Behavioral Finance

Behavioral Finance is a practical and pragmatic way of conceptualizing the social, cognitive, and emotional factors that influence financial decisions during a divorce.

The field of Behavioral Finance has developed in recent years with a goal of understanding and explaining how human emotions and cognitive processes (particularly cognitive errors) influence the movement of stock markets. While the field was originally explored by those interested in increasing their profits in the markets, analysis of the principles of this field show there is a broad applicability to a variety of everyday settings and decisions. Behavioral Finance combines the disciplines of psychology and finance to explain why people make seemingly irrational or illogical decisions when they spend, invest, save, and borrow money. Since psychology systematically explores human judgment, behavior, motivation, emotion, and well-being, it can teach us important facts about how human functioning differs from traditional rational economic assumptions.

Financial Decisions

Modern financial experts assume people reach decisions about money through a rational decision-making process including consideration of all factors and available information. In reality, people are not nearly so rational in making such decisions.

Richard Thaler, Professor of Behavioral Science and Economics at the University of Chicago, Booth School of Business, asked this question: “How much would you pay to eliminate the risk of dying from a disease if you had an affliction with a one in 1,000 chance of killing you?” The answer was around the range of $5,000. A second question of the same group was asked: “How much would you charge to take part in a study where we exposed you to the same disease in question one?” The answers were two or three orders of magnitude larger at $500,000 or $5 million. Economic modeling would tell an economist the answers should be the same when a rational decision-making process is used. So what happened? Emotions happened. Fear happened. Cognitive processes involved in making a decision were dramatically shaped by human emotions and fear.

The study of Behavioral Finance tells us that humans often become irrational in the face of the social, cognitive, and emotional factors that affect psychological functioning during the decision-making process. Application of Behavioral Finance relaxes the traditional assumptions of financial economics by incorporating the observable human departures from rationality into conflict resolution, negotiation coaching, guidance of the decision-making process, and successful client relationships.

Why Is Behavioral Finance Important?

Declines in portfolio values and home values, and escalating unemployment have induced a fear of the unknown that is unparalleled in recent history. Unemployed and underemployed workers are in danger of losing their homes and their piece of the American dream. Workers are accessing their 401(k)s to make ends meet and wondering what effect this will have on their future retirement security. Many have lost faith in the financial markets, and belief systems have been shaken to an extent not seen in most lifetimes. This fear has urged Americans to re-evaluate their attitudes toward risk, debt and spending.

Unite all of this with a life transition as complicated, chaotic, and life-altering as divorce, and the worlds of financial planning and emotional and cognitive behavior collide.

Decision-Making During a Divorce

Most divorcing couples are engaged in a decision-making process where they can benefit from guidance, not in an adversarial contest. Family law practitioners are involved in one capacity or another as advisers in the process. These divorcing couples find themselves in the midst of one of the most highly turbulent experiences they will ever encounter. Family law practitioners can serve as conflict resolution specialists offering guidance during dissolution proceedings. Experience tells us that settlements feel more fair, are less acrimonious, and support the health of a re-formed family when the settlement decisions are made by the parties with the support of their advisers. Building ownership of the outcome is facilitated with the client's involvement in the decision-making process.

A process driven by numbers, formulas, codes, case law, and statutes leaves much to be desired for stressed divorcing couples. Some clients can be comforted by repetitive modeling of settlement scenarios and some can quiet their fears by listening to a trusted expert. Effective and rewarding client relationships require the comfort of factual data, trust in the expert, and a personal relationship reinforced by the adviser's ability to recognize and address the cognitive and emotional barriers a client faces in decision-making. If too much focus is given to the strategies, solutions, and implementation while ignoring the client needs, wants, and wishes, we risk the relevance of the advisory process and its ability to reflect the client's unique degree of reality.

The analysis and use of Behavioral Finance concepts and principles promotes divorce practitioners' understanding of how emotions and cognitive processes affect decision-making around financial issues of those involved in divorce proceedings. This in turn, allows practitioners to recognize their client's obstructions to settlement, giving them the ability to avoid those barriers and be proactive in facilitating a settlement.

How Is Behavioral Finance Applied?

In applying Behavioral Finance to client situations, practitioners must either modify their client's biased behavior or adapt to it. We discuss herein some guidelines practitioners can use to make this decision. The first step is getting to know the mind of the client you will be working with during the decision-making process.

