How Fear Plays a Part in Financial Indecision

Have you ever procrastinated about a financial decision you had to make? Or felt anxiety, stress or even had a panic attack at the thought of making a change to your finances? For some, the thought of consolidating their pensions, committing to start investing or making a significant financial decision for their business, is terrifying, so terrifying that the decision is avoided, and instead they do nothing.

Financial decisions are a part of our daily lives, and unless you are in a position where someone else makes them for you, this is something you cannot get away from. Some of the most significant financial decisions you may have to make include buying your first home, taking out a student loan, or deciding to get a divorce – they can all be rather costly! In business, major financial decisions include whether to finance the business with debt or equity, pay a bonus this year or offer office-based or offer hybrid working.

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The Fear of Wrong Decisions

Decidophobia, a term introduced by Walter Kauffman, a philosopher at Princeton and Harvard universities, describes the fear of making the wrong decision. Decidophobia is often experienced by intense paralysing feelings such as panic attacks, and increased dependence on others to make decisions.

Applied to finance, those with this phobia are afraid of making finance-related decisions. This may present itself as inaction, avoidance, or deliberate ignorance – purposefully ignoring information. One may avoid auditing their debts to ascertain whether debt consolidation is a good idea or in business, procrastinate exploring financing options to fund their working capital. Deliberate ignorance may come as a result of a cost-benefit analysis - comparing the negative feelings of making the wrong decision (cost) against the benefits of the potential action – concluding that the costs are too big.

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Why We Fear Financial Decisions

When you fear the right things, you prevent harm and are better prepared to deal with threats in your environment – fear is not all bad. Fear becomes a problem, if it begins to prevent positive progress, cause mental problems, and negatively interfere with everyday life.

Fear of Losing Out

An example of a commonly feared part of life is the fear of losing something, known as loss aversion. Loss aversion is the phenomenon where people feel the pain of losing, twice as much as the pleasure of gaining the same thing. The drive to avoid losses results in people making decisions and behaving in undesired ways such as lying, manipulating, and sticking to the status quo.

Loss aversion could present itself in conjunction with other desires, such as the desire to fit into a social group.

Loss aversion could present itself in conjunction with other desires, such as the desire to fit into a social group. The decision to begin saving for an emergency fund or start investing may be stressful if you worry that you will no longer be able to live a life that matches your social circle. Here you may fear losing connection, feeling belonging, and identity issues. In business, the endowment effect may prevent a business director from deciding to end a poor-performing project out of fear of not matching the income elsewhere.

Learned Behaviour

The dread of taking charge of your finances may be due to learned behaviour, for example, from watching others not take control of their money. If you were raised in an environment and witnessed a parent or guardian leave all financial responsibility to another partner, you may have taken on this approach to money management and fear doing it yourself. Many relationships see one partner have the sole responsibility for their finances, although this may not be in the best interest of the household – the fear of responsibility may prevent pragmatic decisions from being made.

Subordinates often observe their managers on how to complete tasks, manage projects, and go about decision-making. If you are managed by someone who avoids financial tasks or lacked confidence, you may learn to work in a similar way - thinking it is normal to pass the responsibilities on to someone else.

Too Much Information and Too Many Choices

Cognitive overload is a well-known occurrence experienced when people are presented with too much or unclear information. The brain’s working memory struggles to process, compare and make decisions. For example, the terms and conditions accompanying a mortgage illustration are extensive and can be easily overwhelming, resulting in inaction and not proceeding with the process.

Ambiguity about how to choose between options and know which is the optimal choice can cause overwhelm and paralysis.

Choice overload is a similar concept but differs in that excessive choices are the cause of the struggle. Ambiguity about how to choose between options and know which is the optimal choice can cause overwhelm and paralysis. You may fear making the wrong choice, looking silly or losing out. The lack of clarity on the differentiating factors may be a result of insufficient information, and can cause frustration and stress – this often results in people staying with the default option.

Low Financial Capability

We may also fear making finance-related decisions due to our limited knowledge. Lack of financial skills training, within the workplace, hinders good decision-making as one simply does not know what to do. Non-finance staff are often required to make important financial decisions including project management, budgeting, and pricing, and end up making subpar choices that often go unnoticed. The risk here is the missed opportunity of higher margins, unnecessary expenditure and unbilled work.

Talking about money is widely a taboo subject, making it easier to simply bury our heads instead of seeking support or training. Outside of work, money and what we can buy with it is often a common method of signalling to our peers and reinforcing our right to be included. Financial avoidance, fear and stress within the home can cause unsustainable finances, ill health and other mental issues.

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How to Prevent Fear from Keeping You Stuck

Fear can creep up in a range of ways and keep you paralysed in the same spot for too long. This can cause you to miss out on good opportunities, increase profits, or improve inefficiencies. Below is a whistlestop list of suggestions to help reduce the fear of dominating financial decision-making:

• Make shared decision-making normal: Some financial decisions require complicated information to be assessed which may prevent those with low financial confidence from getting involved. Create working groups in the workplace, encouraging collaboration. At home, partner on various financial aspects, and make it normal to do the household finances together.
• Create space for learning and growth: Many of the people handling finance in the workplace are not financially trained. Cultivate an environment that encourages learning and is safe for those lacking knowledge to speak up.
• Simplifying options: Provide a summarised list of options with key features emphasised. This will help make the important information salient and easier to compare.

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Take Away

The fear of making financial decisions could be a result of not wanting to lose out on something, low financial capability, learned behaviour or information and choice overload. You may have subconsciously decided that the negative feelings you associate with the decision at hand are more costly than the potential benefit of taking action - therefore decided to leave things as they are.

The most damaging consequence of fear taking control of your finances is the lack of a conscious decision being made. You must realise that not acting and leaving things as they are is a decision with its own costs. For example, deciding not to consolidate your debt may mean continuing to pay high interest, instead of a lower interest rate. 

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I'm Krystle McGilvery, a behavioural finance specialist, Chartered Accountant and CBT Coach. My work tackles financial illiteracy, poor financial decision-making and low confidence. Visit Mind Over Money to find out more about my work with organisations. Or learn more about me here.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.