Volume 52 | Winter/Spring 2023
In this issue

FOREWORD

Welcome to Spectrum, the biannual magazine in which we share the current topics that matter most to our clients. We understand what’s on your mind, and we’re here to help guide every step taken on your financial journey.

In this issue, you’ll read about opportunities to manage wealth through different means, while navigating turbulent markets with financial well-being as your compass.

First Republic is committed to being your financial partner as you strive to achieve your goals. I hope you find Spectrum insightful and empowering.

It’s a privilege to serve you,

Bob Thornton
Executive Vice President and President,
First Republic Private Wealth Management

Disciplined Investing in Volatile Markets: Using Mental Models

Investors don’t need to fully eliminate emotions or bias from their investment decisions, but they do need to manage them.
Understanding your own biases is a critical first step toward ensuring they don’t derail your portfolio goals.
Using mental models provides an objective way to evaluate reactions to market events and opportunities.

Disciplined Investing in Volatile Markets:
Using Mental Models

Investors don’t need to fully eliminate emotions or bias from their investment decisions, but they do need to manage them.
Understanding your own biases is a critical first step toward ensuring they don’t derail your portfolio goals.
Using mental models provides an objective way to evaluate reactions to market events and opportunities.
Conventional wisdom suggests that emotion-driven investment decisions have one likely outcome — and it’s not good. For example, fear often sends investors out of markets as they drop, which can lead to missing critical recovery days. Conversely, too much excitement over a company or opportunity can lead investors to buy high and face losses.
But while there’s some truth to the perils of emotional investing, eliminating biases isn’t the aim. The key is understanding your biases and then employing mental models that allow you to take advantage of them — or override them — as needed. This is especially helpful during volatile markets when relying on biases can lead to short-term decisions that derail your long-term goals.

Understanding your biases

Specific events and experiences can lead investors to develop investment biases that may feel safer. However, left unchecked, these biases can keep you in positions for too long or cause you to miss opportunities for gains. What’s more, most investors hold at least a few biases simultaneously, leading to multiple emotional decisions that all compound.
Here are some of the most common biases:
    Christopher J. Wolfe
    Chief Investment Officer, First Republic Investment Management
    Conventional wisdom suggests that emotion-driven investment decisions have one likely outcome — and it’s not good. For example, fear often sends investors out of markets as they drop, which can lead to missing critical recovery days. Conversely, too much excitement over a company or opportunity can lead investors to buy high and face losses.
    But while there’s some truth to the perils of emotional investing, eliminating biases isn’t the aim. The key is understanding your biases and then employing mental models that allow you to take advantage of them — or override them — as needed. This is especially helpful during volatile markets when relying on biases can lead to short-term decisions that derail your long-term goals.

    Understanding your biases

    Specific events and experiences can lead investors to develop investment biases that may feel safer. However, left unchecked, these biases can keep you in positions for too long or cause you to miss opportunities for gains. What’s more, most investors hold at least a few biases simultaneously, leading to multiple emotional decisions that all compound.
    Here are some of the most common biases:
    • Anchoring or confirmation: This refers to a first impression or preconceived notion that’s hard to shake. For example, perhaps the market dropped after the pandemic, and now you’re convinced there’s more decline to come.
    Here are some of the most common biases:
    • Anchoring or confirmation: This refers to a first impression or preconceived notion that’s hard to shake. For example, perhaps the market dropped after the pandemic, and now you’re convinced there’s more decline to come.
    • Loss aversion: Investors don’t want to sell a losing investment because then they have to admit they made a poor decision that cost them money.
    • Disposition effect: With this bias, you deem investments “winners” or “losers” and either hold onto them for too long or sell too early based on your initial assessment.
    • Hindsight bias: In this case, investors overestimate their accuracy in predicting market events and then assume that other predictions they have about the market are correct.
    • Familiarity: An investor is overly comfortable with a specific investment strategy or sector, leading to an increased concentration of that sector or overreliance on that strategy within their portfolio.
    • Self-attribution: Investors with this bias give themselves credit for successful investment decisions and attribute poor outcomes to external events.

