3.4 Putting off the decision can be a (bad) decision
Finally, a common weakness when making decisions is inertia – meaning it’s always easier not to make a decision rather than make one and find out you chose wrongly. Try this activity.
Activity 5 Inheriting money
Imagine you inherit £20,000. The inheritance comes to you in the form of £5,000 in cash and £15,000 in shares. Would you:
- Use the cash to buy more shares?
- Make no changes?
- Sell some shares to increase the amount of cash?
Did you select ‘no changes’? If you did, it’s not unusual. That’s because we all have a tendency towards inertia. That means we tend to feel uncomfortable making changes and so often stick with existing arrangements even when they might not be the best option.
To help people deal with the problem of inertia when it comes to financial decisions, policymakers have become very interested in the idea of giving us a ‘nudge’. This is a way of structuring financial choices so that people, while still free to choose, are steered in a direction that’s likely to be best for them. A recent example has been the introduction of workplace pension schemes. Here employees are automatically enrolled onto pension schemes unless they take action to opt out. So here inertia – taking no action – means employees become pension scheme members and start to build up their own savings for their retirement.
If you did select ‘no changes’ you may also have been manifesting your risk appetite too, preferring to keep the portfolio as it is rather than taking on more risk by investing more in shares.
As you’ve learned in this section, we have to be aware of, and try to overcome, certain biases when we’re trying to make the best financial decision. But it’s not just about being rational – we all have emotional pressures that may influence us to spend, or to choose one particular product over another. In the next section, you’ll look more closely at these emotional pressures.