3 Reasons Smart People Make Poor Financial Decisions

Intelligence and financial success do not make anyone immune to poor money decisions. In this video, our managing partner, Shane Tenny, CFP®, explains how overconfidence, compelling stories, and outside influences can affect our judgment—and shares a simple question that can create space for a more objective decision.

In This Video

• Why professional success can lead to financial overconfidence
• How a compelling story can outweigh probability and logic
• Why conversations, social media, and emotion influence money decisions
• A question to ask before making an impulsive financial choice

For a deeper look at the behavioral patterns behind financial decisions, read the related blog - Why Smart People Make Poor Financial Decisions 

Transcript:

[00:00:03.23] 
Why do smart, successful people still sometimes make bad money decisions? I'm talking about people who know better, people like you and people like me. I have a client, a really sharp executive, and one night at dinner, a friend pitches a startup opportunity. It's the ground floor, big possibility, could really be something, and a few friends are already in. He makes the decision to put in $50,000 of his recent bonus.

[00:00:29.28] 
A few weeks later, we're together kind of reviewing his numbers, and I point out that his wife's car loan is at a 7% interest rate. He looks surprised, and I asked, "Help me understand, why did you decide to put money into the startup instead of just paying off the car loan?" Well, he gives a slight smile and says, "Well, when you put it like that."

[00:00:50.10] 
Look, this isn't about intelligence. It's about being human. Most of the time we know what we should do, what the right thing is. We just don't always follow through.

[00:01:01.03] 
Why not? Well, there's 3 things I see all the time. Number 1, without question, is overconfidence. When you're successful in your career, in your profession, it's easy to think, I've kind of got this figured out. But being great in your lane doesn't always mean you have the right temperament to be a great investor.

[00:01:19.22] 
Number 2 is we love stories way more than math and logic. A 7% loan payoff? That's a little boring. But a startup with huge upside? That's exciting. We're often wired to chase possibility more than probability, even when probability might be the better choice.

[00:01:40.04] 
And number 3, we're influenced far more than we want to admit. Most decisions about money don't happen on spreadsheets or in an office. They happen at dinner, in conversations, when you're with friends, when you're doomscrolling, or if you're me, when you get the chance to do a one-click purchase through Amazon.

[00:02:00.15] 
Emotion can override logic any day of the week. So what do you do? Well, here's my simple tip: when you're about to make a decision that you haven't thought about for a long time, so it's a little impulsive, pause and ask yourself, what am I wanting right now? And then quickly follow it up with, " What do I want most?

[00:02:21.28] 
Confusing these two things, what you want most with what you want now, is where a lot of bad decisions start. And if you're still unsure, say it out loud to someone objective, your spouse, a friend, maybe your friendly financial planner.

[00:02:38.14] 
Smart people don't make bad decisions because they lack intelligence. We make bad decisions because we're human, and a little objectivity before you decide can make all the difference.