    The power of knowing your investment goals

    Recognizing your biases is the first step toward developing tools to make them work in your favor. Next, you must define your financial goals and connect them with a strategy. For example, you may aim to save a specific sum for retirement or to fund your children’s higher education.

    Each goal should include a defined timeline that will inform the required strategy and risk level. And each goal should be anchored into a personal “why.” The latter refers to the deeper purpose of those funds; perhaps they’re enabling you to pursue a business endeavor that matches your passion or leave a financial legacy to your family.

    The timeline and the “why” create a context for investment decisions and a backstop for your biases. If a bias is working against your goal, then it merits review. Indeed, remaining humble enough to question your reactions, correct mistakes and even accept some losses (as part of a sound strategy) is an essential part of managing your biases.

    How mental models help

    Investors may be understandably overwhelmed by all the factors that impact an investment decision. Mental models provide a shortcut for addressing biases and achieving your investment goals in the process. While a bias reflects an emotional response to events in the market, a mental model provides the opposite: an objective external framework for evaluating investment decisions.

    Recognizing your biases is the first step toward developing tools to make them work in your favor.

    Using various mental models can help make sense of such patterns. And they don’t need to be complicated. For instance, you may opt to invest in companies widely owned by insiders; this reveals confidence in the business by the people running it. Another mental model is to invest with three buckets in mind:

    • Insurance or safety: This is money you need to protect your standard of living and help ensure you can pay for expected expenses. The strategy or products that serve this purpose can include cash, annuities or traditional insurance.
    • Maintenance: These funds are dedicated to helping you keep pace with — or beat — inflation so that you can afford your lifestyle in the future. Investments here could be equities, fixed income or even alternative investments.
    • Fun: This money is dedicated to helping you further “fun” goals, such as buying a boat or taking a big trip. These investments tend to be higher risk and reward, such as real estate, art collections or concentrated stock positions.

    As with most aspects of investing, you want diversity in your mental models. Select more than one to use and explore others as they arise. Most importantly, use them routinely.

    The role of a wealth advisor

    Recognizing your investment biases, defining your goals and employing mental models are effective ways to ensure that your emotions aren’t driving your investment strategy. However, you can’t rely on introspection alone to achieve your goals.

    The investment process depends on external analysis and expertise, which is where a trusted wealth advisor comes into play. A wealth advisor can provide detailed strategies for achieving your objectives and monitor your progress toward them. The combination of knowing yourself and a trusted advisor who also knows you can help keep your emotions in check and your portfolio on track toward achieving your goals.

    A wealth advisor can provide detailed strategies for achieving your objectives and monitor your progress toward them.

    Contact your First Republic team to learn about additional tools for maintaining investment discipline during up and down markets.

    This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.

    The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document.

    This information is governed by our Terms and Conditions of Use.

    Connect with First Republic.

    The Great Family Wealth Transfer:
    Preparing the Rising Generation

    The personal and financial development of the next generation, also referred to as the rising generation, promotes responsible stewards of a family legacy.
    Connecting the family’s purpose of wealth and values to these financial skills is paramount to a successful wealth transfer.
    Working with your First Republic advisor can help your family navigate this time of growth and preparation to launch the rising generation.
    Margaret Liu
    Managing Director, Family Engagement and Governance Consultant, First Republic Investment Management

    Transferring financial wealth to the younger generation is an opportunity that families often anticipate with a mix of joy — and a hint of unease. On the one hand, a successful gift of family assets extends the values, purpose and legacy of the family to the next generation, also referred to as the rising generation. This can ensure continued financial stability, as well as create opportunities for family, business, career and philanthropy.

    However, financial wealth can also introduce complexities. Family leaders often want reassurance that the younger generation is prepared to guide the family into the future. The rising generation may also have their own questions and uncertainties about what family resources mean for their life goals. By supporting financial education with wealth and life planning skills, families can help answer some of these questions and set the rising generation up for future success.