Three Elements of the Client Mind

Every client mind is made up of three elements during the decision-making process. It is beneficial to place yourself inside the client's shoes as you assess what is taking place inside the client's emotional and cognitive worlds. Knowing the right questions to ask and how to use the answers to these questions will help to isolate the three Elements of the client mind: emotions, risk tolerance, and flexibility. Once these elements have been identified, and it is known how the client is functioning with regard to them, the practitioner can make an informed decision on how to assist the client in moderating his or her biases, or to adapt to the biases of the client.

1. Emotions

• Research has proven that a vast majority of decisions are made with the emotional side of the brain. With this knowledge, the following topics should be considered when speaking with a client about financial decisions: How does the client feel about his/her spouse? Does the client have reservations about trusting the spouse?
• Was money a topic of disagreement during the marriage?
• How does the client feel about money? Is it a tool or means of power, self esteem or even control?
• Does s/he generally worry about money?
• How did his/her parents manage money? What narratives from this example influence the client's current views and emotions about money?
• Is s/he frightened of the unknown financial future?

2. Risk Tolerance

Discussions about risk tolerance should tell the adviser if the client is more likely to be passive or active when making financial decisions. This is important because a passive client will be predisposed to a different set of biases than an active client. A determination of passive or active is often the key in determining whether to attempt to alter a client's decision-making process or adapt to it. Emotional clients are often fueled by fear on the passive end of the spectrum, and power on the active end of the spectrum. Understanding how the client arrived at where he/she is today in his/her life, career, and wealth will help determine if a client is likely to be passive or active. Here are a few questions to help start the conversation.

• How has the client's tolerance of risk and general attitude toward money changed during divorce proceedings?
• Is s/he risk averse or does
  s/he embrace risk?
• Is the client financially secure? Objectively? Subjectively?
• What kind of career has the client undertaken? Is it risky and competitive or safe and comfortable?
• Has the client risked his/her own capital in the pursuit of greater wealth?

3. Flexibility

The flexibility of a client can be determined in various stages, but it is one of the first places we will encounter cognitive and emotional barriers. If the client is actively participating, he or she takes responsibility for his/her actions, and demonstrates willingness to accept the change inherent in divorce; that is a top-notch client. If the client has not committed to being an active participant and appears averse to minor changes, there may be some work to do. The following questions will help to determine how flexible the client may be.

• Is the client committed to being an active member in the divorce process?
• Is s/he willing to make lifestyle changes?
• Is his/her decision-making rationale driven by how the children might feel?
• What changes is the client willing to undertake during negotiation proceedings? Are they dynamic?

Identifying Behavioral Biases

After reviewing what has been learned about the three elements of the client's mind, the information can be combined to place any perceived barriers on a client mind scale and use it to guide the decision about how best to work with the client to overcome his/her behavioral biases.

• Use the Emotion element to determine if the client barriers will have emotional components.
• Use the Risk Tolerance element to determine if the client is passive or active.
• Use the Flexibility element to determine if the client's barriers are cognitive in nature.

Combining the three will help an adviser determine what type of barrier the adviser may be working with and if s/he should adapt to it or attempt to change it.

Emotion-Driven Biases

Clients at either end of the spectrum will manifest emotion-driven biases. Those with a high need for security find they are afraid of losing money, and become uneasy in times of stress, making them emotionally passive (see below). Very active clients are also emotion-driven, as they seek affirmation of their power or pursue the positive feelings accompanying success. Clients in the middle of the scale experience cognitive barriers and tend to be less emotional about money. They tend to be more flexible in the decision-making process. Cognitive barriers can be overcome with education and analysis since they are often rooted in lack of information.

Classifying Clients

Emotionally Passive

Emotionally passive clients may have gained wealth through inheritance or by working in a large, stable corporate environment. They are usually conservative and not likely to have placed their own capital at risk, making them unsophisticated about financial issues. They are careful not to take excessive risk and slow to make changes. Their focus is likely on taking care of family and enhancing life through home-ownership, education, and other experiential expenses. Advisers should focus on how decisions affect emotional aspects of their lives such as lifestyle or legacy. Here are some common barriers to a client's rational decision-making process.

• Endowment Effect: They demand much more to give up an object they currently own than they would be willing to pay to acquire it. It is a bias toward an asset where ownership rights have already been established when compared with a seemingly identical item that is not yet owned.
• Status Quo Bias: They tend to prefer that things remain the same because the disadvantages of change loom larger than the advantages.
• Cognitive Myopia: They can rely too heavily or “anchor” on a past reference, on one trait, or piece of information when making decisions.
• Mental Accounting: They focus on assets as belonging to current income, current wealth, or future income. Certain parts of the community estate may be compartmentalized while the estate as a whole is neglected.

