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Financial Decision Making

Managing our personal finances to good effect necessarily involves us in making decisions. How can you best make decisions in a financial world that's full of choice?

If you live in the UK , you can choose between around 8,000 mortgages, 1,300 or so credit cards, and over 1,000 savings accounts.

You might be thinking that it's fantastic to have so much choice. In a competitive marketplace, that must mean that there are some sensational deals out there if only you could find a way of tracking down the best ones.

Psychologist Barry Schwartz, author of The Paradox of Choice , believes that having so much choice isn't necessarily good for us. Because of the growing number of options we are presented with, we don't always have the time to look at all the information out there to make the best choice.

Dr Schwartz asks us to think about the difference between the best and good enough. He suggests that there are two types of decision-makers: one group he calls maximisers , people who want the absolute best, and so have to examine minutely every choice for fear they'll miss out on getting the best. However, looking at all the choices is usually frustrating and takes too much time. He calls people in the second category satisficers : these are people who look at the options and choose an option that is good enough.

Generally speaking, we should strive to be satisficers because a satisficer is usually happy with their choice. In contrast, a maximiser isn't normally happy and often regrets what he or she bought.

Of course, some decisions are more significant than others. A typical supermarket carries more than 30,000 items. When we go to do the weekly shop, we are visiting a repository for non-durable goods, i.e. goods that are quickly used and replenished.

Buying the wrong brand of biscuits doesn't have huge emotional or financial consequences, because we can buy the right brand next time. But in many other settings, we are out to buy things that cost more money, and that are meant to last. And here, as the number of options increases, the psychological stakes rise accordingly.

Schwartz recounts an amusing tale about attempting to buy a pair of jeans. The choices befuddle him: relaxed fit, acid-washed, button-fly? While he doesn't place much importance on the pants he wears, he moves on to more serious questions, such as choosing the right retirement fund or healthcare programme where penury or death can result from an ill-advised selection.

So how can we make the best possible decision about something as important as our personal finances when we know that there's no such thing as the best possible decision?

The trick of it seems to be for us to sift through as many options as we can and then take our time to make the best decision we can considering all the available options we are aware of at the time . Having decided, we act.

Then, for the sake of our mental well-being as much as anything, we choose to live with our choice - for a period of time anyway. We might consciously decide to review the decision at some point in the future but we won't beat ourselves up in the meantime if it looks like better options have become available.

The important thing is to recognise that there's no such thing as a perfect, long-lasting product offering in the financial services field. So let's get used to the idea. As Clint Eastwood famously said in one of his Dirty Harry movies, 'a man's got to know his limitations'.


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