by Keenan P. Call, JD, CPWA^®, ABFP^®, Director, Family Office Services

Traditional finance assumes people make rational decisions. However, real-world financial decisions are often influenced by an individual’s emotions, past experiences and psychological tendencies. Successful individuals and families frequently face a range of challenges that significantly impact their financial decision-making, including complex family dynamics, substantial financial responsibilities and emotional attachments to wealth.

Behavioral finance is a field of study focusing on how psychology influences financial decisions. By providing a framework to understand and define how cognitive biases and emotions affect financial behaviors, behavioral finance equips individuals to make more informed and intentional financial decisions. Without awareness and consideration of these psychological influences, financial decision-making may be less effective and less aligned with long-term objectives.

For advisors who understand common biases such as loss aversion, overconfidence, mental accounting and present bias, and recognize the critical role they play in shaping estate and financial planning, the planning process extends beyond simple calculations, projections and strategies. Instead, it accounts for the human side of decision-making and family dynamics, which experience suggests leads to a more practical and sustainable overall wealth management framework.

Loss Aversion
One of the most powerful concepts in behavioral finance is loss aversion—the idea that people feel the pain of losses much more intensely than they experience the joy of gains. This tendency can cause individuals to resist transferring assets or implementing tax-efficient gifting strategies, even when these steps would provide an overall benefit. Many individuals hold on to assets longer than necessary, fearing they may need them in the future, even when such concerns are unfounded. A well-structured estate plan can help minimize taxes, maximize family wealth and incorporate mechanisms to address concerns about financial security.

Awareness and understanding of the loss aversion bias can lead to a more effective estate plan. For instance, if there is a concern that funds may be needed in the future, a Spousal Lifetime Access Trust (SLAT) may be a well-suited strategy, because the trust structure allows the grantor’s spouse to receive distributions from the trust during their lifetime, while still optimizing tax and wealth transfer benefits. Recognizing loss aversion before or during the financial decision-making process enables individuals to make proactive choices, setting them up to retain an appropriate level of access to assets, while implementing strategies that enhance long-term wealth preservation.

Overconfidence
Another common challenge to estate and financial planning is overconfidence. Many individuals assume they can handle financial decisions independently, even when the planning process involves intricate legal and tax considerations. Overconfidence often leads to inadequate planning, creating legal and financial complications for heirs. A measured approach, incorporating thorough research and strategic foresight, can help reduce complexities, mitigate risks and maximize financial opportunities for future generations.

Mental Accounting
The study of Behavioral Finance also indicates that individuals tend to engage in mental accounting, treating different pools of money differently based on their source or intended purpose. For example, an inheritance received from a parent or other family member might be considered “sacred” and left untouched, while investment income may be freely spent. Mental accounting influences how families think about wealth transfer, philanthropy and investment decisions. Recognizing these patterns allows for estate planning strategies that align with individual perceptions of wealth, making the planning process feel more natural and intuitive.

Present Bias
Present bias, or the tendency to prioritize short-term rewards over long-term benefits, is another common obstacle to financial acumen, which can be particularly acute in the area of estate planning. Because estate planning focuses on the future, it is often postponed in favor of more immediate benefits or concerns. However, delaying these long-term planning discussions can result in missed opportunities for tax efficiency and wealth preservation. Instead of delaying longer-term estate planning, breaking the process into smaller more manageable steps makes it more approachable, thus allowing estate planning to become an integrated part of a family’s financial stewardship.

Family Dynamics
Family dynamics also play a crucial role in financial decision making. Social influences can shape how ultra-high-net-worth families manage wealth, particularly in multigenerational estates where expectations and intentions around inheritance can be complex. Because of conflict aversion and privacy concerns, some families avoid discussing estate plans altogether. Many families struggle with fairness and equalization when dividing assets among heirs. Acknowledging and addressing these concerns and family dynamics when developing an estate plan can help create a smoother transition of wealth.

The principles of behavioral finance can be incorporated into estate and financial planning in practical ways. For example, if a family is concerned that wealth may disincentivize future generations from becoming productive members of society, structuring trusts with incentive-based distributions can encourage beneficiaries to develop financial independence rather than rely solely on family wealth. The use of a Letter of Wishes and/or Statement of Intent in conjunction with estate planning can also help with communication, integration and wealth transfer concerns. Additionally, establishing staggered inheritance disbursements can help protect against sudden financial loss due to unforeseen circumstances, while allowing beneficiaries’ financial maturity to develop over time.

The Value of Family Summits
Many successful families also incorporate these behavioral finance principles in Family Summits that focus on financial literacy, social responsibility, family dynamics and open communication about wealth to help ensure each generation is positioned to manage their responsibilities wisely. By fostering an environment where family members can discuss financial strategies, shared values and long-term goals, Family Summits help bridge generational gaps and mitigate wealth transfer challenges, while acknowledging common biases and incorporating the human side of planning. For families who value philanthropy, integrating charitable giving structures, including a Family Philanthropy Plan, within their estate plans can instill a sense of purpose and social responsibility across generations.

A strong understanding of behavioral finance and its impact on decision-making allows advisors to design and implement estate and financial planning strategies that work with, rather than against, human nature. This approach fosters better decision-making, enhances financial security and helps support wealth being positioned for long-term preservation and growth. The psychology of finance is just as important as the numbers, and recognizing the reality of behavioral finance and decision-making often makes estate and financial planning more effective, sustainable and fulfilling.

As research in behavioral finance continues to evolve, its role in estate planning will become more significant. Thoughtful, well-informed choices made today can stand the test of time, ensuring wealth is preserved and managed in alignment with the values and objectives of individuals and their families. Your Oxford team remains at the forefront of this evolving field, equipped with the expertise to leverage these behavioral finance insights for your benefit.

The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action. This presentation has been prepared from original sources and data believed to be reliable. However, no representations are made as to the accuracy or completeness thereof. The opinions expressed are those of Oxford Financial Group, Ltd.’s Family Office Services technical team. The opinions referenced are as of the date of the publication and are subject to change due to market, economic conditions, or regulatory changes that may not necessarily come to pass. OFG-2503-23