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Bad Decisions: How Errors in Thinking Can Impact Your Divorce Settlement

Anyone who has gone through a divorce can confirm two things: it’s an unpleasant process, and there are dozens of decisions to make along the way. Sometimes, in encountering these decisions, we make the wrong choice (or no choice at all) because of biases and shortcuts in how we think. Everyone falls prey to these misperceptions, but knowing what they are and how they work is the first step to making better, more effective decisions — especially about your divorce settlement.

If you sat down and made a list of all the biases, heuristics, errors, and fallacies that affect our thinking, it would be a very long one. This article is by no means a comprehensive list; I will identify, define, and explore the errors I see crop up most often in divorce cases. I’ll also offer some advice for overcoming these issues once you learn to identify them.

Affect Heuristic (aka Emotional Decision-Making)

A heuristic is a mental shortcut we use to make decisions quickly. Everyone uses these shortcuts constantly, because making quick decisions makes our daily lives easier. If we didn’t rely on heuristics, we would labor over every choice — deciding what to have for dinner or selecting an outfit would take hours.

One mental shortcut that can have an outsize effect on your divorce settlement is based on your “affect” — the way you express emotions or feelings. When employing the affect heuristic (or “emotional decision-making”), you’re allowing big decisions to be influenced by your emotions about an object or asset.

For example, in negotiating her divorce settlement, a wife is desperate to keep the family home. She has lived there for 25 years, raised her children there, built a life there, and feels very safe there. In reality, staying in the home will be unaffordable — she will be forced to trade investments that she could use to provide for her retirement.

To make matters worse, every visit to the couple’s long-time Financial Advisor to discuss the investing account has made her feel bored and intimidated, because the advisor talks over her head and doesn’t bother to engage her in the discussion. In her mind, the home feels safe, while the investing account feels overwhelming and esoteric. Even though the choice is clear in terms of dollars and cents, she will struggle to do what is best for her financially — because of feelings, not facts.

If you find yourself strongly considering a course of action that doesn’t make logical sense, you may be allowing the affect heuristic to overcome your more rational self.

Regret Aversion Bias

Regret aversion bias is pretty much what it sounds like — it occurs when a person has difficulty making any choice at all because they anticipate regret if they make “the wrong choice.”

Here’s the classic divorce example: one party makes a settlement offer, and instead of agreeing or making a counteroffer, the other party refuses to agree to anything…because they fear making the wrong decision.

This situation is uncomfortable for everyone. The party who made the offer is frustrated at the lack of movement, and the party who can’t accept or counter the offer is frozen with apprehension. How can a case move forward?

It’s important to realize that regret aversion bias often arises from a lack of understanding or information. This makes sense; it’s difficult to agree to something if you don’t understand what you are agreeing to.

Mental Accounting

Mental accounting occurs when we classify different pots of money differently in our heads. For example, logically speaking, dollars in a savings account are the same as dollars in a checking account. But we may have told ourselves that the dollars in the savings account are for property taxes, while the dollars in the checking account are for day-to-day expenses. We then might be tempted to think that whoever gets the house should also get the savings account to pay property taxes — even though there is no reason for this association besides mental accounting.

Another example might be a husband who does not want to “give up” part of his 401(k) account because he thinks of it as his retirement money. At the same time, he might be very willing to trade away a joint investing account. In some cases the investing account might be more valuable when you consider the impact of taxes — but mental accounting is stopping him from seeing this.

The real problem with mental accounting is that it hampers our ability to be creative and open to a variety of options for dividing the estate. 

Fundamental Attribution Error

The technical definition of this error is a tendency for over-emphasizing personality-based explanations for behaviors we see in others while under-emphasizing situational explanations. Put more simply, we assume someone does something because of the way they are, when they may be doing it because of the situation they are in.

For example, during mediation a wife is frustrated and hurt by her husband’s seemingly unfair opening settlement offer — it’s too low. She attributes this offer to his being selfish, when in reality he is lowballing the opening offer as a negotiation tactic. The wife has made a fundamental attribution error in her thinking. But now her feelings are hurt, and she may have difficulty thinking clearly as the mediation session draws out. Her counteroffer might be equally unfair, causing her husband to fall victim to the same error and assume she is greedy. If both parties remain set in their thinking, it will be a long day of mediation for both sides.

