By Bobby Reamer, MBA, CEPA®, CFP® | Founding Partner, Keel Financial Partners
We make financial decisions with our heads. At least, that is what most of us believe about ourselves.
Behavioral-finance research suggests a different story. The field, which studies the intersection of psychology and financial decision-making, has long observed that emotions can play a significant role in many important financial choices. Not because people are careless, but because human decision-making is shaped by patterns that do not always align with long-term goals.
May is Mental Health Awareness Month, and it is a useful reminder that major financial decisions often involve more than spreadsheets and projections. Recognizing the emotional dimension of those decisions is not a weakness; it is part of making more thoughtful choices and putting financial decisions in proper context.
Why We Do Not Make Purely Rational Financial Decisions
A few of the most well-documented behavioral tendencies worth knowing:
Loss aversion. Research suggests that the pain of losing money is roughly twice as powerful as the pleasure of gaining the same amount. This is why people hold onto losing investments too long, sell winners too early, and sometimes make risk-averse choices that cost them more in the long run than the losses they were trying to avoid.
Anchoring. We tend to attach disproportionate weight to the first number we encounter in a financial context, whether it is a purchase price, a portfolio high-water mark, or a figure someone mentioned in conversation. That anchor can distort every subsequent judgment we make about value.
Present bias. We consistently overvalue what is available right now relative to what is available in the future. This is why saving for retirement feels abstract and spending today feels immediate, even when we know intellectually that the future matters more.
Overconfidence. Most people believe they are better than average at making financial decisions. Statistically, most of them are not. Overconfidence leads to under-diversification, excessive trading, and the assumption that we will recognize a bad decision before we make it.
None of these tendencies make someone a bad decision-maker. They are common features of human decision-making. The goal is not to eliminate emotion from financial choices, but to better understand when it may influence judgment in ways that deserve closer review.
Where Emotions Show Up Most in Financial Planning
Market volatility. When markets drop significantly, the pressure to do something—to sell, move to cash, or change course—can feel overwhelming. That impulse is understandable. But decisions made in periods of stress can make it harder to follow a long-term investment approach, particularly when future re-entry decisions are driven by short-term emotion rather than a broader plan.
Major life transitions. Divorce, the death of a spouse, a job loss, or a significant inheritance can require important financial decisions at a time when emotional resources may already be stretched. In those moments, slowing the decision-making process and considering the broader financial picture can be especially important.
The family home. Decisions about buying, selling, or holding onto a home are often among the most emotionally charged financial choices people make. A home is not just an asset; it can also represent memory, identity, and security. Recognizing those factors can help people evaluate the decision with clearer expectations about both the financial and personal considerations involved.
Business exits. For business owners, the decision to sell is rarely only financial. A business may reflect years of work, personal identity, and family goals. Separating economic value from personal meaning can be difficult, which is one reason these decisions often benefit from careful planning and deliberate evaluation.
What Good Planning Does With This
A well-designed financial plan does not pretend emotions do not exist. It accounts for them.
That can mean building a plan that is realistic to follow, with an asset allocation aligned not only with theoretical risk tolerance but also with an investor’s real-world ability to stay committed during stressful periods. It can also mean establishing decision-making guidelines in advance, so that when volatility or major transitions arise, choices are made in the context of a broader strategy rather than in the moment.
It can also mean taking into account the full financial picture—not just a balance sheet, but goals, constraints, and the life circumstances surrounding a decision. That context can materially affect which options are most appropriate to consider.
In practice, a thoughtful planning process can help clarify what decision is actually being made and what the longer-term implications may be. Sometimes emotion highlights an issue that deserves attention; other times it can make a choice feel more urgent than it really is. The value of the process is often in bringing more structure and perspective to those moments.
A Practical Note
If you find yourself facing a significant financial decision and something feels off, if the urgency feels disproportionate, if fear or grief seems to be driving the timeline, or if you are about to do something that Future You might question, that is worth pausing on.
Not every financial decision needs to be made quickly. The ones that feel most urgent often deserve the most deliberate consideration.
If you are facing a significant financial decision, it may be helpful to pause and consider it in the context of your broader financial picture before taking action.
Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Any examples are hypothetical and for illustrative purposes only. This material should not be construed as a recommendation to implement any particular strategy or as a guarantee that any planning approach will be successful.
Financial planning is a tool used to review current financial circumstances, investment objectives, and goals, and to consider potential planning concepts that may be appropriate to evaluate. All investing involves risk, including the possible loss of principal. There is no guarantee that financial planning will help you achieve your goals.
Artificial intelligence (“AI”) tools have been used to assist with drafting, formatting, summarization, or editing this material. Any AI-assisted content has been reviewed by Winthrop Wealth prior to use. AI tools are not used to provide personalized investment advice, recommendations, or individualized financial planning analysis.