Passive Cognitive

These individuals tend to be followers. People with Passive Cognitive tendencies listen to friends and family and may act upon the advice of others without forming their own opinions or doing their own due diligence. They are the clients who will recite what they recently heard from the Greek Chorus of friends. Recent events and information are often relied upon to make decisions. These clients are likely to say “yes” quickly and regret it later. An educational approach with reinforcement to move slowly and gather all data before jumping to conclusions will serve this client best. Although the barriers are classified as primarily Emotional or Cognitive, most apply to both classifications. Here are some common barriers to a rational decision-making process for Passive Cognitive clients.

• Ambiguity Effect: These clients may avoid options for which missing information makes the probability appear “unknown.” They will choose less ideal options with certain outcomes in order to avoid ambiguity.
• Framing Effect: They tend to draw different conclusions based on how data is presented to them. This includes the tendency to ignore the fact that a solution exists because the source is seen as an “enemy,” “inferior,” or the “mental accounting” of assets as belonging to current income, current wealth, or future income.
• Cognitive Dissonance: They tend to experience conflicts between emotions, beliefs, or values; they may ignore one of the factors in order to alleviate the conflict.
• Recency Bias: These clients tend to rely too heavily on recent events and experience while ignoring other data.

Active Cognitive

Clients with active tendencies experiencing cognitive biases are contrarian personalities willing to see all angles while seeking an edge through information and education. They can be over-confident in their own abilities, and narcissistic in the way they take failures by blaming it on other factors. These clients will be quick to listen and take advice if it can be communicated in a way that respects their independence. They require collaboration, rather than advice, in reaching decisions. Here are some common barriers to a rational decision-making process.

• Confirmatory Bias: These clients tend to search for or interpret information in a way that confirms their preconceptions. Also seen as “selective perception,” the tendency for expectations to affect perception, or “selective thinking.”
• Optimism Bias: They tend to rely too heavily on a piece of optimistic information and under-react to adverse information.
• Ease of Information: They rely heavily upon available information and easily imaginable outcomes. More amorphous possibilities are ignored.
• Self-Congratulatory Bias: They tend to accept accolades for success but blame failures on outside influences. These people have trouble learning from their mistakes.

Emotionally Active

These clients are often entrepreneurial and the first in their families to create wealth. They make quick decisions and are hands-on in the decision-making process. They may be over-spenders as they consume today at the expense of tomorrow, always rationalizing optimistically that they will make it work. Advisers must stand their ground with these clients and demonstrate the effect of a decision on the family, lifestyle, business partners, or employees. Here are some common barriers to a rational decision making process.

• Overconfidence Bias: They tend to overestimate their own ability to analyze factors and the quality of their judgment of the factors.
• Self-fulfilling Prophecy: They tend to engage in behaviors that elicit results which will (consciously or not) confirm their beliefs.
• Live for Today Bias: They tend to consume today with no regard for tomorrow.
• Illusion of Control Bias: They believe they possess more control over the outcome of a decision-making process than others involved in the decision.

Overcoming Behavioral Biases

Once you have identified the client's behavioral biases, the next step is to modify or adapt some of the biases discussed. Knowing emotional biases are much harder to change than a cognitive bias, the practitioner can make a decision to begin working to overcome a client's cognitive biases and facilitate a high-quality decision-making process. Additional factors should be considered where applicable. For example, a client with seemingly unlimited financial resources can survive with a tendency to live for today at the cost of tomorrow. A party with very limited means may not be able to survive with his/her endowment bias, as limited financial resources will be directed at inappropriate emotional attachments.

The number-one priority for family law practitioners is the creation and fostering of an informed decision-making process to maximize the quality of outcomes. Understanding behavioral finance is a tool to overcome one of the most common barriers to an informed decision-making process.

Every attorney, mental health professional, financial adviser and mediator involved in the unwinding of marriages should have a working knowledge of Behavioral Finance. Cases in middle class and upper middle class families offer the best and most effective application of the concepts. Given the opportunity to recognize they have decision-making challenges rather than disputes, the vast majority of the middle and upper middle class families can avoid litigation and maximize the quality of outcomes in their divorce proceedings.

Conclusion

Advisers with Behavioral Finance expertise can assist divorcing couples by encouraging parties to engage in an informed and deliberate decision-making process. This should help facilitate resolution and settlement by helping clients recognize that they may be able to resolve their situation without resorting to litigation.

