Financial decisions, especially those made during tight economic times, are harder to make than those of previous times of prosperity. Especially dicey are tough calls that demand a difficult decision to hang on or cut the cord.
No one makes the right decision all the time, but some draw better conclusions than others. Listed below are six reasons why.
1. Good decision makers strip emotion out of the process.
The worst time to make a decision is from an emotional place, be that happy, sad, anxious, or under pressure. Emotion clouds logic. Because of that, logic cannot overlay emotion. When faced with a tough financial choice, pull emotion out of the decision.
Lay out the facts, face up like playing cards, and stare at them. Evaluate the cards. Regardless what you want, you are staring at either a good hand or a bad one, a winning one or likely loser.
Hope is not a strategy. So, as much as we might want something to work out, it does no good to try and talk ourselves into an odds-against proposition and hope it works out the way we want.
Never be pressured into making a decision from a vulnerable, emotional place. If you feel that — take time out. Get away and clear your head. Go to the gym, a yoga class, or take the dog for a walk. Clear your mind of the clutter. Get back to a balanced, even place better suited for drawing a rational conclusion.
2. Sell yourself (hard) on both sides of the argument.
Fairly analyze all options. Most of us begin the process of making a tough decision with an existing bias that favors one side of the decision more than the other. This is a fool’s mistake.
Once we have stripped emotion away from the situation, we are left with a set of facts. Take those facts and sell hard the reason why each option is best. Take those facts and turn them all opposite ways: Convince yourself why to do it and why not to do it.
This technique is called contrarian thinking. The two keys to contrarian thinking are:
- parking your existing bias, and
- aggressively selling yourself on both alternatives.
When you sell the heck out of each option, one of those stances will surface stronger logic. With it will come a more definitive value proposition.
3. Respect the difference between optimism and pessimism.
It’s wonderful to go through life from a positive place. Since an optimist lives in a place of positive possibility, a ray of hope is plenty. That said, there are times when a pessimistic view is the situationally prudent route to take.
Money is just as loyal to pessimists as optimists. The Achilles heel of many an optimist is their steadfast positive belief, generated from the steam engine of their relentlessly positive outlook on life. Optimists do not typically respect the downside risk of probability to the degree they should.
Optimists cling to the sunshine of what’s possible. Pessimists see a bad situation as a better place than what might still happen.
It is great to be an optimist but at times it’s smarter to be a pessimist. This is why “Cut your losses,” “Don’t throw good money after bad,” and “A fool and his money are soon parted,” are centuries old adages that are still quite relevant.
Flex to the situation. Don’t let unbridled optimism mask the value of a pessimistic choice. Smart optimists realize there are times in life to flex their daily styles into that of a scrutinizing, cynical, and unemotional pessimist.
4. Snoring helps.
Because big financial decisions should not be rushed, get a good night’s sleep before finalizing your choice. The “sleep on it rule” comes in quite handy in high-pressured sales environments such as car purchase decisions, home buying or selling, or investment commitments. This is also a great rule to share to those you are dealing with.
Do not be shy about explaining your process to others impacted by your impending decision.
“I’m going to study this from all angles, examine the risk and reward from both options, and then sleep on it. I’ll get back to you tomorrow, after I’m comfortable with my decision.”
This approach minimizes stress and “buyer’s remorse,” which is self-doubt that looms like Godzilla soon after a big financial decision is made.
5. Manage the Worry Circle.
Worrying about things within your control—primarily your own behaviors—are good. Worrying about things beyond your control is terrible, because those thoughts are toxic. The mind flashes those things forward to the worst possible degree that almost never happens.
Mushrooming stress in a crowded head leads to bad decisions. Invest your energy and efforts only into things you can control. Big decisions have ramifications. Study them and own the ones you can control. Waste no energy on the ones you can’t.
6. Your first loss is usually your best loss.
Whenever we find ourselves in a tight spot, we have a choice: hang on and hope for the best or cut our losses and move on.
If we hang on, there is usually a cost of continuance, which means our eventual payoff must be significantly better than it is today. The odds of this happening often grow longer, because more things — often things outside our control — have to go right in order for us to cash in.
This decision is often an optimist’s Waterloo.
Often the smart play is to make the hard call and get out. Then move on quickly. A tough call may bother you but that’s okay; a bitter decision is allowed to bother you for three days. After that, ban the negative energy from your mind. Move on to other things. Never dwell on a past decision.
When we study options from all angles and make the right decision — and recognize that the right thing and the easy thing are not always the same thing — we are free to move on.
Brighter days lie ahead. Cut your losses, move on, and focus on today and tomorrow. It’s an enlightening approach to take.