    Readiness rooted in purpose

    The process of learning financial skills provides a powerful way for the rising generation to connect their financial capabilities to the family’s purpose of wealth and values. Uncovering and understanding a family’s purpose of wealth provide the rising generation with a lens they can use to “thoughtfully align choices about the earning, saving, spending, investing and sharing of money with what matters most,” says Stacy Allred, who leads First Republic’s Family Engagement and Governance team. This becomes the compass for making decisions. For example, if a family determines that part of its purpose is to remain active and contribute to a specific community, then leveraging assets to help the rising generation purchase homes in that area, start local businesses or donate to community charities can help bring that purpose to life.

    Building financial acumen for future growth

    Children of wealth often want more education and information regarding personal and family finances. The transition into college provides a great opportunity to teach young adults about financial skills. The 10 x 10 Model for Building a Thriving and Connected Family of Wealth — developed by First Republic’s Family, Engagement and Governance team, in partnership with the Money, Meaning and Choices Institute — outlines the financial capabilities relevant at different life stages. Emerging and early adulthood, which spans ages 19 through 35, provides critical opportunities for learning about saving, managing assets and developing decision-making skills.

    Children of wealth often want more education and information regarding personal and family finances.

    Learning financial skills in emerging adulthood

    The related skills start with budget basics and build on that knowledge as the family members move through their careers and financial lives and prepare for independence. With this in mind, emerging adults — ages 19 through 25 — can choose to focus on the following:

    In early adulthood, the learning continues

    The skills learned during the emerging adulthood stage provide a solid base for financial responsibility as family members move into and out of college or trade school. The next stage is early adulthood, which covers ages 26 through 35, when more advanced financial capabilities are acquired:

    The experience of shaping the rising generation’s financial readiness creates meaningful touchstones around family values and self-reliance.

    Working together to prepare the rising generation

    The experience of shaping the rising generation’s financial readiness creates meaningful touchstones around family values and self-reliance. It’s important to honor the varying comfort levels each individual may have with discussing the family’s assets. Different viewpoints can offer opportunities for healthy discussion and promote deeper understanding, while sharing the right amount of information at the right time.

    The good news is that it’s never too late to spark these conversations. Trusted wealth advisors can share frameworks for a productive discussion about the family’s purpose and values related to financial wealth. They can also help educate the rising generation about asset management, preservation and charitable giving. By involving the rising generation early, families can empower their younger members to connect with the family purpose of wealth and invest in its legacy, even as the family grows and evolves.

    Contact your First Republic team today to learn more about how to prepare the rising generation for successful financial lives and support a strong and connected family of wealth.

    This information is governed by our Terms and Conditions of Use.

    Connect with First Republic.

    The Estate Planning Advantage:
    Discover the Upside of a Down Market

    Estate plans are increasingly being updated, as recently depressed asset values provide an opportunity to take advantage of high federal lifetime tax exemptions.
    Volatile markets present an advantageous opportunity to gift depreciated assets to irrevocable trusts and exclude future appreciation from their taxable estate.
    There are multiple trust strategies investors can leverage to protect assets and maximize tax savings.

    The Estate Planning Advantage:
    Discover the Upside of a Down Market

    Estate plans are increasingly being updated, as recently depressed asset values provide an opportunity to take advantage of high federal lifetime tax exemptions.
    Volatile markets present an advantageous opportunity to gift depreciated assets to irrevocable trusts and exclude future appreciation from their taxable estate.
    There are multiple trust strategies investors can leverage to protect assets and maximize tax savings.
    While recent market volatility may give investors pause, it also provides an opportunity to revisit your estate plan. In fact, we’ve seen a surge of plans being updated that are three to five years old, or new ones being created based on personal situations. For some, there’s an opportunity to take advantage of depreciated assets, along with the high lifetime federal exemption amounts. What’s more, if you have experienced a personal life event — such as a birth, death, marriage, divorce, retirement or change in net worth — then updating your estate plan will help ensure it reflects your current circumstances.
    Regularly reviewing your estate plan is an essential part of your financial life. Doing so can create a plan that takes advantage of tax exemptions and maximizes asset protection to benefit your family and your legacy (among other things).

