Wealth Planning Outlook: How to Make Smart Financial Decisions Amid Uncertainty

12.15.2020 - Bryan Kirk, Director of Estate and Financial Planning and Trust Counsel

Taking Action When Life is Filled with Uncertainty

We all make countless decisions every day. Financially, our decisions range from everyday choices, like whether to splurge for the expensive coffee, to major once-in-a-lifetime events, like selling a business, retirement, purchasing a home or moving to a new state.

In 2020, these decisions took on new meaning as we adjusted to life amid a global pandemic. Looking forward to 2021, we hope these concerns will settle down.  But as the decisions continue to arise, the heightened uncertainty is also likely to persist. 

How much should you give to charity in 2021? Is this the year to begin gifting to your kids? Should you be rebalancing your portfolios? Do you need to revisit your estate plan? Is now the time to terminate a trust, or create new ones? These questions all involve variables and uncertainty in normal times. Add in a continuing global pandemic and the most impactful financial question for 2021 may simply be: How can we make better decisions amid all the uncertainty? 

Our Problem with Uncertainty

Imagine you have a choice. In front of you are two bags. I will give you $100 if you select a red marble out of one of the bags. In the first bag, half are red, and half are blue. The second bag contains the same total number of marbles, and all of them are either red or blue, but you don’t know how many of each.

Which bag do you choose? If you’re like most people, you’ll choose the first bag.1 Intuitively, this makes sense to most of us. But does this really make sense? 

Based on the available information, the probability of selecting a red marble is 50/50 with both bags. The first bag contains half of each color marble. Easy, 50/50. The only information you have about the second bag is that it contains red and blue marbles. If you consider all possible combinations of red and blue, half the time there are more red and half the time there are more blue. In other words, when you choose the first bag, there’s a 50% chance you put yourself in a better position to select a red marble and there’s also a 50% chance you do the reverse. Again, 50/50. 

If you need to read that paragraph again, please do. The fact is our instinct to choose the first bag–our aversion to uncertainty or ambiguity–is so strong that we tend to reject the idea of there being anything irrational about it. But if half the time the devil we don’t know is better than the devil we do, the problem isn’t with uncertainty. The problem is with us and our instinct to avoid uncertainty when making decisions.   

Solutions for Your Financial Life

Turning back to our financial lives, our aversion to uncertainty can easily lead us astray. We regularly make financial decisions. At the same time, uncertainty is everywhere—from capital markets, interest rates and tax rules to life expectancy, costs of living and the emotional impact of money. If we follow our instincts and turn away from uncertainty, that choice may not always lead us to the best possible outcome.

The value of a business may decline. We may miss out on time spent in retirement. We may increase our tax bill while waiting for tax policy to clarify. Of course, the opposite may also occur. The trick is to recognize when we may be leading ourselves astray and understand the less rational instincts uncertainty may prompt in us.    

  1. Avoid filling the gaps. One theory for what we’re doing when we avoid uncertainty is that we fill in the gaps.2 We don’t know if the coat we want will go on sale, so we decide on a probability in our heads to allow ourselves to decide whether to buy it.

This may sound silly. But if we’re honest, we do it all the time.  

For minor financial decisions, like buying a coat, this is not a big deal. But for more major financial decisions, like whether to sell a concentrated stock holding, cash in a life insurance policy or make a significant gift to your children, we fill in the gaps at our own expense. In contrast, if we avoid filling the gaps, we may not have easy answers, but it can force us to look for better reasons for our solutions.     

  1. Surround yourself with trust. A second theory for our aversion to uncertainty is we simply don’t trust it.3 We assume uncertainty comes with deceit and run the other way. Why can’t I tell you the percentage of red and blue marbles in the second bag in our hypothetical? Am I lying to you? Do I even know? It must be rigged!

This makes sense if there is deceit. Not so much, if there isn’t. The challenge is telling the difference. 

Major financial decisions are usually complex. The person who argues away the uncertainty likely is deceiving you. But you can take the edge off the uncertainty and allow yourself to make better decisions by seeking guidance from professionals you trust and weeding out influences you don’t.  

  1. Increase your level of understanding. A key service any professional advisor provides should be education. This has the double impact of building trust and building your sense of competence, which is another factor in how we deal with uncertainty.

Not surprisingly, we tend to avoid uncertainty more when we feel less competent.4 At Fiduciary Trust, we try to educate as much as advise because we know it helps you engage in what otherwise may seem like untenable decisions. It also can help guard against the pitfall of risking too much uncertainty when you feel more confident.

Be Armed for Uncertainty

The thing to remember is you’re not alone. It’s been estimated 10,000 people a day retire in the US.5 Reports have shown a similar number of businesses are sold each year.6 Each situation is unique. By recognizing the similarities of our situation to the situations of others, we can prevent ourselves from making decisions based on a limited or false understanding of those facts.  

Financial decisions seldom involve certainty, and 2021 may not provide any further clarity. But by facing the uncertainty head on, surrounding ourselves with knowledgeable and trusted individuals, and realizing we’re not unique in the questions we face, we may better position ourselves to make the decisions we need to make. Of this, we’re certain.    

1. John Maynard Keynes first used this example in 1921 to explain the concept of probable error, and Daniel Ellsberg then used it in 1961 to develop the concept of ambiguity aversion, which explains our tendency to choose against a more ambiguous or uncertain situation. John Maynard Keynes, A Treatise on Probability; Daniel Ellsberg, “Risk, Ambiguity and the Savage Axioms,” The Quarterly Journal of Economics.2. Models can be developed to fill the gaps effectively, but our day-to-day attempts are not typically as robust. Yahov Ben-Haim, “Info-Gap Decision Theory” in Decision Making in Deep Uncertainty.3. Roberto Lima Filho, "Rationality Intertwined: Classical vs Institutional View."4. Chip Heath and Amos Tverskey, “Preference and Belief: Ambiguity and Competence in Choice under Uncertainty,” Journal of Risk and Uncertainty.5.

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


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