Episode Details

The quote above is from the fictional character, Gordon Gekko from the legendary 1987 movie, Wall Street. The challenge he was alluding to is the fact that it’s impossible to have a completely impartial lens when making financial decisions. There are many reasons for this.

Firstly, it’s our money, we worked hard for it and we don’t want to make a mistake and lose it. I have observed marriages dissolve because of financial losses. It’s a big deal and a lot is at stake.

Secondly, we tell ourselves stories about money. These stories have been shaped over many years by our upbringing, culture and personal experiences. Stories like money is evil, money is a measure of success, it’s hard to make money from investing, money changes people, money will solve all my problems, money makes me feel safe and so on.

The sun is smaller than it looks

Have you ever taken a photo of a sunset or landmark and been surprised how small it looks in the photo compared to the naked eye? The reason is because our brains play a trick on us… it’s an optical illusion. Our brain makes us see something that’s not real. Here are some explanations why this happens – although it’s not important for this blog – I’m merely making the point that sometimes we see what we want to see. Our impression of “reality” is shaped by our beliefs.

My observations over the past 17 years

I agree with Gordon Gekko that emotions are rarely a useful human behaviour when it comes to making financial decisions. They distort our views and can cause us to make expensive mistakes. In my experience, emotions can cause a few common errors including:

§ Overthinking – it might sound a bit perverse, but you can overthink financial decisions. The problem with overthinking is that you start to explore every possible outcome and add too much weight to outcomes that are very unlikely to occur – almost so remote that they do not really warrant any attention or consideration. This can cause people to jump at shadows.

§ Blind to risk – sometimes we want something to be true so much that we irrationally ignore any evidence to the contrary. This often happens when people decide to invest in a certain asset. At that time, they almost have rose coloured glasses and can’t see any risks or flaws. This is a very risky mindset.

§ Paralysed by the fear of making a mistake – this is particularly common for people closer to retirement. They know they need to have an investment strategy and they also know that they don’t have any room (time) for error. As a result, they feel so anxious about making a mistake that they find it very hard to see what might be in front of their eyes. Similarly, people that have lost a lot of money on past investments can also be unduly influenced by fear. They become overcautious – not recognising that their past mistakes were caused by breaching investment fundamentals. They have a high level of nervousness even when a prospective investment is fundamentally sound.

§ Overconfidence – how can you expect to be an expert at something without acquiring many hours, weeks, months and years of experience? When it comes to finance, it is important to be consciously incompetent i.e. don’t think you know everything. Because you only have to be a little wrong to completely ruin an investment. And often, mistakes are not obvious (to non-professionals) at the outset. Arrogance is