Scenario # 2: Kyle has a carefully-constructed financial plan that he and his planner have used for the last decade. However, the current recession is causing him some added angst. Stan, his financial planner, can’t seem to understand why. After really trying to get at the root of Kyle’s stress, he finally explained his core issue. His net worth had dropped below $1 million in assets. Even though this was and arbitrary number, and Kyle’s subsequent net worth dipping below this value had no impact on his overall financial plan, he pushed the panic button. He demanded that Stan sell all of his assets and move into cash. Additionally, Kyle was going to put his house on the market and move, even though real estate prices were also depressed and moving was not one of his personal goals. Stan tried to get Kyle to understand the mistake(s) he was about to make, and that his net worth falling below a certain amount was inconsequential, but he just would not listen and forced Stan to sell his holdings. Kyle subsequently put his house on the market, sold it for about 25% less than what he paid for it five years prior, and moved to a remote town in Tennessee, where his “cost of living” would be lower (although he did not really want to move there personally).
1) What behavior/bias is present? 2) Why is this behavior detrimental? 3) What could have been done differently, or what could be done differently next time to avoid this result?
Answer:
1. In above scenario Kyle is nervous about his current financial position and is taking quick decisions without knowing their further consequences. Kyle is facing an anxious behavior.
2. Kyle's behavior is detrimental as he's not giving a deep thought for his decisions and is taking quick actions. Such quick actions can further land Kyle in a big problem. Instead repairing the past mistakes Kyle was about to make future mistakes only because of being anxious and depressed.
3. As Kyle had constructed a financial plan for last decade as per then market conditions, he should have further constructed a financial plan as per current market conditions and situations. The current recession, real estate drop etc should have been considered for constructing current financial plan. Market conditions change and so should be the planning. Adapting the situation would have created less trouble for Kyle.
Scenario # 2: Kyle has a carefully-constructed financial plan that he and his planner have used...
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