Hyperbolic Discounting

Humans don’t like to delay gratification — we want to get what’s coming to us today or tomorrow, not years from now. Because of this, we tend to value future benefits lower than benefits we’ll receive today (regardless of their actual value).

For example, in a settlement negation, say there are only two assets left to divide: a pension benefit and an investing account. One party may reason that they don’t want to wait to receive money from the pension, so they request the investing account instead. But in reality, the pension benefit is much more valuable.

As with most biases, the only way to combat hyperbolic discounting is with facts. If you can, define clearly what each asset in your estate is worth today. In our example above, it’s difficult to conceptualize the value of some future series of payments; it’s far too abstract. It’s much simpler to compare one dollar value to another. If you are determined not to wait to receive benefits, then at least make sure you are fairly compensated for the value of the future benefits you are giving up.

Anchoring Bias (Conservatism Bias)

This bias occurs when we rely too heavily on the first piece of information we receive about something and ignore newer (and possibly more accurate) information in making a decision. Anchoring bias is extremely common in everyday life. We even have an expression for it: “He has it in his head that (fill in the blank).”

Anchoring bias is often seen if there are questions about the value of a piece of real estate. For example, the first rough draft of an Inventory may show the family home valued at X amount. Maybe this was the value shown on a website like Zillow, or it could be the value shown on the property tax statement. A later draft of the Inventory might show a value of Y (which is different from X by a wide margin). That value of Y is based on a Comparative Market Analysis done by a qualified Real Estate Agent taking into account specific elements about the home not captured by the previous value assessment.

But one party already has the idea that the home is worth X and not Y. Now the parties may find themselves at loggerheads; settling their disagreement by paying for a formal appraisal will take more time and more money.

Reactance Bias

This bias can be summed up on one simple phrase: “Don’t tell me what to do!” Reactance bias is the tendency to do something different from what someone wants or asks of you in reaction to a perceived attempt to constrain your freedom of choice.

The simplest example would be when one party in a negotiation makes an offer that isn’t accepted, only because the other party wants to have their say in how things are divided. A more destructive example would be when one party files for divorce and then seeks to reach an agreement without the assistance of an attorney or mediator. If the other party suffers from reactance bias, they may refuse to engage and even drag their feet to delay proceedings as long as possible.

Reactance bias is about maintaining your control and perceived autonomy in a process that can feel very disempowering. If you are the party exhibiting this bias, you may be actively costing yourself extra money and destroying goodwill by dragging out your case or refusing to cooperate.

Thinking More Clearly

So how should we deal with these biases, errors, and mental shortcuts? The first step is building your awareness that they exist, and understanding that they may interfere with your ability to move forward. Once you are aware, the next step is to ask yourself questions in an attempt to focus more on the facts at hand. Those questions might include:

  • Why am I asking for a specific asset?
  • Does that asset really serve my needs, or is there something else driving my decision-making?
  • Why might my soon-to-be-ex-spouse be behaving this way?
  • What might be driving his or her actions?
  • Is there evidence to support my conclusion?
  • Is the evidence I’m using to support my conclusion the most valid, or are there other things I haven’t considered? 
  • What is customary or routine in a case like mine?
  • What do experts say about this element of my case?
  • If I’m unable to make a decision, is there someone who can help me think through my options?

Not every case needs the intervention of a non-attorney expert. But if you’ve asked yourself these questions, consulted with your attorney, searched your soul, and still find yourself struggling…that may be a sign you need outside assistance. An outside financial expert like a Certified Divorce Financial Analyst™ (CDFA®) or CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) may be able to provide the analysis and expertise you need to overcome some of your errors in thinking. Your attorney should be able to refer you to a trusted professional.

Truly wise decision-making is difficult in the best of times. In especially hard situations, like a divorce, we err most often when we draw a conclusion without getting enough information. Keep an open mind, ask the experts, and check yourself periodically. It probably won’t make your divorce pleasant, but understanding potential errors in your thinking can help make the process more efficient and less stressful for all parties involved.

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