    Explore asset transfer opportunities

    For 2023, the federal exemption amount is $12.92 million for individuals and $25.84 million for couples. This is the highest exemption in history, and there’s a small amount of urgency at play here as well. With legislative gridlock, we’re not anticipating a substantial overhaul of the existing tax policy anytime soon. However, under current legislation, the lifetime exemption will be cut in roughly half in 2026 (approximately $6.8 million for an individual and $13.6 million for married couples). That gives investors a defined window of time to optimize the current exemptions before they’re dramatically reduced.
    Raymond C. Radigan
    Regional Team Lead, First Republic Trust Company
    Co-Authored by Advanced Planning Team,
    First Republic Private Wealth Management
    While recent market volatility may give investors pause, it also provides an opportunity to revisit your estate plan. In fact, we’ve seen a surge of plans being updated that are three to five years old, or new ones being created based on personal situations. For some, there’s an opportunity to take advantage of depreciated assets, along with the high lifetime federal exemption amounts. What’s more, if you have experienced a personal life event — such as a birth, death, marriage, divorce, retirement or change in net worth — then updating your estate plan will help ensure it reflects your current circumstances.
    Regularly reviewing your estate plan is an essential part of your financial life. Doing so can create a plan that takes advantage of tax exemptions and maximizes asset protection to benefit your family and your legacy (among other things).

    Explore asset transfer opportunities

    For 2023, the federal exemption amount is $12.92 million for individuals and $25.84 million for couples. This is the highest exemption in history, and there’s a small amount of urgency at play here as well. With legislative gridlock, we’re not anticipating a substantial overhaul of the existing tax policy anytime soon. However, under current legislation, the lifetime exemption will be cut in roughly half in 2026 (approximately $6.8 million for an individual and $13.6 million for married couples). That gives investors a defined window of time to optimize the current exemptions before they’re dramatically reduced.
    When depreciated assets are moved into a trust, the IRS excludes any subsequent appreciation from your estate value. For instance, let’s say you transfer $5 million worth of depreciated stock into a trust for your children, and that stock appreciates to $15 million during the rest of your lifetime. That growth — the additional $10 million — remains outside of your taxable estate and doesn’t count against your exemption.

    Explore different trust strategies

    As you work with trusted financial advisors to update your estate plan, multiple trust strategies may come into play. Of course, every estate plan is unique and accounts for your financial goals, your assets and the legacy you want to leave.
    Here are some more commonly used trusts to consider with your advisor:

    Zeroed-Out Grantor Retained Annuity Trust (GRAT)

    A grantor can gift assets to a GRAT, a type of irrevocable trust, in exchange for an annuity payment for a specific number of years. Zeroed-Out GRATs are structured so that the present value of the retained annuity stream is equal to the amount transferred to the trust. This means the value of the remainder interest (the gift) is valued at zero — so little, if any, gift tax exemption is used. If the assets appreciate by more than the presumed interest rate (known as the “7520 rate”), assets will pass on gift tax–free. GRATs tend to work best with assets that are likely to appreciate in the near future, such as real estate and pre-IPO stock.
    Regularly reviewing your estate plan is an essential part of your financial life.

    Spousal Lifetime Access Trust (SLAT)

    SLATs are another type of irrevocable trust that can provide an effective way to transfer money out of the estate, while also giving a surviving spouse limited access to the assets. Many couples opt for a SLAT because they’re comforted by the fact that their spouse can take trust distributions, if needed. It may help decrease concerns about maintaining cash flow for a surviving spouse, while enabling couples to move money out of their estate.

    Dynasty Trust

    This trust structure offers the opportunity to create a family endowment — so the assets are protected in the trust forever. This is particularly useful for assets such as a family vacation home (though you can also use a dynasty trust for securities or other assets). Placed in a dynasty trust, the assets can pass from generation to generation without being subject to future transfer taxes. The assets also stay beyond the reach of creditors.

    Donor Advised Fund (DAF)

    For those with charitable intent, a DAF offers an effective way to transfer assets out of an estate and receive a charitable deduction for income tax purposes. This is especially useful if you need a tool for reducing taxable income in specific years. You receive an upfront charitable deduction in the year you gift the assets to your DAF, but you can then make gifts from the fund to eligible charities at a later time.

