We are kicking off 2018 with a series of articles by guest contributor, Rebecca Van Roy. Rebecca has worked as a consultant and program manager across various industries to understand human behavior, and improve decision-making. Currently, Rebecca is contributing with Foundation, a finance start-up in the U.K. This series was originally posted to the Foundation blog.
Ok, why are we talking about turtlenecks?
Well, for starters, let’s remember that some of the world’s most iconic innovators - like Steve Jobs, Mark Zuckerberg, Matilda Kahl, and even Einstein have a knack for wearing the same thing every day. These are accomplished people, by any account, whose fashion choices have helped them overcome barriers that deter everyday investors.
These deterrents, grounded in behavioral science can be categorized as “decision paralysis” and “cognitive overload.” Writer Michael Lewis, whose stories often uncover how our thinking goes astray, captured both terms in an interview with Obama, where the former president said:
“'You’ll see I wear only gray or blue suits, I’m trying to pare down decisions. I don’t want to make decisions about what I’m eating or wearing. Because I have too many other decisions to make.'” He [Obama] mentioned research that shows the simple act of making decisions degrades one’s ability to make further decisions.”
Now, investing will likely require more thought than blue or grey suits. But being smart about our money often requires a habitual--or even automated--approach, especially when we’re getting started. Understanding how these two concepts affect our thinking and behavior (and knowing that we're not alone!) can help us get started.
Decision paralysis is the inability to decide. It results from three conditions arising from a decision situation:
- Having too many choices
- Experiencing little or partial understanding of these choices
- Facing uncertainty regarding the outcome of these choices
Cognitive overload is the mental draining that derives from analyzing multiple options to inform a decision. Yup that's right - thinking too much can really weigh us down.
Decision paralysis and cognitive overload often reinforce one another. When combined, the mental exhaustion forges a crippling inability to decide. And when it comes to investing - indecision can hurt. The younger we are when we start investing, the more we can benefit from compound interest and recover losses through downturns. But, under the grip of decision paralysis and cognitive overload, years can go by without putting our money to work.
The good news is that there are strategies to mitigate decision paralysis and cognitive overload to get started in investing. Many of these strategies draw from behavioral science and "nudge" concepts. In this post, I’ll focus only on one: value-focused thinking.
Apply value-focused thinking
So how do we limit our options and minimize mental effort? One way is to apply value-focused thinking, a decision making approach developed by Ralph Keeney. He argues that we should make decision according to our values instead of externalities like the stock market. In Keeney’s words:
“The standard way of thinking about decisions is backwards: people focus first on identifying alternatives rather than on articulating values. A problem arises and people react, placing the emphasis on mechanics and fixed choices instead of on the objectives that give decision making its meaning.”
In this case, Keeney is encouraging people to start investing, but to do it with your personal values and objectives in mind. Sounds sensible, of course. However, if values are subjective then how will laying them down lead to a coherent investing strategy?
Luckily, there is no such thing as a perfect investing formula. Investing should be highly subjective, because we all want to achieve different things with our money. For some, it may be a plush retirement, and for others, a holiday next August. Naturally, those two objectives require different investing strategies. The underlying premise of value-focused thinking is that investing should enable you to enhance your happiness according to the things you value.
Once we grasp that there is no right or wrong formula, we can release the pressure blocking us from getting started with investing. Just like Jobs, Zuckerberg, Kahl, Obama and Einstein, you can declutter your brain space and start taking action.
(Stay tuned for more mitigating strategies in the next posts. Spoiler: they have to do with one unapologetic advice by Warren Buffet, architecture that is not for buildings and biases we're often unaware exist.)
This article was written by Rebecca Van Roy, Behavioral Science Consultant.
Rebecca consults on what drives human behavior and how to improve and predict decision-making. She has worked in tech, health, international development and energy in Washington DC and London, helping organizations design better products and services. She holds an MSc in Decision Sciences from London School of Economics, an MA in Communication and Digital Technologies from Johns Hopkins University and a BA in International Economics from University of Richmond. She can be reached at firstname.lastname@example.org.