The recent passing of the renowned behavioral economist Daniel Kahneman got me thinking about the important role emotional intelligence plays with money management. Kahneman, a Nobel Prize winner in economics, proved that, despite common belief, people often do not make “rational” money decisions. His bestselling book, Thinking, Fast and Slow, points out that “slow thinking” may have irreplaceable and sometimes overlooked benefits.

Kahneman’s studies also cited examples of irrational thinking such as selling our winning investments too soon and hanging on to losing investments for too long. He famously wrote, “The idea that I could see what no one else can is an illusion.” Kahneman pointed to overconfidence as one culprit that leads to such irrational decisions.

I’ve seen firsthand the impact irrational, “fast thinking” has had on some of Tilly’s clients. Here are just a few examples:

Selecting and buying individual stocks instead of index funds
Irrational because: The overwhelming evidence proves that beating the S&P 500 Index over the long haul (10+ years) has less than 10% probability of success — especially for amateur investors.

Sacrificing their own retirement nest egg to pay for their children’s college
Irrational because: Someone who is 20 years old has 45 years to work and pay for a college education, but a parent, who is closer to retirement age, has little time left to save for their golden years.

Not spending the small time required to ensure their finances are in good order
Irrational because: Sure, managing your finances requires some time, but not an unmanageable amount of time, yet the consequences of not doing so can be enormous.

Investing too high of a percentage of assets into speculative investments such as cryptocurrency, high-risk stocks, and/or commodities
Irrational because: Speculative investments often lose all of their value, which is one reason speculative investing requires professional qualifications.

Paying big fees to brokers and mutual funds despite the fact that similar options are available for free
Irrational because: Over time, fees that don’t provide value greatly deflate investors’ nest eggs.

Continuously spending more money than their budget can afford, and therefore not adequately saving for the future
Irrational because: Future needs — and expenses — are inevitable, so small sacrifices must be made today to meet those future obligations.

What can we learn from Kahneman’s work on emotional intelligence and money management? First and foremost, try to think rationally when it comes to money matters. Second, seek advice from unbiased experts. Next, use your brain — not your raw emotions — when making financial decisions. And finally, think slowly, not fast, to ensure your choices are wise.