Your financial decisions can be some of the most emotionally charged decisions you make in your life, which is why many people prefer to let professionals handle their money. They believe that professionals with no personal attachment to the money will be better able to make rational decisions.
The world of corporate finance is similar in that people are typically dealing with someone else’s (the company’s) money, so you may think emotions run low in corporate finance. But that’s not always the case. Even though they don’t realize it, people working in corporate finance sometimes let their emotions influence their decisions, at least to some extent.
Consider this real-life example: On the day that U.S. Marines captured and killed Osama bin Laden, stocks in the U.S. jumped significantly. Osama bin Laden’s death had absolutely nothing to do with the value of these companies, but their stocks jumped anyway.
Why? Because the mood people are in when making financial decisions influences the decisions they make. When people hear good news, they’re more prone to accepting additional risk in their investments. When people receive bad news, they tend to be more wary and avoid risk as much as possible (assuming they’re not prone to extreme acts of self-destructive behavior that would lead them to do something crazy).
No matter how far removed you are from the person who actually owns the money you’re working with, when you’re forced to make a decision, your mood and emotions will influence the decision you make to some extent.
Although this won’t change your entire financial strategy (only those with extreme emotional volatility will allow an emotional state to dictate their major decisions), when your mood influences your willingness to deviate from rationality, financial inefficiencies will occur, resulting in either increased costs or decreased income.
In a single incident, this deviation from rationality may not be entirely damaging, but as more and more people in a company are influenced in this way or a single person is continuously influenced, over time the company can face significant decreases in total financial effectiveness.