    Charitable Remainder Trust (CRT)

    CRTs provide the ability to gift assets for the benefit of charitable and noncharitable beneficiaries. With a CRT, the donor may transfer highly appreciated assets to the trust and receive a charitable deduction in the year the trust was funded. Those assets may be sold and the proceeds reinvested, yet no capital gains tax is immediately recognized. The trust then pays a fixed annuity payment to one or more of the trust’s noncharitable beneficiaries. At the end of the annuity term or when the beneficiaries pass away, the remaining trust assets are dispersed to the qualified charity.
    Down markets provide an opportune time to take advantage of any depreciated assets you plan to gift.

    Is it time to review your estate plan?

    Multiple factors can impact your estate plan — from exemption amounts to interest rates and market performance. Since estate plans are rarely reviewed once they are filed away, it may be time to review your existing plan or create a new one. Down markets provide an opportune time to take advantage of any depreciated assets you plan to gift. You can potentially optimize the lifetime exemption by using some of the common trust strategies listed here.

    Contact your First Republic team to learn more about trust and estate planning strategies that can help protect your assets and preserve your legacy.

    First Republic and its affiliates do not provide tax or legal information or advice. The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document.

    This information is governed by our Terms and Conditions of Use.

    Connect with First Republic.

    Demystifying Annuities:
    Preserving Wealth During Turbulent Times

    While there are many different retirement vehicles, annuities often fit many investor risk profiles and provide several benefits, including guaranteed income.
    There are many types of annuities, but deferred annuities are the most common among our clients.
    The “3 C’s” framework — Cost, Commitment and Complexity — can help you evaluate and compare annuity products and their potential impact on your wealth planning strategy.
    Bob Densmore
    Annuity Sales Director, First Republic Securities Company

    As investors aim to protect their wealth and supplement their retirement income in the current down market, they’re increasingly turning to one investment vehicle: annuities. In fact, annuity sales set a new record last year, with total sales exceeding $80 billion in the third quarter alone. That’s a 29% increase from the previous year, according to LIMRA, the trade association representing insurance and related financial service industries.

    Annuities may raise questions about the benefits they provide and when they make sense in a portfolio. As retirement investment vehicles, annuities tend to fit many investor risk profiles. They can help protect your portfolio from downside risk and provide guaranteed income for the future. In addition, they often come with tax advantages that help ensure you get more from your investments.

    Understanding different types of annuities

    There’s a considerable knowledge gap between investors who own annuities versus those who don’t. A 2020 LIMRA survey revealed that almost 60% of annuity owners received high scores on a quiz about the products, compared to 21% of quiz takers who don’t own annuities. Moreover, most investors who own annuities have a favorable view of them.

    Annuities can be a tool to help investors find their comfort zone between risk and reward.

    There are two types of annuities: immediate and deferred. Immediate annuities allow you to convert a lump sum of cash into an income stream. With a deferred annuity, you make a lump-sum payment and defer withdrawals. Deferred annuities are the most common type of annuity deployed by our clients, and they can be especially beneficial as supplemental retirement savings vehicles.

    These are the four most common types of deferred annuities:

    Annuity advantages

    Annuities are popular during market uncertainty because they offer asset protection and guaranteed income, depending on the type of annuity. Minimizing losses is often more important for those approaching retirement than achieving significant gains. Annuities can be a tool to help investors find their comfort zone between risk and reward.

    Annuities offer the possibility of investment stability, guaranteed income and additional benefits that can help reduce stress and improve retirement outcomes.

    They also provide a hedge against investor bias and behavior. For example, some investors may be tempted to pull their assets from the market after a significant drop in value. Annuities can help enable investors to weather the ups and downs more easily by mitigating some of that volatility. Investors may even use annuities in the same way they use fixed-income assets within their portfolios, though with the added benefit that (in general) annuities aren’t subject to interest rate risk.

    Lastly, annuities often offer additional benefits beyond investment features. These may include extending distributions to a spouse after the beneficiary’s death and tax-deferred wealth transfer to children and grandchildren, as well as optional riders (for an additional fee) for enhanced living and death benefits.

    Incorporating the 3 C’s

    If you have concerns or are considering annuities, the 3 C’s framework — Cost, Commitment and Complexity — is an effective way to evaluate and compare products. Consider how each component impacts your overall wealth planning strategy:

    Interested in an annuity?