Behavioral Finance is a practical and pragmatic way of conceptualizing the social, cognitive, and emotional factors that influence financial decisions during a divorce.

The field of Behavioral Finance has developed in recent years with a goal of understanding and explaining how human emotions and cognitive processes (particularly cognitive errors) influence the movement of stock markets. While the field was originally explored by those interested in increasing their profits in the markets, analysis of the principles of this field show there is a broad applicability to a variety of everyday settings and decisions. Behavioral Finance combines the disciplines of psychology and finance to explain why people make seemingly irrational or illogical decisions when they spend, invest, save, and borrow money. Since psychology systematically explores human judgment, behavior, motivation, emotion, and well-being, it can teach us important facts about how human functioning differs from traditional rational economic assumptions.

Financial Decisions

Modern financial experts assume people reach decisions about money through a rational decision-making process including consideration of all factors and available information. In reality, people are not nearly so rational in making such decisions.

Richard Thaler, Professor of Behavioral Science and Economics at the University of Chicago, Booth School of Business, asked this question: “How much would you pay to eliminate the risk of dying from a disease if you had an affliction with a one in 1,000 chance of killing you?” The answer was around the range of $5,000. A second question of the same group was asked: “How much would you charge to take part in a study where we exposed you to the same disease in question one?” The answers were two or three orders of magnitude larger at $500,000 or $5 million. Economic modeling would tell an economist the answers should be the same when a rational decision-making process is used. So what happened? Emotions happened. Fear happened. Cognitive processes involved in making a decision were dramatically shaped by human emotions and fear.

The study of Behavioral Finance tells us that humans often become irrational in the face of the social, cognitive, and emotional factors that affect psychological functioning during the decision-making process. Application of Behavioral Finance relaxes the traditional assumptions of financial economics by incorporating the observable human departures from rationality into conflict resolution, negotiation coaching, guidance of the decision-making process, and successful client relationships.

Why Is Behavioral Finance Important?

Declines in portfolio values and home values, and escalating unemployment have induced a fear of the unknown that is unparalleled in recent history. Unemployed and underemployed workers are in danger of losing their homes and their piece of the American dream. Workers are accessing their 401(k)s to make ends meet and wondering what effect this will have on their future retirement security. Many have lost faith in the financial markets, and belief systems have been shaken to an extent not seen in most lifetimes. This fear has urged Americans to re-evaluate their attitudes toward risk, debt and spending.

Unite all of this with a life transition as complicated, chaotic, and life-altering as divorce, and the worlds of financial planning and emotional and cognitive behavior collide.

Decision-Making During a Divorce

Most divorcing couples are engaged in a decision-making process where they can benefit from guidance, not in an adversarial contest. Family law practitioners are involved in one capacity or another as advisers in the process. These divorcing couples find themselves in the midst of one of the most highly turbulent experiences they will ever encounter. Family law practitioners can serve as conflict resolution specialists offering guidance during dissolution proceedings. Experience tells us that settlements feel more fair, are less acrimonious, and support the health of a re-formed family when the settlement decisions are made by the parties with the support of their advisers. Building ownership of the outcome is facilitated with the client's involvement in the decision-making process.

A process driven by numbers, formulas, codes, case law, and statutes leaves much to be desired for stressed divorcing couples. Some clients can be comforted by repetitive modeling of settlement scenarios and some can quiet their fears by listening to a trusted expert. Effective and rewarding client relationships require the comfort of factual data, trust in the expert, and a personal relationship reinforced by the adviser's ability to recognize and address the cognitive and emotional barriers a client faces in decision-making. If too much focus is given to the strategies, solutions, and implementation while ignoring the client needs, wants, and wishes, we risk the relevance of the advisory process and its ability to reflect the client's unique degree of reality.

The analysis and use of Behavioral Finance concepts and principles promotes divorce practitioners' understanding of how emotions and cognitive processes affect decision-making around financial issues of those involved in divorce proceedings. This in turn, allows practitioners to recognize their client's obstructions to settlement, giving them the ability to avoid those barriers and be proactive in facilitating a settlement.

How Is Behavioral Finance Applied?

In applying Behavioral Finance to client situations, practitioners must either modify their client's biased behavior or adapt to it. We discuss herein some guidelines practitioners can use to make this decision. The first step is getting to know the mind of the client you will be working with during the decision-making process.

