Ask me the biggest challenge facing EML’s clients and that’s your answer.
Cognitive bias is the scientific explanation for the ongoing battle between our brains logical and intuitive decision making processes. It is not just us making a bad decision (we all do that!) but the systematic process of making regular poor decisions because the intuitive rather than the logical side of our brain makes the decision. Recent research in this area has identified over 150 biases covering many aspects of life and when it comes to contemplating our own ‘later life’ these biases run riot.
This is clearly seen in our management of money. Because we don’t know when we are going to die many of us opt to hold on to everything ‘just in case’. How much of an issue is this? Well inheritance tax is a voluntary tax – pass your money on seven years before you die and no tax is payable yet we estimate that over the next 30 or so years the U.K. Government is expecting to collect £500 billion via this ‘ voluntary tax’. The same issue can be seen in many different aspects of life. Our logical brain understands the issue clearly yet our intuitive brain makes the decisions – obesity, alcoholism, smoking, loneliness and hoarding all result from systematic poor decisions making.
So how does EML deal with it? Not by applying rational logic! Those affected already know they are making poor decisions but struggle to help themselves. Instead we look to ‘reframe’ the situation. Our work with focus groups found that, while the same biases apply, those with a different perspective on the situation took very different decisions.
Why do some families manage pass ‘family wealth’ down through the generations while other loose it despite both groups demonstrating the same biases. The difference, it seems, is that while most people take decisions from a personal perspective (it’s my money) the successful families (sometimes known as ‘old money’) are more detached – they all see the wealth not as their own but as ‘family money’. Often one family member will be the guardian for their generation, but they know that is a limited period of time.
Thinking this way is not guaranteed and requires all family members from each generation to participate.
The role of the ‘generational guardian’ is to be family orientated and ensure:
- that sibling have reasonable access to the funds they need
- the family wealth is enhanced as much as possible during their lifetime
- and most important, whatever happens, they pass on the wealth 7 years before they die