient, they go on to say. Retirees are often presented with trade-offs between immediate reward and long-term benefits, and impatience may lead to the wrong decision. Scientists classify sadness as an avoidance emotion, so sad investors may put off doing proper estate planning or proper investment rebalancing among other difficult decisions.
So, what’s an investor to do? Remember, moods may be fleeting, but consequences can last. Those anxieties may pass and you may still have time to recover and catch up. Think twice over a period of time about difficult decisions. Ask yourself what you would tell someone else to do if they were in your shoes. Talk to a professional who can share experiences of others and of other difficult times.