    Annuities can be complex, which is all the more reason to work with a wealth manager. Your wealth manager can help you understand the advantages and considerations of different products, as well as how to select an annuity that serves your wealth planning goals and optimizes your retirement portfolio.

    The “3 C’s” framework is an effective way to evaluate and compare different annuities.

    Planning for retirement amid the current market uncertainty may cause investors more than a few sleepless nights. Fortunately, annuities offer the possibility of investment stability, guaranteed income and additional benefits that can help reduce stress and improve retirement outcomes.

    Contact your First Republic team to learn more about whether or not annuitieshave a place in your portfolio.

    First Republic and its affiliates do not provide tax or legal information or advice. The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document.

    This information is governed by our Terms and Conditions of Use.

    Connect with First Republic.

    Elevating Your Decision-Making to Enhance Well-Being

    First Republic Head of Family Engagement and Governance Stacy Allred interviewed Dr. Hal Hershfield about the behavioral science behind decision-making.
    Dr. Hershfield says that we can always improve our decision-making process, even if we’ve struggled with it previously, which can in turn maximize our well-being.
    There are several research-driven methods people can use to make more successful life decisions.
    Stacy Allred
    Head of Family Engagement and Governance, First Republic Investment Management
    Dr. Hal Hershfield
    UCLA professor of Marketing, Behavioral Decision-Making and Psychology
    In his decade of behavioral science and psychology research, Dr. Hal Hershfield, UCLA professor of Marketing, Behavioral Decision-Making and Psychology, realized that most people could better themselves with a more disciplined decision-making process. Faced with important life choices, we often inadvertently neglect important factors, or delay making a choice, until one is made for us. However, even though we’ve struggled to make decisions in the past, we can always improve. Stacy Allred, First Republic Senior Managing Director and Head of Family Engagement and Governance, agrees and believes it’s imperative to have a diverse set of tools in our cognitive toolbox that can be used together to make better decisions.
    Dr. Hershfield is the author of Your Future Self: How to Make Tomorrow Better Today, which publishes in June 2023. He recently sat down with Stacy to discuss the behavioral science behind five research-driven insights that ultimately lead to more effective, thoughtful life decisions.

    Consider how today’s decisions will affect your future self

    Stacy Allred: While we may not face significant life decisions (e.g., whom to marry or whether to have children) very often, we all encounter important, mid-level choices more often, such as whether to take action to improve our health or pursue a career opportunity. What challenges do people encounter in making these decisions?
    It’s imperative to have a diverse set of tools in our cognitive toolbox that can be used together to make better decisions.
    Dr. Hal Hershfield: One of the places that this goes awry is in people’s inability to fully recognize how they’ll feel in the future about decisions they’re making today. Research shows that people usually think they’ll feel one way about a decision, but they often don’t consider their other feelings or how long that feeling will last.1
    For example, if I lose my job, I may think my life will be measurably worse, but I probably won’t account for other things that make it not as bad as I assumed. I might end up finding a better opportunity or realizing that I needed a break. In addition, Steven Levitt, economist and author, has shown that people are inclined to stay with the status quo and fail to recognize how a change may boost their well-being.2

    Ask questions that drive toward what you want to optimize

    Stacy: Your research shows that people are more likely to evaluate their lives in 9-ending years (29, 39, 49, etc.).3 Why do you think this is a pattern?
    Dr. Hershfield: I think it’s a byproduct of our number system that we use these arbitrary age markers. But we really do — across cultures and countries, humans audit the meaningfulness of their lives as they approach new decades, while also making big decisions during that same time period.
    Stacy: You’ve referred to these periods as times of “taking stock.” How can people do this evaluation and search for meaning more effectively?
    Dr. Hershfield: A lot comes down to understanding what you’re optimizing for — and then asking the right questions. For example, do you want to optimize for meaning or happiness? Those may not be the same thing. A life rich with experiences may provide more meaning, but all those experiences may not be happy. It’s essential to understand your goal because it will inform your actions. If you want more satisfaction and meaning out of your career, you may take a job farther away from home. Now you commute, which reduces happiness, but maybe it’s worth it for job satisfaction.

