Popularly celebrated in honour of an early saint named Valentinus, Valentine’s Day is widely accepted as the period of romance and love. Second nature to the concept of love is the need to give in whatever form possible to the ones we love.
In today’s day and age, a universally accepted form of giving is to spend money on one’s loved one. As certain as the need to spend maybe, the nature and quantum of expenses incurred depend on many factors prevalent at the time. Two of such prevalent factors that influence our spending decisions are emotional and rational factors.
Traditional Finance assumes that people are rational. (Reasoning based on facts)
Behavioural Finance assumes that people are normal (reasoning based emotions)
It is interesting to note that many individuals are faced with the rational-emotional dilemma in their everyday decisions. The month of February appears to further complicate this decision-making process given the hype and particular emphasis on emotions (romance, love and affection) in the month. A typical example would be the decision to spend 70% of one’s monthly salary on a romantic evening dinner at a plush hotel with a loved one.
Rationally, an individual would take into consideration the expenses they may need to cover for the rest of the month (electricity bills, transportation expenses, rent. etc) before justifying this decision. Emotionally, the same individual’s decision will be justified solely on how romantic they would appear to their loved one given the nature of the expense they will incur at the plush hotel.
Given the nature of this decision-making process, it can make use of structured techniques, mathematics and computers in arriving at solutions.
This form of decision making comes in handy when taking high-value decisions that could have significant repercussions.
Emotional decision making, on the other hand, is based on the Instincts and impulses of the individual. An individual’s emotions are triggered when the brain interprets what is going on based on memories, thoughts and beliefs. This, therefore, triggers how the individual feels and behaves.
This form of decision making comes in handy when there is a need to make a fast decision based on very limited or unavailable facts.
Contrary to Kahneman’s book, recent research suggests that an individual can’t take decisions solely based on rationality alone, neither can the same be done entirely based on emotions. Thus, emotional and rational decisions are linked and their combined inputs lead to many of the decisions taken by individuals.
In the same vein, the decisions taken in the month of February should not just be driven by emotions but should factor in a dose of rationality. Happy Valentine Everyone!!!!
Fedorikhin, A., & Shiv, B. (1999, December). Heart and Mind in Conflict: The Interplay of Affect and Cognition in Consumer Decision Making. Journal of Consumer Research, 26, 278-292.
Kahneman, D. (2011). Thinking, Fast and Slow. New York: Farrar, Straus And Giroux.
Statman, M. (2019). Behavioural Finance, The Second Generation. New York: CFA Research Foundation. Retrieved February 10, 2020
George Ephraim Afotey Anang, FMVA is a Financial Analyst with top-notch experience in Financial Analysis, Investment Banking, Financial Advisory and Business Valuation. He holds a BSc in Banking and Finance, an MPhil in Finance, a Financial Modeling and Valuation Analyst Certification and is currently a CFA level 2 Candidate.