We nicknamed one of our daughters “Mudge” because she suffers from early-onset curmudgeonness (which I suspect stems from my side of the family). While she is highly productive and disciplined, when something is way out of her comfort zone, she can sometimes react negatively. I was thinking about how this relates to decisionmaking and realized that each of us falls somewhere on a 2x2 matrix.

Think of the vertical axis as optimistic at the top, pessimistic at the bottom. Treat the horizontal axis as analytical to the left and emotional/intuitive to the right. If you can honestly assess where you fall on this matrix, you can develop a better understanding of how you make decisions and how they influence you.

Here is how this applies. When we think about how we spend, we are using a mental model that incorporates our current and future disposable income. Over the next several years, this calculation is going to be impacted by tax rates, wages, gifts, and investment returns.

We cannot accurately predict how each of these components will play out over the next few years or decades, but how we approach these factors will determine the life we are comfortable living. It is important to understand that we do not have answers — only biases. So no matter how rational you think you are being, you are still using guesswork.

Let’s take the vertical axis. If you are highly pessimistic, you will most likely discount future earnings prospects, investment returns, and inheritance. You probably think that taxes are only going up. Pessimists’ inclination is to save because the future is uncertain and there is so much that can happen to derail our plans.

Timbuk3 expressed the highly optimistic axis in their song, “The Future’s So Bright, I Gotta Wear Shades.” Your career is on a trajectory, you have a knack for picking investment winners, and an unknown aunt is going to leave you her fortune. Who cares about taxes?

Most of us don’t fall at the extremes between pessimism and optimism, but in trying to determine appropriate decisions, we need to be aware of tendencies. In his book, “Economics Rules: The Rights and Wrongs of the Dismal Science,” Dani Rodrik writes, “We can say an assumption is critical if its modification in an arguably more realistic direction would produce a substantive difference in the conclusion produced by the model.” The assumptions for an optimist compared with a pessimist would prove to be wildly different, therefore leading to disparate model outcomes and completely different ways to live. I was talking to one client who I showed was spending at a much lower percentage level than our model allowed, and he replied, “But I’m spending at 100 percent of my comfort.”

The other axis — analytical vs. emotional/intuitive — is more about how we justify our decisions. Clients who consider themselves to be highly analytical may use all types of data — cash flow analysis, investment research, spreadsheets analyzing insurance deductibles — to make them comfortable with their financial choices. Emotional or intuitive clients tend to base things on what feels right to them. The client spending at his comfort level is quite analytical, yet his spending decision was more intuitive.

The analytical vs. emotional side tends to be more fluid depending on the decision being made. One of our clients is analytical around small money decisions and emotional around the larger ones. She watches her cash flow carefully, pays close attention to things like eating out and buying clothes (and is quite critical of those expenses) and yet will somewhat thoughtlessly splurge on something of significance that grabs her. In modeling for this client, we have to plan for these extravagances.

Depending on where you fall in the matrix, there are things that you can do to protect yourself from biases that may negatively affect you.

Precommit. The best way to circumnavigate your spot on the matrix is by developing automatic programs. For example, clients who are high on the optimism and emotional spectrum should incorporate automatic savings programs in order to insure that they are putting away some money. They also should limit credit card use because they are likely to overspend. Clients who are high on the pessimistic and emotional spectrum need to develop ways to be better spenders. Every purchase will not lead to bankruptcy. For these types of clients, setting aside money for experiences and working with them to be sure that they spend those accounts helps overcome their inadvertent scarcity mentality.

Reframe. Depending on where you fall on the matrix, try alternative explanations for why you are doing something. If you are analytical and pessimistic, you may find yourself doing a poor job of timing the stock market. Rather than being all in or all out of stocks, commit to an asset allocation and describe your bonds as your cash flow cushion. Or when evaluating housing decisions view it as a lifestyle, rather than an investment, choice.

None of us stay in the same spot on the matrix; even curmudgeons can be excited about opportunities if they think about them differently.


Ross Levin is the founding principal of Accredited Investors Inc. in Edina.