Mind Over Money - Good Housekeeping Philippines (featuring Dr. Ronnie Motilla, President of P.E.R.A. Inc. )
Following are excerpts of a Good Housekeeping Philippines article (July 2017 issue) featuring Dr. Ronaldo A. Motilla, Phd, CSCLP, RP, and President of the Psychological Empowerment to Resources and Aspirations (P.E.R.A.) Inc.
It’s important to understand the role emotions play in decision-making, especially when it comes to our finances, lest they lead us to less-than-favorable situations. For instance, you might think your impulse purchases are few and far between, but if you don’t recognize and address the underlying emotions that push you to make them, you might be surprised to find yourself drowning in credit card debt one day. After all, small purchases may seem inconsequential at the time you make them, but they certainly add up.
“If you’re not aware of your emotions, that would really propel you to unconsciously make unnecessary or irrelevant expenses,” says Ronaldo A. Motilla Ph.D., a clinical psychologist, professor, and head of the Integrated Lifestyle and Wellness (ILAW) Center in Miriam College in Quezon City, and President of the Psychological Empowerment for Resources and Aspirations (P.E.R.A.) Inc., which provides financial counseling services to local and overseas Filipino workers and their families. “That’s why the question we ultimately ask our clients is: Is this purchase or decision bringing you closer to your goals? Or are you just feeding your emotions?” adds Dr. Motilla. “Emotions are really powerful and, when unmanaged, could lead you to make or break your finances.” It doesn’t stop at spending habits, though. Here are other ways emotions can affect your financial well-being.
Retail therapy is real. You don’t need to look far to find proof that people turn to shopping when they need a quick pick-me-up on a bad day. And there are surveys and studies that support it. It’s certainly not a long-term solution to whatever problems may be plaguing you at the time, but buying something you like has been proven to make you happier, at least temporarily. So in a sense, shopping could be beneficial. It only becomes a problem when you overdo it, and you spend more than you can afford.
But here’s the rub: According to research from Jennifer S. Lerner, a social psychologist from Harvard University in the U.S., sadness increase the amount people are willing to spend for a commodity, " they seek self-enhancement." In another study, Lerner and her colleagues found that sadness makes people impatient, rendering them incapable of delaying gratification.
Doesn't sound like a good combination, does it? Rather than spending a fortune on an immediate but temporary benefit, think of all the other, more rewarding ways you could appropriate your money.
Fund expert Marvin Fausto illustrates: The concept of "now versus later" is very important in terms of our decision-making. For example, you got your salary, which is really the result of your hard work. So you want to reward yourself by buying something now versus buying something later.
So if you see a P20,000 bag, you think, ‘I’ll buy the bag today because I can see it. If I save P20,000 for retirement, I won’t buy the bag now. But the bag is so concrete, and the P20,000 for retirement doesn’t really mean anything. What am I going to do with P20,000 when I retire? That’s 10 years or 20 years from now, I don’t even know where it’s going to go.’ So, the idea of ‘now versus later’ is a practice that can sometimes make your decision irrational, or not ideal.”
Meanwhile, more positive emotions like joy or happiness can help you make better decisions, simply because they usually give you a sense of contentment, and a more constructive outlook on things.
“I think you make poorer decisions when you’re sad because you want to make yourself happy,” says Fausto. But too much of a good thing can also be bad. Extreme happiness can lead you to become overconfident or optimistic about what you can or can’t afford. For example, an unexpected bonus or big commission might lead you to suddenly book an out-of-town trip for the entire family. Or the sales staff’s glowing compliments at a store might push you to buy a P4,000 dress you don’t need.
In the world of investments, being overly confident and optimistic are common behavioral pitfalls that expose investors to greater risk. “When we’re making a lot of money, or when we feel so good about ourselves, and we’re doing things right, we tend to be overconfident,” explains Fausto. “Parang, we feel we’re always right, so we make decisions based on that, and believe that they’re all going to be correct because our experience says that it is. For example, in the stock market, if the stocks become expensive, the rational thing to do is not to buy anymore. In fact, you should sell. But when you’re overconfident, you do otherwise. That is what will lead you to failure.” He continues, “The over-optimism comes when you are buying stocks even at a higher price. So you have that kind of thinking that nothing’s going to go wrong. And then, you make bad decisions.”
Dr. Motilla agrees, “Some people, because of being overjoyed, could make the wrong decisions, too. That’s why we always say, when you’re extremely happy—or extremely sad—don’t make any decisions because, more often than not, they won’t be very wise decisions. So you have to allow your emotions muna to calm down, before you make decisions.”
An ill temper can really mess things up. You know how people say hurtful things when they’re angry, but regret it once they’ve calmed down? Anger can have a similar effect on your finances.
This intense emotion can severely cloud your judgment, and thus lead you to make rash and possibly destructive decisions, before you can even think about their consequences. Perhaps you were left enraged after a temporary misunderstanding with your husband and let off steam by throwing your phone against a wall.
Once you cool down, you and your hubby will most likely talk things out and make up. But you’ll also realize that you may need to shell out some money to repair or replace your damaged phone. “So many irrational behaviors can come out of anger,” says Dr. Motilla. “Babasagin mo lahat, pupunitin mo mga titulo, itatapon mo… If you’re not aware, you’re going to be led by your anger. It’s going to eat you up, so you’re really not going to be able to decide rationally or logically.”