Three Elements of the Client Mind

Every client mind is made up of three elements during the decision-making process. It is beneficial to place yourself inside the client's shoes as you assess what is taking place inside the client's emotional and cognitive worlds. Knowing the right questions to ask and how to use the answers to these questions will help to isolate the three Elements of the client mind: emotions, risk tolerance, and flexibility. Once these elements have been identified, and it is known how the client is functioning with regard to them, the practitioner can make an informed decision on how to assist the client in moderating his or her biases, or to adapt to the biases of the client.

1. Emotions

• Research has proven that a vast majority of decisions are made with the emotional side of the brain. With this knowledge, the following topics should be considered when speaking with a client about financial decisions: How does the client feel about his/her spouse? Does the client have reservations about trusting the spouse?
• Was money a topic of disagreement during the marriage?
• How does the client feel about money? Is it a tool or means of power, self esteem or even control?
• Does s/he generally worry about money?
• How did his/her parents manage money? What narratives from this example influence the client's current views and emotions about money?
• Is s/he frightened of the unknown financial future?

2. Risk Tolerance

Discussions about risk tolerance should tell the adviser if the client is more likely to be passive or active when making financial decisions. This is important because a passive client will be predisposed to a different set of biases than an active client. A determination of passive or active is often the key in determining whether to attempt to alter a client's decision-making process or adapt to it. Emotional clients are often fueled by fear on the passive end of the spectrum, and power on the active end of the spectrum. Understanding how the client arrived at where he/she is today in his/her life, career, and wealth will help determine if a client is likely to be passive or active. Here are a few questions to help start the conversation.

• How has the client's tolerance of risk and general attitude toward money changed during divorce proceedings?
• Is s/he risk averse or does
  s/he embrace risk?
• Is the client financially secure? Objectively? Subjectively?
• What kind of career has the client undertaken? Is it risky and competitive or safe and comfortable?
• Has the client risked his/her own capital in the pursuit of greater wealth?

3. Flexibility

The flexibility of a client can be determined in various stages, but it is one of the first places we will encounter cognitive and emotional barriers. If the client is actively participating, he or she takes responsibility for his/her actions, and demonstrates willingness to accept the change inherent in divorce; that is a top-notch client. If the client has not committed to being an active participant and appears averse to minor changes, there may be some work to do. The following questions will help to determine how flexible the client may be.

• Is the client committed to being an active member in the divorce process?
• Is s/he willing to make lifestyle changes?
• Is his/her decision-making rationale driven by how the children might feel?
• What changes is the client willing to undertake during negotiation proceedings? Are they dynamic?

Identifying Behavioral Biases

After reviewing what has been learned about the three elements of the client's mind, the information can be combined to place any perceived barriers on a client mind scale and use it to guide the decision about how best to work with the client to overcome his/her behavioral biases.

• Use the Emotion element to determine if the client barriers will have emotional components.
• Use the Risk Tolerance element to determine if the client is passive or active.
• Use the Flexibility element to determine if the client's barriers are cognitive in nature.

Combining the three will help an adviser determine what type of barrier the adviser may be working with and if s/he should adapt to it or attempt to change it.

Emotion-Driven Biases

Clients at either end of the spectrum will manifest emotion-driven biases. Those with a high need for security find they are afraid of losing money, and become uneasy in times of stress, making them emotionally passive (see below). Very active clients are also emotion-driven, as they seek affirmation of their power or pursue the positive feelings accompanying success. Clients in the middle of the scale experience cognitive barriers and tend to be less emotional about money. They tend to be more flexible in the decision-making process. Cognitive barriers can be overcome with education and analysis since they are often rooted in lack of information.

Classifying Clients

Emotionally Passive

Emotionally passive clients may have gained wealth through inheritance or by working in a large, stable corporate environment. They are usually conservative and not likely to have placed their own capital at risk, making them unsophisticated about financial issues. They are careful not to take excessive risk and slow to make changes. Their focus is likely on taking care of family and enhancing life through home-ownership, education, and other experiential expenses. Advisers should focus on how decisions affect emotional aspects of their lives such as lifestyle or legacy. Here are some common barriers to a client's rational decision-making process.

• Endowment Effect: They demand much more to give up an object they currently own than they would be willing to pay to acquire it. It is a bias toward an asset where ownership rights have already been established when compared with a seemingly identical item that is not yet owned.
• Status Quo Bias: They tend to prefer that things remain the same because the disadvantages of change loom larger than the advantages.
• Cognitive Myopia: They can rely too heavily or “anchor” on a past reference, on one trait, or piece of information when making decisions.
• Mental Accounting: They focus on assets as belonging to current income, current wealth, or future income. Certain parts of the community estate may be compartmentalized while the estate as a whole is neglected.

