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B=Behavior

E=Emotions

L=Logic

In this representation of Behavior, you can substitute Behavior for that of Thought/Action/Resolution Etc. When an Emotional process begins in your mind, it is exponentiated by a random quotient on how far your mind takes the idea. Think of it like pushing the first domino; who knows how many dominos will topple, and therefore it’s an entirely random slippery slope. I call this the “What If” voice in your head; when a “What If” script runs, the random iterations are exponential. Meanwhile, the Logical process can be referred to as “If/Then” in other words, consider this a switch; it is either on or off, yes or no, action or no action. In a rational thought, the Emotional script is run at a 0, thus creating no effect, and a decision/action/resolution (Behavior) is effective, efficient, and absolute.

One of the biggest motivators of action is emotion, and one of the most destructive actions is emotion-driven decisions.

Using Behavioral Finance as a thought exercise, let’s take a look and John and Jane. Both are signing up for their retirement plan at a new job.

Jane checks a box for the contribution to her plan and is done. Her equation looked like this E=0 (Rand)=9 L=1; therefore, B=1, efficient Behavior that logically represents her situation, and she checked the box that was right for her.

John, on the other hand, was handed an enrollment kit, where he had to handwrite all of his information, including his beneficiaries, at which point his emotions began running as his mind went into a fearful thought loop about whether or not he would have enough money for his children. “What If” I don’t save enough, “What If” I lose this job, “What If” I die. Each “What If” lines up a staggering number of dominos that begin to fall. Then John gets to the contribution part of the enrollment, and What if something happens to my roof and I need a new roof, I can’t put my money in retirement, I need it to fix my broken roof, and what if the water heater goes down, isn’t that thing getting old, what if, what if, what if. John puts a number down that is emotionally driven. His equation looks more like E=6 (rand)=9 L=0 making the Behavior a blistering 10 Million.

This is quite the exponent of Behavior, but the effect of choosing a lower contribution rate than logically necessary has a blistering impact, and this equation explains just that.

In conclusion, the key to sound financial decisions is stripping the emotion out of the equation, effectively turning emotion into a 0; now, we have an equation to utilize when assessing the emotional impact of a decision.