Our recent article on decision fatigue was very well-received. So, this week we thought we would return to the theme and shed some more light on this very important element of good financial decision making. (OK: we admit it. It also lets us run another photo of an extremely cute baby, which should get lots of positive comments as well!)
In putting the last article together, we came across a particularly interesting piece of research titled ‘Extraneous Factors in Judicial Decisions.’ The research method was as simple as it was ingenious. Eight Israeli judges hearing parole applications had their rulings tracked over time. More than 1,000 decisions were reviewed – and the results were fascinating. The researchers found that about 65% of applications heard either first thing in the morning or straight after a break were granted. The rate of granting applications then fell steadily over time, until those poor applicants whose cases were heard immediately before a break or at the end of the day had almost nil chance of being approved. Put simply, if yours was the first case heard in the morning, you had a 65% chance of being granted parole. If yours was the last case heard in the afternoon, you had virtually no chance.
The researchers emphasised that they had simply identified a correlation and stopped short of saying that judges made different decisions when they were tired or hungry. What’s more, it was later revealed that self-represented applicants had their applications heard last – meaning that it was also self-represented applicants whose applications were most likely to be rejected. Pro-judge commentators tried to argue that the judges were not succumbing to fatigue, but were simply more likely to reject self-represented applicants (although we must confess, we were not sure that this reflected any better on the judges).
Even allowing for other effects, though, going from 65% when the judges were fresh to almost nil when they were tired is a huge correlation. It also makes sense to anyone who has watched their kids’ mood change at the end of the day, when the sun has gone down but they have not yet eaten dinner! It is therefore pretty safe to say that the judges were making decisions based on an ‘extraneous’ factor – and that factor was how mentally tired they were.
What is even more interesting (and relevant to us here) is the type of decision that the judges made when their energy was low. The applications were for parole. This means that the applicant was currently in prison and the judge had to decide whether to let them out early. The risk in this decision is that the judge would allow someone out who would then reoffend. There was no such risk if the judge rejected the application. Keeping people in prison was the ‘safer’ option. Doing nothing was safe; making a change was risky.
As the judges became tired, they increasingly decided to do nothing. That is, they became risk-averse and kept things as they were. Put simply, fatigued decisions tended to be more conservative and simply maintain the status quo. The flipside of this observation is that making a positive change requires freshness and energy.
This is a really important thing to remember when making financial decisions. After all, improving our financial position usually means changing the status quo. We must actually do something. To achieve a capital gain, we have to buy an asset. To increase our super, we have to raise our rate of contributions. To be effectively insured, we have to buy life insurance. Unless our parents were billionaires, maintaining the status quo will not be much help to us.
Avoiding a decision will not make a positive difference to your financial wellbeing. To become better off, you need to do something to make that ‘better-offness’ happen. Please note that this is not to say you need to do everything! Even first thing in the morning, the judges still rejected 35% of the parole applicants. The key is to make good decisions, not just any decisions.
But the general point is this: if you never buy any investment assets, then you will never make any returns. If you never buy insurance, you will never be insured.
With no pun intended, making good decisions means taking a judicious risk. As the Israeli judges showed, your ability to take a judicious risk is better when you are rested. So, if you are finding your finances too hard to think about, ask yourself a basic question: what time of the day or week am I trying to think about them? Is it the time of day or week when I am at my best? If not, then make a deliberate effort to make a change.
This is, by the way, one of the reasons why we meet some of our clients first thing in the morning and we meet others much later in the day. In part we do this for your convenience. But in equally large part we do it so that we can be helping our clients at the right time of their day.
So, if you are a morning person, we can meet you in the morning. If you are more of a night owl, we can talk to you then. Either way, we want to help you give your finances your best attention. We want to help you make judicious decisions which lead to positive changes. And making a positive change requires freshness and energy.