Happy New Year, everyone!
This post is part three in our decision-making series, “Are Your Clients Really Irrational?”
Sometimes, even an “easy” decision can be emotionally difficult if the stakes are high enough.
And if the decision seems easy, but the stakes are high enough, a good decision maker might well pause and wonder whether he is missing something.
For example, each year many people have the opportunity to decide what state to live in. For most people, the decision of where to live depends on more than one factor. But for some, state income taxes can be an “elephant in the room.”
Consider, for example, a married couple who like the Pacific Northwest, and earn a combined $500,000. If they decide to live in Oregon, they would pay about $44,000 in state income taxes.
Everything else equal, if they live in Washington, they’ll pay zero state income taxes.
Over a twenty year period, the difference in state income taxes could easily amount to $1 million dollars. That’s high stakes for most people.
One reaction to that difference might be something like “what’s the catch?” A million dollars is a lot of money. Consider someone who has no other reason to prefer one state over another, and for whom saving a million dollars is a no-brainer. That person might still pause, because the amount is so large, and take a second look to be sure he’s not missing something obvious.
These kinds of “no-brainer” high stakes decisions can arise in many different areas. However, taxes seem to bring them up often. One reason is that there are so many taxes, the tax laws can be complicated, and some tax laws seem designed specifically to tax people who don’t stop to consider that they might not have to pay as much tax if they choose “A” instead of “B.”
“High Stakes Paralysis”
“High stakes paralysis” is the condition of indecision that some people face when they must make a decision which is clear and easy, except for the fact that the stakes are high.
Most people who encounter “high stakes paralysis”, almost by definition, only encounter it a small number of times. This is either because they rarely face high stakes decisions, or because if they face many high stakes decisions, they become comfortable making high stakes decisions.
Hidden Insecurity?
Some clients will not admit to you that they are afraid to make a big decision, or that they believe they are not really competent to make a big decision. Instead, sometimes these clients will avoid making a decision, or they will offer supposed reasons that are in fact merely excuses. If you take those reasons at face value, you are probably wasting your time, because those reasons are excuses, and as soon as one is answered the client will generate another. All because the client cannot, or will not, admit that he is just stumped.
Dealing With High Stakes Paralysis
In dealing with high stakes paralysis, the first step is to clarify that it is in fact the high stakes, and not some other aspect of the decision, that is giving the decision maker a hard time.
As noted in the first part of this series, there are typically five factors that can make it hard for people to decide. In addition to high stakes, the others are:
Conflicting Goals
Complexity
Uncertainty about outcomes
Small differences between outcomes
To help a client dealing with “big decision” paralysis, who is privately afraid of making “the wrong” decision, walk through his issues with him. While all decisions are likely to have several factors making them hard, if you can identify the key difficulty your client is facing, you are in a better position to help him get past that difficulty.
Once you identify high stakes as the key issue, the next task is to get the client to discuss what he’s afraid of.
Is he afraid that there’s a hidden “gotcha?”
For example, someone who moves from California to Texas, looking forward to eliminating his state income tax, might not believe that it is so easy. In addition to consulting with a state tax expert, you might note that the US census bureau reported that between April 2020 and July 2021, over 300,000 people left California for lower tax states. There are costs – such as the cost of missing friends, the cost of moving, of making new friends, and so on. But your client probably already understands those. But he might still be worried that he’s missing something crucial.
If neither you nor the client can identify the “hidden gotcha” but the client is still afraid, try to help the client understand that not making a decision is not free. Every year the client lives in California, instead of Texas, he pays a ton of extra taxes; taxes that are in effect optional. Of course it’s your client’s choice to pay extra taxes. But just make sure that the client owns his decision to pay more taxes.
Non-Decisions Are Usually Costly Decisions
The above example of someone not moving because he won’t make the decision is typical of non-decisions.
Non-decisions are in fact decisions, and often lousy ones. You cannot make your client make a decision. But you can at least try to make sure the client knows that a non-decision is still a decision, and one that he’s responsible for.
As a result, the client is likely to get relatively lousy outcome, compared to what is possible with even basic planning. He’ll pay a ton of tax, he’ll accomplish zero estate planning (meaning he’s teeing up another big tax when he dies), and, ironically, he’ll have less flexibility (because he’ll have less) cash if he does choose to enter a new business.
Key Decision Skill #2 – Identify and Overcome Fear of a Big Decision
Any decision that is both hard and important is likely to have high stakes. If the stakes weren’t high, you as and advisor probably wouldn’t be involved.
Sometimes a client’s real difficulty is simply fear. If so, your client is not alone.
Alice Boyes, writing in the Harvard Business Review, advises
“Don’t be ashamed or afraid of your fear of making mistakes and don’t interpret it as evidence that you’re indecisive…”[1]
Boyes also advises not to try to eliminate fear. Most people cannot, and don’t have to. They have to act in spite of their fear, or anxiety.
Part of the advisor’s role is to stand with his client, and help the client make a fear-inducing decision.
[1] Alice Boyes, How to Overcome Your Fear of Making Mistakes, Harvard Business Review, June, 2020
We will continue to discuss key decision skills in the remainder of this series on decision making. Stay tuned to our blog for more updates.