Avoid financial flaws with “clear thinking”

One of the best books of 2023, and one that will definitely be on my financial life planning advisor resource list, was published near the end of the year. As the creator and curator of the Farnham Street blog and newsletter, I have followed Shane Parrish’s work for many years. Therefore, his new book clear thinking abilitywas in the queue.

One of Parrish’s greatest talents was simplifying the realm of behavioral science to the point where it was, uh, clear and, perhaps more importantly, practical. So you can peruse, or just read, a near-comprehensive list of 188 cognitive biases that we can fall prey to. clear thinking ability and check it out 4 defaults Parrish suggests they are “the enemy of clear thinking.”

In this article, we will review each of the four lessons and suggest four related lessons that you can apply in your pursuit of better lessons. finance decision making:

1) Emotional Default: “We tend to react more to emotion than to reason and facts.”

In the field of personal finance, emotion is often used as a pejorative synonym for stupidity, but as Parrish suggests, it denies that “emotions can multiply all your progress by a factor of zero.” you can’t.

In fact, as Daniel Kahneman said, emotions often lead to hasty decisions because they are concentrated in System 1. think fast or slow term. Our System 2 is the processor in our brains that appears to be slower, more deliberate, and more rational, while System 1 is the source of our quick, autonomous, and yes, emotional thoughts and reactions. .

That’s why when we are emotional, we may act or say things so that there is no gap between our feelings and our actions. And while it would be nice if we could choose which system to use when faced with a financial decision (System 2, please!), the reality is that more than 80% of our decisions are based on systems. 1. Emotions.

Lesson: Money is inherently emotional.

This is where the financial industry has served us so poorly. From investment managers to gurus to advisors, most of us are taught to insist that our consumers, followers, and clients separate themselves from their emotions. The only problem is that it’s biologically impossible. You need to work on your emotions instead of suppressing them or ignoring them, especially since money is inherently emotional.

Of course, retailers and social media companies are well aware of this challenge and are trying to take advantage of it every day. Therefore, the best thing we can do when experiencing emotions is to slow down the process. Recognize your emotions, process them, discuss them, decide, and in the best case scenario harness the power of System 1 to make more informed decisions. Emotions don’t have to be the enemy, they can be part of the solution.

2. Ego Default: “We tend to react to anything that threatens our self-esteem or standing in a group.”

Nothing threatens our self-esteem more than others’ perceptions of our net worth. People who have destroyed every relationship in their lives are often considered successful simply because they are rich. And their wealth may just be a matter of perception, especially given that most visible signs of wealth are evidence that someone has parted with their money in pursuit of an asset that depreciates in value. .

Lesson: “Comparison is the thief of joy” The modern world is wired to generate comparisons everywhere we go.

in gap and gainCo-authored by Strategy Coach founder Dan Sullivan and Dr. Benjamin Hardy, this book explains that the world we live in is designed to continually make us believe we are “in the gap” and that we suggest that we are conditioned to calculate situations based on them. Rather than “gaining,” we recognize what we are missing, how far we are from our ideal state, and how much progress we have made from our starting point in pursuing our goals.

3. Social Default: “We tend to follow the norms of our larger social group.”

Have you ever been in an environment where you quickly realized that your opinion or worldview was in the minority? You may have been in a group such as your neighborhood, work, school, church, your child’s extracurricular activities, or online. Have you ever worked as a member of So, has a large group apparently unanimously deviated from your beliefs and preferences, putting so much pressure on you that it shakes your beliefs and changes your preferences?

I live in Charleston, South Carolina, but I’m originally from Baltimore, and when I meet someone from Charm City (Baltimore in IYKYK), the first question I get is usually, “Where did you go to school?” I don’t mean university. They want to know which super elite private school I went to. They are measuring me. I can’t tell you how much I love telling them that I was a public school student 🙂 But condescension is powerful and I’d be lying if I said I didn’t want an answer like Gilman . .

Similarly, a friend of mine from England is a teacher at an elementary school across the pond, and he told me that on the first day of class, all the kids wanted to know, “Which football team are you pulling?” Ta. “Football” refers to soccer, but my friend said what the kids really wanted to know was whether she was Catholic or a “prodi.” Because it’s very clearly differentiated by which jersey she wears. (She chose to respond by mentioning the worst team in the league, she told me.) That team was throwing kids off course and the heckling for supporting such a terrible soccer team. ).

The powerful power of groupthink is one of the most persuasive things in life.

Lesson: Recognize the influence of social groups.

The lesson here is never to become a hermit, because we are social beings and benefit a lot from social connections. The lesson is to be aware of our surroundings and circles and question apparent norms. Most of the parents on your child’s lacrosse team have a home, a car, and are very likely to be taking vacations with a price tag that is less than 25% of her standard deviation.

Some subgroups, particularly in the personal finance sector, have reached downright cult-like levels of pressure. For example, if you follow Dave Ramsey, you’re likely to be met with obvious disdain if you attend his Total Money Makeover class on “The Ultimate Driving Machine.” If your down payment on the home is less than 20% of his, or if you take out a mortgage with a term of more than 15 years, you’ll get noticed as well. On the other hand, you can’t even attend a pickleball game at a country club if: do not have driving a luxury car.

Remember, personal finance is more personal than finance, so so are the best financial decisions. Is it morally right or wrong to drive or live where you choose (what you can afford), whether you have a mortgage or not, and whether it is morally right or wrong to send your children to private or public school? There is nothing. The question is what is right and wrong for you and your family.

4. Inertia Default: “We form habits and seek comfort. We tend to resist change and prefer familiar ideas, processes, and environments.”

As we learned from the likes of Charles Duhigg and James Clear, humans are creatures of habit, whether we like it or not. Parrish’s inertia is often unconscious, because even things we don’t think of as habits usually become habits. So one of the best ways to become aware of your habits, good or bad, is to stop long enough to ask yourself, “Why am I doing this?”

The challenge is that it’s very difficult to stop doing what we habitually do. Therefore, the best way to stop a bad habit is to replace it with a new one. Recognize the trigger that triggers the behavior and replace it with the desired one.

Lesson: Understand the habits and processes that are most likely to lead to financial success.

There are no guarantees in life, especially money. However, there are basic principles that can increase your chances of financial success. Thankfully, some of these principles are explained in related lessons to counter his three defaults mentioned above.

Know thyself. Become aware of your feelings about money by slowing down the process between idea (or, more often, emotion) and action. Even better, dig deep into your emotions and uncover what’s most important in life to you, rather than what’s most important to the people in your social circle. Then, better understand your values, motivations, needs, and desires and pursue those goals, appreciating how far you’ve come rather than clinging to distance from your ideals. Establish habits that encourage