Moreover, another study by social psychologist Lerner, published in the Journal of Personality and Social Psychology, reports that angry people tend to seek bigger risks. Meanwhile, a study by researchers from the University of California, Los Angeles, published in the journal Cognition and Emotion, found that anger makes people more stubborn. Now, an appetite for risk can surely serve you well when it comes to investments. And hardheadedness can help you persist with your financial plans and goals. It becomes a problem when you refuse to let go of poorly performing assets, or gamble all your funds to buy only the most speculative stocks.
And then there’s fear, which is as influential as, but has the exact opposite effect of, anger. According to Lerner’s research, while angry people tend to take bigger risks, the fearful tend to avoid it. In the investment lexicon, this translates to loss aversion.
“When you have loss aversion, you prefer help you through lean elp you through lean to avoid losing over doing something to periods potentially gain the equivalent amount,” explains Fausto.
“For example, your feelings at the prospect of losing P100,000 outweigh the prospect of gaining it. So the pain of potentially losing something is so great that you just don’t want to risk it.”
Also a common behavioral pitfall, this sense of fear does not work well for investors. While there’s certainly something to be said about being cautious—taking calculated steps to reduce or balance out the potential for losses—the very nature of investing requires you to be open to risks if you want to gain great rewards.
“Because of that aversion to loss, you sometimes just don’t want to make any risky decisions at all. But in terms of investing, getting into a business, even entering a relationship, everything you do in life involves risk,” says Fausto.
Conversely, fear can help you make practical choices. For instance, the fear of losing money over, or not having enough for, an emergency will push you to build an emergency fund. Meanwhile, the fear of leaving your loved ones empty-handed can motivate you to buy life insurance.
These are wise steps to take, though it’s best to make sure you have the resources to see them through before you make any financial commitments. Often, fear—or too much of it—can also drive us to cling to things that we believe can save us, even if we don’t need them or have the funds to pay for them at the time.
Dr. Motilla illustrates, “For example, natatakot ka, ‘Baka masunugan tayo, so we have to get fire insurance.’ Or ‘Baka magkasakit tayo sa future, so we have to get health insurance also.’ So it’s really fear that’s the reason for those decisions. Although some people might say they’re practical, do you really need these things? Especially if you don’t have the capacity to pay for them now, kukunin mo pa ba sila?”
TA K E ACT I O N
Now that you’re aware of the power emotions hold over your decisions, it’s time to find out how you can manage and control them.
1 CHOOSE TO BE MINDFUL The first step to gaining control over your emotions, says Dr. Motilla, is to decide to become a more mindful person. “Any kind of change will have to start with a decision, a choice na, ‘I have to become a mindful individual,’” he says. Mindfulness is a psychological practice that invites you to pay closer attention to your experiences, and the internal reactions they elicit. It can give you a better grasp of the intangible factors that direct your thoughts and decisions. Once you’ve identified these factors, “name them,” says Dr. Motilla. “Ask yourself, ‘What am I feeling right now?’ Don’t be afraid kasi you can feel more than one emotion. Pwedeng ‘I’m anxious right now, pero kahit ganu’n, medyo may gaan ng loob pa din.’ Sometimes there’s that mix of emotions eh. So, name the emotions— kasi sometimes the emotions can be really vague for you. Pero once you have a name for them, you have a better grasp of them.”
2 BE PROACTIVE
“When you feel extreme sadness or joy, out of impulse na lang or reactivity ang decisions mo. That’s why they say, when the decision is made out of impulse, talagang hindi siya maganda,” says Dr. Motilla. “So you have to turn that reactivity into proactivity. Kasi the wave of emotions is the first thing that informs your decisions. And more often than not, you would make decisions in reaction to those emotions. So kailangan proactive versus reactive ka.”
Being proactive means giving yourself time to assess the situation you’re in, and considering the different ways you can respond to it. Mindfulness also comes into play here. Dr. Motilla illustrates, “Let’s say may nagpa-libre, kasi nanalo ka sa isang game. ’Pag proactive ka, pag-iisipan mo, ‘Teka muna, gusto ko sila i-treat, pero may budget ba ako? My budget is meant for the tuition of my son, so hindi na lang muna.’ You don’t allow yourself to just react to the demands.” He continues, “So, first, be aware of what you’re feeling. Then feel it, and afterwards, that’s the time to identify what decisions you’re going to make. When you’re mindful, it will enlighten you, and that will give you more options on how to respond, rather than being fixated on one, like spending to address your emotions.”
3 DEVELOP GOOD MONEY HABITS
When you make something, like saving, a habit, it takes the emotion out of that practice. “The only way we can take out the emotion is when we start the habit of doing one thing over and over again. Like setting aside a little percent of your money every time,” says Ryan de Vera, a registered financial planner and entrepreneur. “For example, at home, every time we earn, my wife and I put the money in jars—for our investments, spending, et cetera. Whatever happens, we just put money in these jars every time we earn. And we realized that, through this, we’re able to treat money as money. Naiiwasan namin mag-spend just for gratification.”
Meanwhile, if you ever find yourself tempted to make an i mpulsive purchase, step away from the it em, walk around, and count to ten. “’Pag parang the object is calling your name, move away from it, and
then walk around again. Count to ten, and then see if you still want to buy the item,” advises Dr. Motilla. “When you move away from the object, it cuts you from the invitation to purchase it. And it gives you another kind of neuronal connection in the brain. In other words, it diverts your attention.”
Apply these strategies and watch yourself make better choices for your finances. And if it ever becomes too challenging, just remember: Emotions are fleeting, but there are some decisions you’ll have to live with forever.
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