Will you believe me if I say that you are your money’s worst enemy?
You will probably think that I am insane or just laugh it off as a joke.
You not admitting this will not change the fact – you are your money’s worst enemy. Ben Graham, the great value investor once said. “An investor’s chief problem – and even his worst enemy – is likely to be himself”.
We humans as a species make mistakes. We all have made numerous mistakes in our lives – as kids, in school, at work and so on. Do not worry, making mistake is not limited to only you – every human makes mistakes. Mistakes made by political leaders often result in wars and unrest, those made by economists and governors of central banks result in recession and unemployment.
Making mistakes is an integral part of human behavior.
While handling your finance and investments, you make mistakes in the form of bias.
A bias is an inclination towards or against a certain person, belief or thing. Most often the bias is so ingrained in us that we don’t even realize that we are biased and hence end up making mistakes.
Let me illustrate this by asking you a few simple questions.
- You purchased a bat and a ball for Rs. 110. If the bat costed Rs. 100 more than the ball, what was the price of the ball?
- If 5 machines take 5 minutes to produce 5 buckets, how many minutes will 100 machines take to produce 100 buckets?
- In a lake there is a patch of lotus flowers. Every day the patch doubles in its size. If it takes 30 days to cover the full lake, how long will it take to cover half the lake?
Did you get the price of ball as Rs. 10?
Did it take 100 minutes to produce 100 buckets?
And did it take 15 days to fill the lake half?
Let me tell you – these are wrong answers.
The price of the ball is actually Rs. 5! 100 machines will produce 100 buckets in 5 minutes and the lake will be half filled in 29 days! Just a little scratching of your brain cells and you will get these answers!
Do not fret if you got any or all the answers wrong.
These questions were first framed and asked by researcher Shane Frederick in 2005 as a part of his famed Cognitive Reflection Task. When these questions were asked, only 17% people could get all the answers right and 33% got none right! More than half of the seemingly best brains of students at the reputed Massachusetts Institute of Technology could not get all the answers right.
Why did you get these wrong?
These questions are not to test your mathematical prowess, but to give you a sense of your thought process. Our minds are used to think in a certain way and every decision that we make is influenced by this thought process. We commonly call it as a ‘gut instinct’.
Due to this behavior of ours, we end up making irrational decisions without realizing our mistake. Various studies have found that we rely on our emotions and past influences more while making decisions when:
- Problem is complex,
- Information is incomplete, ambiguous and changing,
- Goals are ill-defined or changing,
- Stress is high due to time constraints and high stakes,
- Interaction with others is an influencing factor
Any investing and personal finance decision you take is accompanied with all the factors mentioned above. This is why most of us end up making poor investment decisions – we rely on our erroneous thought process.
By now, you will agree with me that poor investing decisions are a big reason for less than optimal returns on your investments. The question now arises – is there a solution?
Yes – there is indeed a solution available to get you out of this erroneous mindset. The solution is to change your behavior towards money. Isn’t changing your behavior easier said than done?
Yes – changing behavior requires a lot of effort; a conscious effort to resist from what you have been doing all your lives. This process can be made easy as well as enjoyable by inculcating these three simple practices:
#1. Treat it as a journey:
A change in behavior will never happen in a day or a week.
It takes a lot of time to inculcate a habit and further more if you have to eliminate existing practices and add new. This can be best achieved if you treat the entire process as a journey with an objective to leave your money’s worst enemy behind.
A journey is always cherished and filled with memories; this one will be no different!
#2. Break it down:
Our behavior is shaped by many biases.
Some of the most common bias include a bias to be over confident about your own self (I am an above average performer OR I am good at identifying stock picks) and confirmatory bias (seek information that suits your belief – asking a barber for a haircut!).
We need to deal with biases – identify them, understand the dangers associated with it and eliminate them.
#3. Choose a buddy:
You might have experienced that your inclination towards doing a certain task increases when you have a companion.
Whether it is hitting the gym or undertaking a course, your commitment tends to be higher when you are with a companion. This companion could be a buddy or even better – it could be a coach.
Results are always better when you have someone looking over your shoulder and monitoring your progress. Do the same for your finance.
Following these practices will enable you to get rid of your money’s worst enemy and make your financial life very healthy.
Transform your thought process to live a prosperous life. The only challenge is to identify biases and eliminating them.
Do leave a comment if you want to learn more about biases and ways to eliminate them. I will be happy to share ways to identify biases and remove them. You can also leave your contact details here if you want a personalized travel plan to win this battle against your money’s worst enemy – YOU!