Imagine strolling through your favorite supermarket on a Sunday evening after finishing a game of soccer with your friends. You’re worn out, hungry, and the air is filled with the tempting aroma of freshly cooked pastries. As you pass the second vendor he is frying up some crackling crispy pork, your mouth waters at the thought of biting into it. Your stomach is screaming “Yes!” and before you even have a chance to weigh the pros and cons, you find yourself buying some. This instinctive, visceral response is a prime example of the affect heuristic, a mental shortcut that lets your emotions guide your decisions in less time than it takes to blink.
This scenario was my reality last weekend as we drove home from my boys’ soccer practice. I was saying yes to just about everything my stomach or kids asked for. We made an unplanned stop at the Asian supermarket to check if they had Monaka ice cream sandwiches (I’m addicted to these things) and instead came out with crispy pork, steamed buns, cheesy ramen, spicy ramen, an Asian version of Pringles, fake crab, and hot dogs. All the while our original plan after soccer practice was to head straight home for dinner.
In a world teeming with information and choices, the affect heuristic is our brain’s way of saying, “Why overthink it? Just follow your gut.” But don’t let the simplicity of this shortcut fool you; it can shape our choices, perceptions, and judgments in both delightful and deceptive ways.
Now, here are 11 financial examples of the affect heuristic at work in a deceptive way:
- Feeling Pain: You might change financial advisors because the value of your investments dropped, and the pain of feeling loss triggers you to take action, whether warranted or not.
- Feeling Good: You make impulsive purchases because they provide immediate emotional gratification. This could be as minor as grabbing a piece of candy off the shelf while checking out or as major as buying an SUV that’s not in your budget and won’t fit in your garage.
- High Stress: You get stressed out listening to a salesman share the odds of an upcoming market downturn and it leads you to buy an annuity from him. Well that annuity pays him a 15% commission of which guarantees you a 15% loss on your investment and the inflationary erosion of your payments purchasing power for years to come.
- Busy and Annoyed: You purchase rental car insurance because the service representative is annoying you, forgetting that your credit card has the same coverage.
- Windfall Carelessness: A startup investment pays out 25 times your initial investment, and your exuberance leads you to spend the payout on a new boat. Six months later, you have to sell your boat to cover the taxes on the payout.
- Selling Winners Early: You sell stocks that have quickly gained value because you feel a strong emotional drive to taking profits, even if a more rational analysis suggests you should hold for potential long-term gains and a guaranteed lower tax rate.
- Real Estate Purchase: You purchase a house that you feel emotionally connected to when touring it, even if the price is high, it stretches your budget, and it isn’t a financially prudent choice.
- Fear of Missing Out: You invest in a specific asset or market trend based on your buddy’s opinion solely because you fear you will miss out on potential gains, without researching or understanding the investment.
- Charitable Giving: You donate to causes that evoke a strong emotional response, such as those involving cute animals or adorable children, without assessing the effectiveness or impact of the organization.
- Inheritance Decisions: You may make emotional decisions regarding inherited assets based on how they make you feel, such as selling or keeping sentimental family properties, instead of making objective financial choices.
- Car Problems: You trade in your old vehicle and buy a new one because you were upset at dealing with an unforeseen repair. You overpaid and the decision may have changed if you had taken the time to work through a decision process.
Do any of these examples resonate with you? The affect heuristic is an inherent part of our human nature, deeply ingrained in our DNA as one of the 315 human behavioral biases we possess. While it is perfectly fine to rely on our instincts when making less critical decisions, for the more impactful ones, you may want to consider utilizing a decision quality process.
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