This is the second article in our series from Rebecca Van Roy
In our previous article, Steve Jobs and his turtlenecks: A lesson for new investors, we explained that you’re more likely to start investing if you focus on your values, instead of trying to fully grasp the elaborate world of finance all at once.
Cool, so what’s next?
You’ve identified a set of goals that you want to invest towards- it could be a first home in five years or a retirement. Congratulations! You now have a clear sense of direction. You’ve carefully penciled your priorities and choices. You feel great about it.
This sense of empowerment is an essential first step.
Social cognitive research has found that you’re more likely to follow through with your plans if you’re feeling confident. Feel incompetent? Chances are, you’ll dip, duck and pass without ever crossing the finish line. We’ve all been there.
Your subconscious thoughts, and the ensuing emotions, can compromise your ability to achieve goals despite your best intentions.
But why? Well, for starters, we have irrational minds. Thinking involves multiple, complex and simultaneous processes. To muddle our thoughts further, we’re bombarded by unconscious biases that form beyond our control.
One of the most powerful unconscious biases is the overconfidence effect that (unintentionally) leads to a miscalculation of our capabilities.
When putting new plans into action, our newfound enthusiasm can lead to an overconfidence effect, that inaccurately perceives the challenges ahead. It’s okay, this effect is natural, even hard-wired — and can be wonderfully effective for some of life’s “just go for it” moments.
The problem arises when overconfidence leads to a miscalculation of resources such as time or expertise. In academic circles, this is called the planning fallacy. As we realize that we’re biting more than we can chew, and our incompetencies unfold, we become less likely to follow through with our objectives.
This is especially true for new investors, who commonly feel the need to monitor, analyze and control every tick, which, can become impossibly consuming. Luckily, new technologies and user experiences can manage these tendencies, to make investing more enjoyable, and re-calibrate our thinking. Otherwise, a well intentioned person may cease investing towards a first home because it felt like too much to handle.
Ok, noted. We fail when we try to do too much. But where should we draw the line?
Lucky Number Seven
George Miller, a renowned psychologist, found that our brain can only handle about 7 ideas at once. In layman terms, our brain collapses when we think too much. As much as we intend to process information carefully prior to any important decision, our brains often restrict excessive information and become satisfied with less, an idea called bounded rationality.
Here’s the good news - by becoming aware of these limitations, you can optimize your mental capacity to reach your personal or financial goals.
It seems like Warren Buffet has done exactly that. He credits many of his successes to the “less is more” mantra. With a net worth around £60 billion, things have worked out just fine for Warren.
In a nutshell, Buffett believes that you should crystallize your main objectives when planning ahead. Here’s an interview with his private pilot, who once asked Buffett for advice:
- Buffett: “Make a list of the top 25 things you want to do in the next few years or even your lifetime, and then pick the five most important. The other 20 things? Forget about them for now.”
[The pilot went ahead and did just that.]
- Buffett: “But what about these other 20 things on your list that you didn't circle? What is your plan for completing them?"
- Pilot: "Well, the top five are my primary focus but the other twenty come in at a close second. They are still important so I'll work on those intermittently as I see fit as I'm getting through my top 5. They are not as urgent but I still plan to give them dedicated effort.”
- Buffett: “No. […] Everything you didn't circle just became your 'avoid at all cost list'. No matter what, these things get no attention from you until you've succeeded with your top 5."”
(Excerpt from Live your Legend by Scott Dinsmore.)
Like many great thinkers and shapers, Buffett has succeeded by believing less is more. Your mind is like a muscle that can only carry so much, don’t try lifting a bulldozer.
This article was written by our guest contributor 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.