Money may not be the root of all evil, but it is the root of many poor decisions. Despite every attempt at cold, steely rationality, everything changes when money is involved. It’s no coincidence that arguments about money are one of the most common marital problems. Dealing with money is difficult. We weren’t designed for it. Once the “money” label is attached to a number it invokes a host of decision biases. How much, how little, what to do with it, and how the balance has changed can not only change decision-making but how a person feels about themselves.
A dramatic example of this is the famous Depression-era speculator Jesse Livermore. According to his suicide note he took his life because he felt he was a failure, presumably due to losing the bulk of his sizable fortune. But he died with $5 million in various trusts and assets, the equivalent of $82 million in today’s dollars. I suspect if he’d been told at the outset he would end up with that amount he would have volunteered in an instant. But the meaning he attached to those numbers and how he reached them made it intolerable.
As Livermore highlights, money plays a starring role in decision biases and The Big List of Behavioral Biases lists over 100 to choose from. There is some overlap from academics trying to make a name for themselves with their very own decision bias, but it’s clear the more that money is the focus of your life, the more biases will bedevil you. Trying to keep in mind 107 biases to avoid while making a decision is impossible. Keeping money out of mind is a more achievable solution, though it’s often easier said than done.
Decisions have been shown to use different areas of the brain when money is at stake, and the greater the stakes the worse the typical performance. Evolution has given us wonderful heuristics for avoiding predation, finding food, and improving mating success, but very few that work when dealing with the dynamics of global financial markets reflecting the valuations of billions of people (many of whom are hunting your money).
The quantification that money allows often encourages a false sense of precision. If X then Y. If I make $X dollars this year, have $X in the bank, or have $X for retirement, then: I will be happy, I’ll have no worries, people will respect me, I’ll have a great retirement, I can do what I want. It’s a seeming mathematical certainty which is almost entirely illusory. Your feelings aren’t a market with buyers and sellers competing for scarce resources. Any prices you attach to your hopes and dreams are pure, arbitrary nonsense.
Ignoring that admonition can lead to price tags on everything in life. Your self-worth, how you spend your time, what you consider worthwhile, and even your relationships can come to depend on the balances in your accounts. Further, accounting is necessarily focused on the past, so whether it makes you feel good or bad, there’s nothing that can be done about it. There is no hope without the possibility of change, so obsessing about your numbers can only lead to hopelessness.
Short of becoming a hermit in the woods, dealing with money is unavoidable in modern life, and doing so successfully requires focusing on it to some significant degree. Yet focusing on it will mess with your head. It’s a catch-22. Fortunately there may be some ways around it:
- One strategy, as Bruce Bower wrote in What’s Your Number?, is to focus on the process and enjoy the aspects of it that lead to success, rather than focusing on specific monetary goals which are often more a distraction than a help.
- Another response is to avoid absolute numbers and use percentages, ratios and other measures which disguise the potentially mind twisting amounts with which you are dealing. If your profit factor is 3.27, it really doesn’t matter whether you’re dealing with $100 or $100 million; you’re doing what you need to do.
- If necessary, delegate all the accounting functions and only allow yourself to see sanitized performance reports showing the quality of your decisions, not the quantity of money involved (but keep full control over the accounts to keep your money from disappearing with your accountant).
- Everyone does better in some situations than others so self-knowledge is vital in avoiding monetary decision traps. For example, some trade better when ahead, others from behind and artificially creating those situations can prevent unnecessary losses. If you focus better when climbing out of a hole, periodically take enough money out of your account to get your mind where it needs to be. If you do better when you are up, consider splitting your risk money into two accounts, with one as a reserve gas tank to replenish the main trading account when losses start to mess with your head.
- It’s often difficult to be objective when thinking about yourself and your money, so ask yourself “Would a great trader/investor take this trade?” By focusing on what someone else would do with their account (which you care nothing about), it’s easier to be objective. You’ve probably read about many great trades but the default scripts that govern your behavior and attitudes often keep you from capitalizing in similar situations. Think of George Soros, Ray Dalio, or whomever you prefer, and use how you think they would act to write a different script.
- The duty to others can help hurdle decisions that are difficult when they only involve your own welfare. Whether you simply focus on doing it for the kids, or actually trade your wife’s 401(k), invoking a sense of fiduciary duty will often trigger a more useful set of responses and motivations.
- Reframe it. Going from zero to $5 million is great. Going from zero to $100 million, and then to $5 million is horrible. It’s the same ending either way but the feelings attached to it depend on how you look at it. Change your perspective and change your mind.
Dealing with money will probably always be difficult but money is just a label attached to a number. What it does to you depends not on the money itself but how you view it and respond to it. Ultimately those are things you can to some degree control.
Now, as a quick test, look at the above picture again to check that you can see more than money.