We’re very fortunate to be blessed with wonderful clients, friends and other readers that find their way to this space each week. Before today’s post, I want to take this opportunity to wish you all good health and happiness as we continue through the holiday season and into 2022. If you’re not up for a financial/psychological discussion today, feel free to move on from here and enjoy the rest of the season!
For those sticking around, a quick story on how we’re hard wired as humans to be attracted to certain kinds of risk. I was recently listening to one of my favorite podcasts, Freakonomics interview University of Oxford mathematics professor Marcus du Sotoy on an episode entitled “What’s Wrong with Shortcuts”.
They discussed, in part, how humans come programmed to want to gamble in various areas of life. The strength of this desire runs across a wide spectrum, but it is nevertheless part of human nature to a degree. We are attracted to shortcuts in all walks of life, to seek out easier ways to accomplish difficult tasks.
In many instances, this is a positive inclination and increases productivity across society. It’s what allows us to find new and innovative ways to solve problems through productive shortcuts or improved processes. But, in cases like investing, trying to lose a few pounds or other such pursuits, these shortcuts can sometimes get us into trouble.
When it comes to investing, these shortcuts could include being drawn to a hot stock, wanting to take action because of where we think interest rates, inflation, or some other anxiety inducing marker is likely to head. We’re wired to be attracted to shiny objects, to winning games of chance, to take shortcuts to accomplish certain life goals.
du Sotoy made the case that we shouldn’t spend any time on attempting to break or “fix” this hard-wiring. He compared it to asking the listener to imagine how hard it is to learn English as a new language with all its rules, exceptions and other quirks. Then, he asked listeners to imagine attempting to unlearn English. Take a moment with that as I did while listening. Imagine what it would mean to unlearn a language you have spoken all your life.
His belief is that this seemingly impossible task is akin to trying to unlearn our behavioral wiring.
All is not lost. His alternative suggestion is to use cognitive behavioral therapy (CBT) to help resolve whatever bad habit we’re trying to break. While the details of this far exceeds my expertise, the basic premise is that we learn to focus on noticing when these behaviors present themselves, what triggers potentially harmful decisions or behavior in our lives and use mindfulness or other techniques to learn how to notice them and move on rather than act. It’s similar to many mindfulness exercises or meditation techniques that have become increasingly popular in recent years.
While we know that saving a little more, spending a little less and investing those savings in a low cost, globally diversified portfolio is the way to go, the types of temptations mentioned above often lead to making the wrong moves at the wrong time and can cost us real money over our lifetimes. Letting go of our attraction to these shortcuts is akin to trying to unlearn our native tongue.
CBT, or similar exercises, might be a useful alternative to dealing with these emotions, or at least identifying and short circuiting how you typically react to them. Instead of trying to push them away or ignore them, we can evaluate ourselves and notice how we feel compelled to act in the face of news that Bitcoin has doubled in price or Zoom has lost half its value.
The goal is not to change those emotions, but simply to notice them and then proceed with the financial plan we’ve developed over years during calmer, clearer times.