Changing Your Mind. Are You in Control?

Last week I was privileged to attend and speak at the Kosher Money event in Lakewood, New Jersey. I was definitely one of the top two speakers, only to be outshined by Rabbi Naftali Horowitz, Managing Director, Senior Portfolio Manager at Morgan Stanley Wealth Management. Mind you, I can say that confidently, as we were the only two financial speakers. Rabbi Horowitz was the keynote speaker and spoke on the topic of “Your Money and Your Mind.” As readers of this column know, it is one of my favorite topics.

During his presentation, Rabbi Horowitz explored the concept of cognitive biases and their profound influence on decision-making. Cognitive biases are like tricks our minds play on us, causing us to make decisions that might not be completely rational. These biases can irrationally influence our judgments, perceptions, and decision-making abilities in ways that can be predicted.

One of the cognitive biases Rabbi Horowitz highlighted was Representative Bias. This bias occurs when people make judgments or decisions based on stereotypes or prototypes, relying on faulty or incomplete information instead of objectively considering relevant data. This often leads to inaccurate conclusions. For example, we might make investment decisions based on hunches, affinity, or stereotypes, leading to poor outcomes.

Another common cognitive bias is Mental Accounting. This bias refers to our tendency to treat money or resources differently based on their origin, context, or purpose. We might be cost-conscious when making significant purchases but relaxed when spending on smaller items. The “house money effect” comes into play when people become frivolous with windfall money but careful when spending hard-earned income. Two great examples are how most people will spend more when using credit cards than when they use cash. The second is why many people carry credit card and HELOC balances while keeping excess savings in the bank.

Regret Aversion is yet another cognitive bias that influences our decision-making. This bias makes us overly cautious and hesitant to take risks to avoid future feelings of regret. As a result, we might stay on the sidelines in the face of market moves or hold on to losing investments for too long, hoping to recoup our losses. This fear of regret often prevents us from making logical and timely decisions. Rabbi Horowitz cautions that this often leads to adopting a “herd mentality,” assuming others are doing the same.

Anchoring was another cognitive bias discussed. This bias occurs when individuals heavily rely on the first piece of information encountered when making decisions. This initial information becomes an “anchor” that influences subsequent judgments, even if the anchor is irrelevant or misleading. We might cling to outdated beliefs or refuse to adjust our financial strategies based on new realities, leading to missed opportunities. A good example could be those who believe home prices will soon crash or that interest rates will continue to rise.

Using Rabbi Horowitz’s guidance, here are some of my suggestions to make better financial decisions and counteract cognitive biases: Seek independent information by relying on base rate facts and unbiased sources to avoid Representative Bias in investment decisions. Take a holistic approach to your finances, avoiding mental accounting traps and recognizing the fungibility of money, understanding that each financial decision affects the bigger picture. Embrace the natural emotion of regret, acknowledging that it might not hurt as much as we fear, and prioritize evidence-based reasoning over emotions for improved long-term outcomes.

Lastly, cultivate an open-minded attitude, willingly adapting to new realities and freeing yourself from anchors that keep you rooted in the past, ensuring successful financial decision-making through flexibility and openness to change. As we change our minds and challenge these biases, we unlock the potential for better financial choices and a more prosperous future. PS, to hear more of Rabbi Horowitz, visit Kosher Money on YouTube or wherever you listen to podcasts.

Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].

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