Investment management is often described as a technical discipline involving asset allocation, tax strategy, risk analysis, estate planning, and modeling future needs. But even the most sophisticated financial plan is ultimately acted on by human beings — and human beings do not make decisions based on data alone.
We interpret information through emotion, personal history, family experience, and beliefs about safety, success, responsibility, and control. During periods of market volatility or broader uncertainty, those forces can become especially powerful.
Emotions are not inherently detrimental to sound decision-making; they can shape judgment in ways that are helpful or harmful depending on the emotion, context, and decision involved (Lerner et al., 2015). Fear can alert us to real risk, concern can motivate thoughtful planning, and optimism can help us remain committed to long-term goals. The challenge arises when an emotional response begins to drive financial decisions without being recognized or examined.
Managing wealth well therefore requires more than technical expertise. It also requires emotional awareness and an understanding of how individuals and families respond when uncertainty activates them. This is true even among financial professionals: research with experienced traders suggests that stronger performance is associated not with eliminating emotion, but with understanding and managing its influence on judgment (Fenton-O’Creevy et al., 2011).
The Cost of Reactive Decisions
The effect of investor behavior on outcomes is measurable. Morningstar (Ptak, J. 2025) reported that, during the 10 years ending December 31, 2024, the average dollar invested in U.S. mutual funds and exchange-traded funds earned about 7% annually, compared with an 8.2% return for the funds themselves. Morningstar attributed much of that gap to the timing of investor purchases and sales.
To illustrate the effect of compounding mathematically, even relatively small differences in assumed annual returns can produce materially different ending values over long periods. On a $10 million portfolio, the difference between earning 7% and 8.2% over 20 years exceeds $14 million, before taxes, fees, withdrawals, or contributions.
The lesson is not that investors should never make changes. It is that decisions made primarily to relieve discomfort may alter long-term results. More information does not always improve judgment, either. Constantly monitoring markets can create more opportunities to witness fluctuations — and to react to them.
Why Uncertainty Feels So Urgent
Market declines, political instability, geopolitical conflict, business disruption, and family transitions can all register as threats. The body may respond with tension, disrupted sleep, racing thoughts, irritability, or an urgent desire to check accounts and headlines.
This response is human. When the brain detects possible danger, its protective systems mobilize quickly. In short, we usually feel first and think second.
That sequence is useful when a threat is immediate. It is less useful when the source is a market fluctuation, a troubling headline, or an event over which we have little control. A sense of urgency can then be mistaken for evidence that urgent action is necessary.
An investor may feel compelled to sell, hold excess cash, concentrate a portfolio, accelerate or stall a wealth transfer, delay a family conversation, or revise a well-considered plan. The action may provide short-term emotional relief without improving the long-term outcome.
The goal is not to eliminate emotion but to prevent a temporary emotional state from quietly rewriting a long-term strategy.
Common Biases in Wealth Decisions
Behavioral biases are mental shortcuts that affect everyone, including sophisticated investors, executives, and trustees. Several become particularly influential during uncertainty:
Loss aversion makes losses feel more consequential than equivalent gains. It can lead investors to abandon an appropriate strategy simply to avoid further emotional pain.
Recency and confirmation bias often reinforce each other. Recent events receive disproportionate weight, while people seek information that supports what they already fear or believe.
Action bias makes doing something feel safer than waiting. Trading or restructuring may reduce the discomfort of feeling passive, even when nothing fundamental has changed.
Anchoring and status quo bias can pull in the opposite direction. Families may remain attached to a prior valuation, structure, trustee, or concentrated holding even when circumstances have changed.
Overconfidence may also distort judgment when prior success creates an exaggerated sense of certainty or resistance to outside perspectives.
Awareness does not eliminate these biases, but it makes it easier to ask whether a decision is being shaped by current facts or by the way those facts are being experienced.
Wealth Decisions Rarely Affect Only One Person
For families of significant wealth, financial choices carry emotional and relational meaning beyond portfolio performance.
The beliefs people bring to those choices do not develop in isolation. They are shaped over time by what family members say about money, what they avoid discussing, the behaviors they model, and the experiences they share (Gudmunson & Danes, 2011). These patterns can influence not only financial behavior and well-being, but also relationships and other dimensions of well-being across the life course (LeBaron & Kelley, 2021).
A parent’s desire to preserve capital may reflect memories of financial instability. A child’s request for transparency may be interpreted as entitlement when it is actually an effort to understand future responsibilities. One sibling may view a concentrated family business position as an expression of loyalty, while another experiences it as unacceptable risk.
These are not merely investment disagreements. They are questions about identity, fairness, trust, independence, responsibility, and belonging.
Effective wealth management creates space for two questions:
- What is financially prudent?
- What is emotionally, relationally, or developmentally at stake?
When families overlook the second question, emotion does not disappear. It often influences decisions indirectly through avoidance, urgency, conflict, or resistance.
A Framework for More Grounded Decisions
When uncertainty is high, families and individual investors can pause before making a significant change.
Notice: What is happening emotionally and physically?
Name: What outcome am I afraid of, and what story am I attaching to this event?
Separate: What has objectively changed, and what merely feels different? Have liquidity needs, taxes, spending, health, family obligations, business exposure, estate planning goals, or the time horizon changed?
Regulate: Step away from financial news, wait a predetermined period, speak with an advisor, or write down the rationale for the proposed action.
Return: What did we decide when conditions were calmer? What do the investment policy, estate plan, family agreements, and long-term objectives suggest?
Respond: If something fundamental has changed, act deliberately. If it has not, tolerating discomfort may be more productive than modifying the plan.
A particularly useful question is:
Am I solving a financial problem, or am I trying to make an uncomfortable feeling go away?
Build the Emotional Plan Before It Is Needed
The best time to prepare for volatility is not in the middle of it. Families can agree in advance on what circumstances justify changing strategy, how often portfolios should be reviewed, who must be consulted, how much liquidity is needed, who has decision authority, and how disagreements will be addressed.
These agreements reduce the likelihood that every unsettling event becomes a referendum on the family’s strategy. Advisors can also add perspective by helping clients assess whether remaining aligned with a well-considered plan remains appropriate when emotions run high.
Managing wealth well means combining financial skills with the ability to recognize when fear, confidence, identity, or family history is influencing a decision. Families that develop both forms of intelligence are better positioned to navigate volatility without allowing temporary circumstances to determine permanent outcomes.
For full list of disclosures, please see cressetcapital.com/disclosures.
References:
Fenton-O’Creevy, M., Soane, E., Nicholson, N., & Willman, P. (2011). “Thinking, Feeling and Deciding: The Influence of Emotions on the Decision Making and Performance of Traders.” Journal of Organizational Behavior, 32(8), 1044–1061. https://doi.org/10.1002/job.720
Gudmunson, C. G., & Danes, S. M. (2011). “Family Financial Socialization: Theory and Critical Review.” Journal of Family and Economic Issues, 32, 644–667. https://doi.org/10.1007/s10834-011-9275-y
LeBaron, A. B., & Kelley, H. H. (2021). “Financial Socialization: A Decade in Review.” Journal of Family and Economic Issues, 42, 195–206. https://doi.org/10.1007/s10834-020-09736-2
Lerner, J. S., Li, Y., Valdesolo, P., & Kassam, K. S. (2015). “Emotion and Decision Making.” Annual Review of Psychology, 66, 799–823. https://doi.org/10.1146/annurev-psych-010213-115043
Ptak, J. (2025). “The More Investors Traded, the Less Their Average Dollar Made.” Morningstar. https://www.morningstar.com/financial-advisors/volatility-bedevils-fund-investors