As Halloween approaches, you might be looking forward to giving yourself a fright with some scary films and spooky decorations.
Many of us enjoy horror films because exposing ourselves to fearful situations releases adrenaline and heightens our senses, creating a thrilling experience. This is especially true because we know it’s fiction and the dangers aren’t real.
However, outside of the safety of Halloween celebrations, fear can become disruptive.
While fear has an important evolutionary role to play, helping us avoid dangerous situations and take measures to protect ourselves, it can affect certain cognitive processes.
Read on to learn three ways fear could affect your decision-making.
1. Fear often leads to rushed decisions
To understand fear’s role in decision-making, consider how your brain makes choices in different situations.
Celebrated psychologist Daniel Kahneman outlined two separate modes of decision-making: System 1 and System 2.
System 1 is the fast, automatic process for making choices. This might come into play when making small, everyday decisions. For instance, if you’re driving a route that you’ve followed hundreds of times before, your brain automatically tells you when to turn, without you thinking consciously about it.
System 2, on the other hand, is a more logical, slower process. Your brain might engage System 2 thinking if you’re planning your route for a new journey or searching for a parking space on a busy road.
Fear can influence which mode of decision-making you lean towards, and with good reason. If you’re in danger, you don’t always have time to make a measured decision. Instead, you revert to System 1 thinking and make a snap judgment, so you can act quickly.
While this could help you out of dangerous situations, System 1 might lead to rushed or sub-par decisions in circumstances where you feel fear, even if you’re not in physical danger.
For instance, you might be fearful about your investments during a period of market volatility. When you see the value of your investments fall suddenly, it’s easy to worry about your future financial security.
Unfortunately, if you revert to System 1, you might panic and decide to sell before you experience further losses. This could mean you miss out on potential growth when the markets bounce back.
In this situation, it’s important to take a step back and remain calm. Then, when System 2 thinking kicks in, you can discuss your portfolio with your financial planner and decide how best to proceed.
2. Catastrophising could cause you to overestimate risk
Weighing up risk is a crucial part of the decision-making process. However, if you’re prone to “catastrophising” – always focusing on the worst-case scenario – you might overestimate risk.
For instance, you might consider downsizing your home in retirement. If you’re catastrophising, you’ll focus on not liking the new house or area. Perhaps you’ll worry that you won’t have enough space and could miss your old home.
These are all valid concerns, but downsizing might also free up funds to travel the world and enjoy retirement. You might even come to love the new area you move to.
By focusing only on the negatives, you could overestimate the risk involved with the decision and ignore the potential benefits. This could mean you are too apprehensive to make important life choices.
This mindset could disrupt your financial plan too. If you overestimate the risks involved with investments, for instance, you may stick to low-risk, low-growth options. As such, it could be more difficult to build wealth for the future.
Working with a financial planner means you can assess risk carefully, while also having the confidence to make investments that generate sustainable growth.
3. You may be paralysed by the fear of making the wrong choice
Rushed, fear-driven decisions could lead to negative outcomes. However, you might go too far in the other direction and let fear paralyse you, especially when faced with lots of options.
For example, if you’re trying to buy a new car or choose something to watch on TV, the sheer amount of choice could make you worry that you’ll make the wrong decision. So, to avoid a mistake, you might put off making any decision at all.
This often comes into play when managing your finances. If you notice that you’re receiving a very low interest rate on your cash savings, you might decide to move your wealth. Yet comparing many available accounts may overwhelm you, leading you to simply leave your savings where they are.
The same is true of investments as there are so many different products available, each of which has its own benefits and drawbacks. What’s more, you might worry about making transactions at the wrong time.
Unfortunately, inaction could cause you to hold investments that are not suited to your financial plan or miss opportunities to grow your wealth faster.
The benefit of working with a financial planner is that we can help you understand and compare all your options and overcome fears of making the wrong choice.
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We can help you face your financial fears and make important decisions this Halloween.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.