5 Cognitive Biases That Lead to Difficulty in Divorce Finances

5 Cognitive Biases That Lead to Difficulty in Divorce Finances

A cognitive bias is a systematic mistake or error in thinking that affects our judgment. Some of these biases helped our ancestors survive on the savannah, but often no longer serve a good purpose in modern life. Our brains did not develop with the amount of information that is now available to us, nor with modern systems such as finance.

A number of biases have been identified and social scientists study how they affect decision-making in a variety of areas (finance being one of them).

One of the most common reasons for bankruptcy is going through a divorce. Some of that may be due to trying to avoid financial responsibilities, but much of it happens when the finances aren’t correctly addressed during the process. By being aware of common cognitive biases when it comes to divorce, both those going through a divorce and the professionals assisting them can mitigate the effects of bias on decision-making.

  1. Anchoring

This is the tendency to rely too heavily on the first piece of information offered. Even if the information is incorrect, our brains still have the tendency to anchor to it, simply because it came first.

For example, a divorcing couple may look at their house on a popular Internet home search site and get an estimate of $400,000 for the home. However, when they bought the place, they followed the familiar adage to have the worst house is the best neighborhood they could afford. Their house is smaller and not as nice as many of its neighbors, and so they will be very unhappy when the appraiser or real estate agent informs them that it’s only worth $325,000, since they have anchored to the higher number.

  1. Rosy Retrospection

It’s very common for people to look back on “the good old days” and view the future with negativity. Especially during divorce, people may look back on the beginnings of the marriage when they were happy and long for those days to come back. This is often coupled with fear of the unknown future.

Parties in a divorce looking back with rosy retrospection may attempt to hold on to things they perceive as having participated in the long-ago joy, such as the house. If they can’t afford the house, this bias can lead them into bankruptcy.

  1. Endowment Effect

This bias is the tendency to demand more in order to give up something than what people would be willing to pay to acquire it.

The endowment effect can make divorce more difficult if both sides are fighting over an item. It often has an impact on the family home. Both sides may take ownership and be unwilling to let it go, thought this decision is often tangled up in emotions over the divorce process.

  1. Illusion of Control

There are very few things in this world that any individual has control over, and another person is not one of them.

Those who desire the return of their spouse may try to be more compliant or accommodating in terms of behavior or money. For example, they may not ask for money that is rightfully theirs, believing that will prevent he divorce from happening. However, this more often leaves them in a precarious financial situation. Like wise, there is no control over how the markets will behave, so no one can rely n the market to bring them the financial gains they need in the short term.

Recognizing what is and is not under anyone’s control is an important part of accepting reality, and can alleviate stress. Any individual can take control of their spending on any given day, week or month. Money that is set aside for a long enough period of time in some kind of investment or interest-bearing account will compound and grow. Most people can control whether they regularly set money aside for the future. Taking control of these financial decisions can help empower clients who might otherwise feel that they have lost control during the divorce process.

  1. Reactive Devaluation

Another bias common to couples divorcing is to reject proposals from someone they don’t like.

It’s true (especially but not exclusively in a hostile divorce) that one spouse will often deliberately attempt to undermine the other through disadvantageous proposals. This situation may be more apparent during the divorce, but sometimes the damage will not be clear for a number of years. If the proposal is fair, thought, there is no reason to reject it simply because the hated spouse made it. Accepting a fair and equitable settlement may cost less in the long run, and is less stressful for both sides.

Being able to recognize these biases when they crop up will help people working through divorce. It’s difficult to consider information objectively during the divorce, but it’s necessary for good decision-making.