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Plan Well, Retire Well

Saving and investing your money

People So Fearful They Do Not Take Action on Their Finances

At the Financial Planning Day held here at the University of Illinois on October 8, 2010, Thomas Howard of Harris Investor Services and President of the Illinois Financial Planning Association stated in his remarks that he sees a "public so fearful that they do not take action" with respect to their finances. The U of Illinois Department of Agricultural and Consumer Economics Financial Planning Program sponsored the day, which involved professionals from around Illinois as well as financial planning students from the University of Illinois at Urbana-Champaign and from Eastern Illinois University. Can people be so afraid of the markets that they are paralyzed from taking sound financial steps? What should you do if you think you might be scared to inaction?

First, fear is a reality and there is plenty of it around these days. Psychologists and economists note that fear, like other dimensions of the emotive systems, can play a big role in financial behaviors. The result can be a sort of paralysis and inability to make difficult decisions because of worry about potential bad outcomes. We know that too much stress from fear can make decision-making abilities function poorly. We also know that the fear emotion originates deep in the center of the brain in the amygdala region, where it can have an automatic and strong effect in some circumstances. We also know that the emotive or affective processes have a strong impact on "go/no go" decisions and motivations, as well as on avoidance behaviors. Psychologists also have observed the close link between emotions such as fear or anger and physical states such as hunger or thirst or sexual desire. An extremely important human capacity is the capacity to regulate emotions such as fear or anger. We also know from behavioral economics research that professionals (for example, foreign exchange traders) learn to moderate their emotional reactions to market events, maintaining a calm outlook even when prices drop or increase sharply. Behavioral economists and psychologists also emphasize the way that emotions or the affective system are primary in driving behavior, compared to our cognitive processes of analytic thinking (cost-benefit type calculations). A last dimension of emotions is that their impact can be experienced over a very long time. For example, people who lived through the depression of the 1930s have the reputation of being more thrifty and cautious with their finances because of the strong impact of that time period on their behaviors. The short of it is that fear is a real and important dimension of financial behavior.

What can a person do if he or she can't make a financial move due to fear? There are sound money steps that make sense in any market and at anytime. They include:

  • Reviewing your financial goals and revising them if necessary and recommitting yourself to meeting them.
  • Building up your emergency fund of cash in case a car breaks, you lose your job, or another problem hits.
  • Speaking with a trusted financial professional (see our recent post on choosing a financial professional) who has seen it before and remains steady through the difficult times.
  • Taking a small step such as increasing your contribution to your 401(k) or IRA each paycheck.
  • Making a move to increase your human capital through working on a new job skill or ability.

Hopefully, steps such as these, along with a renewed appreciation for the way fear can affect our decision-making and behaviors, will help you move forward and not suffer financial fear paralysis.

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