    Talk to people who’ve made similar decisions

    Stacy: If you had one piece of advice for how people can make better life decisions, what would it be?
    Dr. Hershfield: In Western culture, we’re taught to value being unique. Yet Dan Gilbert and his colleagues have a paper called “The Surprising Power of Neighborly Advice,” which shows that one of the best ways to make big decisions is to talk to others who’ve made them.4 We think we should know ourselves better than someone who has already done something similar. That’s why it’s so hard for younger generations to listen to older ones. But Gilbert’s research shows that the experiences of people who’ve gone before us may be a more accurate predictor of our well-being than our own simulations. It turns out that we have a hard time simulating the future and many of our simulations are subject to errors; for instance, we might think about the opening moments of an interaction but not the rest of that interaction. Using a “surrogate” — or someone who has gone before us — can eliminate some of those problems in part because surrogation doesn’t rely on faulty simulations.

    Have multiple tools in your cognitive toolbox

    Stacy: Even with that good advice, we know there’s not a single prescription for better decision-making; it’s more about having multiple approaches and a process. What other mental models or tools should people consider?
    Dr. Hershfield: We’ve previously discussed the importance of evaluating time versus money in decisions. For example, my study with Cassie Mogilner Holmes from 2016 showed that given a choice between more time or more money, about 70% of people chose money.5 But the people who chose time ended up happier and more satisfied with their lives. That’s one factor to consider.
    Stacy: What can help people maintain changes they’ve made?
    Dr. Hershfield: I like the concept of an accountability partner. This works especially well for changes that require repeated decisions, such as undertaking a new exercise program. As humans, we’re incredible at making exceptions for ourselves about why we shouldn’t do something. But by telling someone your goal and checking in with them, you create a commitment that helps you stick to the change.

    Recognize how better decisions can maximize your well-being

    Stacy: Taking a step back, why is making better decisions so critical?
    Dr. Hershfield: What’s at stake is the most important thing: our well-being. We’re great at rationalizing and making excuses and looking back and saying that what we did worked for that time. But sometimes making changes can increase our well-being now as well as later. We want to avoid ending up in a position where we look back and have regrets. And in the less extreme, it’s not always about preventing the negative but also promoting the positive. By maximizing our decision-making abilities, we can maximize our well-being across our lives.

    Explore a new approach for elevating your decision-making

    There’s no one right way to elevate your decision-making process, and experimenting with how to improve is a journey — not a sprint. As you explore new strategies, consider incorporating one or all of these insights:
    Recognize how better decisions can maximize your well-being.
    Ask questions that drive toward what you want to optimize.
    Have multiple tools in your cognitive toolbox.
    Understand how today’s decisions affect your future self.
    Talk to people who’ve made similar decisions.

    1 Wilson, T. D., and Gilbert, D. T. (2005). “Affective forecasting: Knowing what to want.” Current Directions in Psychological Science, 14(3), 131–134.

    2 Levitt, S. D. (2021). “Heads or tails: The impact of a coin toss on major life decisions and subsequent happiness.” The Review of Economic Studies, 88(1), 378–405.

    3 Alter, A. L., and Hershfield, H. E. (2014). “People search for meaning when they approach a new decade in chronological age.” Proceedings of the National Academy of Sciences, 111(48), 17066–17070.

    4 Gilbert, D. T., Killingsworth, M. A., Eyre, R. N., and Wilson, T. D. (2009). “The surprising power of neighborly advice.” Science, 323(5921), 1617–1619.

    5 Hershfield, H. E., Mogilner, C., and Barnea, U. (2016). “People who choose time over money are happier.” Social Psychological and Personality Science, 7(7), 697–706.

    This information is governed by our Terms and Conditions of Use.

    Connect with First Republic.

    This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security or other instrument, or to enter into any type of transaction as a consequence of any information contained herein. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. The document may not be reproduced or circulated without ourwritten authority.
    Strategies mentioned in these articles will often have tax and legal consequences. First Republic Bank and its affiliates do not provide tax or legal advice. This information is provided to you as is, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.
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