Many of us know a few top-of-mind quotes because they are used so frequently and have nearly universal applications. We sometimes trot these quotes out in order to sound worldly, well-read and, at times, even a bit cynical. The funny thing about personal finance is that many people recognize many of these old chestnuts yet are unable to see themselves in the messages they convey. Blind Spot Bias is a term to learn. It is when people don’t recognize their own biases.
Let’s begin with Mark Twain. He once said that it’s easier to fool people than it is to convince them that they’ve been fooled. My experience is that the statement is obvious. No one likes to be taken for a fool. Furthermore, if one is taken for a fool, that person will not admit it. Pointing it out only makes things worse. Next time you come across someone who has been taken by a fish tale, point out the foolishness to them and see how they react. My guess is that the more unequivocally you demonstrate your point, the more the person who has been duped will resent you for showing them where and how they were taken.
It is entirely possible that your duped friend might be more upset with you for pointing out that your friend was duped than with the person who duped your friend in the first place (assuming it wasn’t you who did that, too). A debriefing in the name of transparency would be a bit like a magician showing how a trick works. Some things are better left unsaid. Showing people that there’s no actual magic in magic is a sure way to kill the buzz.
It’s bad enough when someone else dupes us. Now, imagine how depressing it would be if you learned that you unwittingly duped yourself. Cognitive biases are everywhere. We all, as human beings, suffer from various forms of mental shortcuts (sometimes called “heuristics”) where we think we know things that we don’t. We make bad decisions based on what we believe to be sound principles only to be shown through experience that we were wrong. Einstein’s definition of madness was doing the same thing over and over yet expecting different results.
Over the past couple of decades, the notion of humans acting rationally and in their own self-interest has been shown time and again to be an overly optimistic assumption. It’s a reasonable assumption – on the surface, but it’s not a particularly helpful assumption in actual practice. There’s a small mountain of evidence that’s been put forward by academics like Duke University’s Dan Ariely that shows that people are consistently and predictably irrational. It is becoming increasingly clear that investing and personal finance are not based on the study of finance. Rather, these topics revolve around how people behave when making financial decisions while faced with competing options. How exactly does one measure (let alone teach) something as imprecise, yet consequential as financial decision-making? As Pogo famously quipped: “we have seen the enemy and he is us”.
According to a somewhat lesser-known individual, Morgan Housel of the Collaborative Fund, inappropriate investing behavior “is inborn, varies by person, is hard to measure and changes over time.” Furthermore, Housel goes on to say “people are prone to deny its existence, especially when describing themselves”. In some ways, that quote encapsulates Twain, Einstein and Pogo all at once.
When speaking with your financial advisor (or when interviewing people who might take on that role), it would likely be enlightening to ask about behavioural finance as it pertains to personal finance. Is the person giving financial advice even aware of the evidence surrounding the behavioural quirks that we’re all prone to? You might want to ask to get a better understanding of who you’re (potentially) dealing with. After all, people don’t know what they don’t know because they don’t know what they don’t know.