Weekend Reading: Making Fulfilling Financial Choices by Remembering Past Experiences
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
You make hundreds of decisions daily, both big and small. When it comes to the financial decisions you make, however, what if there was a way to take a more calculated, observant approach?
Utilizing utility: This article highlights a decision-making framework which focuses on the “Utility” of your choices. The Utility aspect correlates to the potential amount of happiness that could result from a certain decision, and within this realm, various types of Utility exist. They are as follows:
📌Expected Utility: Decisions are based on subjective opinion (Example: I want vanilla ice cream because I think it sounds good)
📌Experienced Utility: How you remember the feelings when you experienced the decision in question in the past, but is not helpful in making important choices (Example: I want vanilla ice cream because I remember I had fun with my friends when we ate ice cream last week)
📌Remembered Utility: Your recollection of the decision at hand when it was made in the past, in addition to aspects that brought pleasure or displeasure, making it an effective decision-making guide (Example: I want vanilla ice cream because I remember how delicious it was and how much more I enjoyed it versus the chocolate flavor)
Intentional recollection: By incorporating the Remembered Utility framework into your decision-making process, you also create what researchers refer to as a “Peak-End Rule”. With this lens, you tend to remember past experiences in three phases: The starting event, the “peak” event and the end event.
Overall, your decisions are most influenced by the “peak” and end events, and as a result, this rule shows that the manner in which we recall an unpleasant “peak” can produce a positive reaction if the end event is perceived as more positive. An example of this might be, “It was bad for a while, but turned out OK in the end.” When it comes to navigating difficult financial decisions, this mindset can help you take the reins by identifying similar challenges that were resolved positively, and comparing the peak and end events to your current situation.
Ponder wisely: Personally, I often see financial decisions being made based on expected utility, rather than experienced or remembered utility. Think deeply and thoroughly about your position prior to executing on it.