At SineCera Capital, we are devotees of Nobel Laureate Daniel Kahneman and his book, Thinking, Fast and Slow.  In this book, Kahneman shares a number of interesting concepts in the area of behavioral finance.

According to Kahneman, the human brain has two systems – System 1, which is fast, intuitive and impulsive, and System 2, slow and analytical. The brain is basically lazy, he says, seeking “Cognitive Ease,” and prefers things that are simple and familiar. One outcome of the brain’s preference is “Question Substitution,” where, when faced with a difficult problem, we answer a cognitively easier one. Or “Base Rate Neglect,” where when evaluating the likelihood of an outcome, we overvalue what feels right and undervalue analytics. Another interesting concept is the “Sunk Cost Fallacy,” in which we hate the idea of wasting what we have already invested, whether time or money. And “Confirmation Bias,” the idea that the brain’s System 1 leads us to search for examples that confirm our previously held beliefs.

Kahneman’s “Loss Aversion” principal is one of the most important of his theories, suggesting that we are twice as likely to feel the pain of a loss than we are to experience the pleasure of a gain. Within this theory is the concept of “Reference Points,” where our starting position influences our choices. In financial terms, a reference point is a person’s current wealth. If we consider the loss of $100, starting from $1,000 makes it seem much smaller than a loss of $100, starting from $200.

Most of us can relate to these concepts, but what happens when spouses have different brain systems, or different degrees of loss aversion? In a recent article in the Wall Street Journal, “Love and Money - & How They’re Connected” (November 23, 2020), author Kate Murphy suggests that our relationship with money often mirrors our relationships with people. According to Murphy, psychological, behavioral, and neuroscience research indicates that how stable and secure you feel in your interpersonal relationships tends to mirror how stable and secure you feel about your finances.

There is a field of study in psychology called “attachment theory,” which posits that we each have an interpersonal attachment style that falls somewhere from secure to insecure. The majority are on the insecure side and exhibit behaviors ranging from anxious to avoidant. Your attachment style is uniquely influenced by your family of origin, early life experiences, and cultural influences. Depending on your background, you may associate intimacy – and money by proxy – with safety, peril, secrecy, control, prestige, power, weakness, vice, acceptance or rejection. These patterns are often established early in life and therefore highly ingrained. Because of this, most people are not even aware of their attachment issues, or those of their life partner. Conversations about money are uncomfortable in most families, so potential conflicts are usually not acknowledged.

At SineCera Capital, every new relationship begins with our Loss Aversion Questionnaire, completed by both spouses. It serves as a starting point for our investment approach for that family, and also as a framework to guide a discussion about goals and concerns. From there, we not only craft an investment strategy, but also offer help in creating family mission statements and facilitating family meetings. For at the end of day, our aim is to be a trusted, collaborative partner who will bring clarity, instill confidence and help align wealth with purpose.