The Theory of Relativity and your Divorce Decision-Making

By Justin A. Reckers

Humans tend to make decisions influenced heavily by relativity. We compare one option relative to another. You may decide a grande latte is a good deal relative to the cost of a tall latte. You may think a BMW including complete scheduled maintenance for 1 year is a better deal than a one year old BMW at a cheaper price. Markets are full of options. There are thirty different brands of salsa all with a different price. You may not be conscious of it but you decide which to purchase by comparing one relative to another.

Economic modeling is based entirely on the premise that the entity making financial decisions is armed with all available information, free of emotion and interested only in the most ”rational“ economic outcome of the decision. If economic modeling held true every consumer would consider the cost per ounce of the tall versus the grande and then make their decision based on which was the better value. Every car shopper will factor the value of included service plans versus expected depreciation in value into their decision making process. Consumers do not operate this way. Humans have social, cognitive and emotional barriers we must navigate during a decision making process. Deadlines keep us from collecting all available information. Emotions keep us from seeing it clearly. Social norms tell us to judge the quality and success of our lives relative to others.

Marketing gurus know this and use it to sell products. Ever wonder why the movie theatre or baseball concession always suggest you spend twenty five cents more on a larger size soda? Why not go for the grande latte? It really isn’t that much more expensive compared to the tall. It is time we use it to learn to make better financial decisions.

For most people, divorce will be the largest financial transaction in their lives. It may also be the most emotionally chaotic or traumatic transition. Economic theory tells us that there should be no emotion in the equation when making financial decisions and all available information should be at our disposal. So how can you hope to make good decisions about the financial health of your family in the midst of emotional chaos? What happens when you don’t have all of the information?

Lack of information is one of the most common barriers to good financial decisions in divorce proceedings. One party usually has the edge having managed the family finances or been a business person. They may completely understand the family financial picture while their spouse has delegated the responsibility without question. This is natural. It would be a waste of valuable time to balance the check book twice every month so one party takes the responsibility.

In divorce proceedings financial knowledge can be power. High quality decisions need high quality information from which to judge the options. The party without the knowledge must spend time and money collecting documents, reconstructing the balance sheet and income statement and trying to level the playing field. This is the most important part of your divorce financial planning and building a good decision making process in your dissolution proceedings. Remember we make decisions based on choosing one option relative to another. If you are confronted with a decision you must make based on limited information you run the risk of reaching a poor conclusion. In the absence of options you must choose from what you know. The human propensity for choosing one option relative to another will leave you open to making irrational financial decisions.

The cliche financial decision in divorce is trading the house for retirement plans. Mom wants the house and dad wants the retirement plan. It is rarely a good deal for both parties. If you do not know the cost of purchasing a new home or renting a comparable home, your default decision will be to keep what you have now. Choosing to keep the family residence as part of your divorce settlement means you must forego other assets. It may mean you have to work a job you do not like in order to pay the bills. You may have to give up retirement accounts or other assets in order to offset the value in your asset division. It may mean you have no emergency cash in the bank in case you lose your job or become ill.

There is nothing wrong with ultimately choosing to retain the family residence as long as the decision was made after gathering the necessary information and considering your options. The natural human aversion to ambiguity will point you towards the status quo in the absence of options. That is fine when it comes to lattes and salsa. Financial decisions in divorce will affect the rest of your life and the lives of your children.

Start thinking about new places to live. The equity in your home is priceless at this stage in your life. In the house it is not liquid and may not be working for you as well as it could in other investments. Decide what kind of home you could see yourself living comfortably now and when your children are grown. To get you thinking and hone your expectations, start looking at local newspaper ads and visit websites like to seek information about current listings. Keep your finger on the pulse of the neighborhood so you can be sure to know when a good deal becomes available. Consider downsizing to a more affordable home that you will be able to care for on your own. You will be surprised how quickly a large home can overwhelm you with maintenance demands. Talk to your family. It is important to discuss expectations with your children. Tell the kids you cannot afford to keep the house and still do the things you all love to do and you would prefer to do fun things with them given the choice. Chances are good that those same children when given the choice will choose to see their mother happy and comfortable in a smaller, more affordable home, over watching her rip up floor boards to heat the McMansion. Consider renting for a year while you transition into post divorce life. There are plenty of homes available to rent while you take time to recover financially from the attorney fees and other divorce related costs.

When you include these considerations in your decision making process you will be judging your options from an informed position. The status quo may be overcome by the excitement of new options or the comfort of safety. These are the biggest financial decisions you may ever make. Prepare yourself with self awareness, information, negotiation skills and trustworthy advisors and you will transition successfully into post divorce life.