The Emotional Roller Coaster - Financial Version

There was a comment on my last post that got me thinking...

"When it comes to money one has to be a lot like the old Star Trek's Dr. Spock. Completely unemotional and totally analytical."

Now that is a tall order! I understand where the commenter was coming from - he wanted to warn about avoiding groupthink and herd mentality. But I think it's an interesting topic anyway. How much do you need to keep your emotions out of your finances?

Well, it depends which emotions and what context they arise in. Some could be highly beneficial. For example, the emotion of fear is well known to be one of the most powerful motivators. Personally, one of my greatest fears is being poor or dependent on others, especially in my older years. So this emotion actually helps me because it is so deeply imbedded in my psyche that even when I make conscious decisions to spend money there is a part of me that is saying "okay, now where can we cut back to make up for this?"

Another emotion that could be financially beneficial is greed. Yes, it can lead to unwise choices too, but many people who chase money above all else actually end up getting it (and often nothing else, but we don't need to get into that!). And especially if greed is matched by a good work ethic, then I think financial success is virtually assured.

However, if you talk about the stock markets, then both greed and fear can sink you pretty fast. They make you sell at the bottom and buy at the top, and make many other stupid moves along the way.

So here's my theory: the context really matters. Emotions are just motivators - they basically cause you to take an action. If you have emotions plus luck or intelligence you get actions with positive outcomes. And if you have emotions plus bad luck or stupidity then you get negative outcomes. In other words, the emotions are neutral but because they motivate action they will expose your strengths and weaknesses much sooner and more decisively.

If I'm right about this theory, then you don't need to control your emotions, you just need to become really smart financially so that every decision you make is a good one. Then when an emotion comes along and causes you to take action, you show off your genius!

What do you think? Are emotions dangerous to finances or is ignorance the real danger??