Passive Cognitive

These individuals tend to be followers. People with Passive Cognitive tendencies listen to friends and family and may act upon the advice of others without forming their own opinions or doing their own due diligence. They are the clients who will recite what they recently heard from the Greek Chorus of friends. Recent events and information are often relied upon to make decisions. These clients are likely to say “yes” quickly and regret it later. An educational approach with reinforcement to move slowly and gather all data before jumping to conclusions will serve this client best. Although the barriers are classified as primarily Emotional or Cognitive, most apply to both classifications. Here are some common barriers to a rational decision-making process for Passive Cognitive clients.

• Ambiguity Effect: These clients may avoid options for which missing information makes the probability appear “unknown.” They will choose less ideal options with certain outcomes in order to avoid ambiguity.
• Framing Effect: They tend to draw different conclusions based on how data is presented to them. This includes the tendency to ignore the fact that a solution exists because the source is seen as an “enemy,” “inferior,” or the “mental accounting” of assets as belonging to current income, current wealth, or future income.
• Cognitive Dissonance: They tend to experience conflicts between emotions, beliefs, or values; they may ignore one of the factors in order to alleviate the conflict.
• Recency Bias: These clients tend to rely too heavily on recent events and experience while ignoring other data.

Active Cognitive

Clients with active tendencies experiencing cognitive biases are contrarian personalities willing to see all angles while seeking an edge through information and education. They can be over-confident in their own abilities, and narcissistic in the way they take failures by blaming it on other factors. These clients will be quick to listen and take advice if it can be communicated in a way that respects their independence. They require collaboration, rather than advice, in reaching decisions. Here are some common barriers to a rational decision-making process.

• Confirmatory Bias: These clients tend to search for or interpret information in a way that confirms their preconceptions. Also seen as “selective perception,” the tendency for expectations to affect perception, or “selective thinking.”
• Optimism Bias: They tend to rely too heavily on a piece of optimistic information and under-react to adverse information.
• Ease of Information: They rely heavily upon available information and easily imaginable outcomes. More amorphous possibilities are ignored.
• Self-Congratulatory Bias: They tend to accept accolades for success but blame failures on outside influences. These people have trouble learning from their mistakes.

Emotionally Active

These clients are often entrepreneurial and the first in their families to create wealth. They make quick decisions and are hands-on in the decision-making process. They may be over-spenders as they consume today at the expense of tomorrow, always rationalizing optimistically that they will make it work. Advisers must stand their ground with these clients and demonstrate the effect of a decision on the family, lifestyle, business partners, or employees. Here are some common barriers to a rational decision making process.

• Overconfidence Bias: They tend to overestimate their own ability to analyze factors and the quality of their judgment of the factors.
• Self-fulfilling Prophecy: They tend to engage in behaviors that elicit results which will (consciously or not) confirm their beliefs.
• Live for Today Bias: They tend to consume today with no regard for tomorrow.
• Illusion of Control Bias: They believe they possess more control over the outcome of a decision-making process than others involved in the decision.

Overcoming Behavioral Biases

Once you have identified the client's behavioral biases, the next step is to modify or adapt some of the biases discussed. Knowing emotional biases are much harder to change than a cognitive bias, the practitioner can make a decision to begin working to overcome a client's cognitive biases and facilitate a high-quality decision-making process. Additional factors should be considered where applicable. For example, a client with seemingly unlimited financial resources can survive with a tendency to live for today at the cost of tomorrow. A party with very limited means may not be able to survive with his/her endowment bias, as limited financial resources will be directed at inappropriate emotional attachments.

The number-one priority for family law practitioners is the creation and fostering of an informed decision-making process to maximize the quality of outcomes. Understanding behavioral finance is a tool to overcome one of the most common barriers to an informed decision-making process.

Every attorney, mental health professional, financial adviser and mediator involved in the unwinding of marriages should have a working knowledge of Behavioral Finance. Cases in middle class and upper middle class families offer the best and most effective application of the concepts. Given the opportunity to recognize they have decision-making challenges rather than disputes, the vast majority of the middle and upper middle class families can avoid litigation and maximize the quality of outcomes in their divorce proceedings.

Conclusion

Advisers with Behavioral Finance expertise can assist divorcing couples by encouraging parties to engage in an informed and deliberate decision-making process. This should help facilitate resolution and settlement by helping clients recognize that they may be able to resolve their situation without resorting to litigation.