The most important requirement for creating and protecting wealth is good decision-making. Seems obvious, until we remind ourselves of our own costly financial missteps. And before you get too hard on yourself, consider the colossal ones made by major CEOs, almost on a daily basis (i.e. Facebook and Wells Fargo of late).
Good decision-making is not a natural thing. In fact, we must work against our natural human biases to improve the quality and effectiveness of our decisions.
In their book, Decisive, brothers and professors Chip and Dan Heath lay out a process they call WRAP to overcome our natural biases and become better decisionmakers.
Widen your Options:
What the Heaths refer to as narrow framing leads us all to overlook viable options. They say that teenagers and executives alike often make “whether or not” or binary decisions. Instead, think AND not OR and consider your increased options simultaneously, through what they call multi-tracking. We do exactly this in our planning process, by simultaneously testing the statistical confidence of every viable scenario in relationship to all the goals and priorities in a client’s life plan.
Reality test your assumptions:
When we assess our options, we tend to pick a favorite option early in the process and then collect ‘skewed, self-serving information’ to support it. To combat this bias, the Heaths encourage us to ask discomforting questions like ‘what problems does this option have?’ They encourage both zooming out to examine global impact and in to examine texture and context. Our process looks at both the global and long-term impact of assumptions on the life plan as well as the short-term budgetary, tax, and lifestyle impacts.
Attain distance before deciding:
Avoid short-term emotions that can cause us to make decisions that are bad for the long term. We practice this discipline both in our regular meetings with clients and during interim conversations that come up in life, sometimes using the model to test how implementing an option born of inspiration or fear might actually impact the plan. Other times sharing our experience is sufficient.
Prepare to be wrong:
“We are overconfident, thinking we know how the future will unfold when we really don’t. We should prepare for bad outcomes as well as good ones. And what would make us reconsider our decisions? We can set tripwires that snap us to attention at the right moments.” Our process is designed to do exactly this. When confidence in a client’s life plan drifts higher, our tripwire suggests that our client is generating more wealth than is required by the current set of goals, providing an opportunity to enhance or add goals. Conversely, a dip in confidence is an early tripwire warning that changes are required to avoid running short of funding. Most often small, we can advise adjustments that are perfectly in line with the client’s priorities and lifestyle requirements.
In the end, process helps us overcome our natural tendencies that often steer us away from our best financial choices. And that cost i impacts lifestyle as much or more than wealth. An improved lifestyle starts with better financial decision-making. Let us WRAP you and your family in better financial choices today.