Where you are today is the sum total of your thinking to this point. Good or bad, what you experienced today is a result of your thinking yesterday. And guess what? What you experience tomorrow will be determined by what you think today.
So, it stands to reason that if you don’t like the results of your life now, you must first change your thinking. But that’s easier said than done.
You see, our brains are pre-wired for mediocrity. In fact, did you know that you are naturally complacent? It’s true. Our brains instinctively conserve energy by relying on things to stay the same. But we all know that complacency creates atrophy and births dependency.
The powerful fact is that most successful people had to change their limited thinking or adjust their standards or habits to support their goals. That’s because big differences in lives come from big differences in thinking. I constantly get asked – “How can I get rich quicker?” My answer: Speed up good thinking. As Jim Rohn always said, “If you want more, you must BE more.”
Your Brain Is Flawed
But how does one speed up good thinking and BE more? By realizing this – your brain is flawed. Yes, flawed. I’ve got news for you: Your brain is not here to make you happy or successful. No. Your brain’s primary function is to help you survive and to keep you alive.
Throughout childhood and into your early adult years you learned certain things from your parents and those around you to help you simplify the processing of information. Your brain then created shortcuts to help you make quicker decisions in the future. After all, quicker decisions help you survive and also to conserve energy.
Unfortunately, these shortcuts create biases and many of these biases lead people to make bad judgements…often financially catastrophic misjudgments.
Here’s Charlie Munger thoughts on this…
“I came to the psychology of human misjudgment almost against my will; I rejected it until I realized that my attitude was costing me a lot of money, and reduced my ability to help everything I loved.”
Now, if one of the greatest investors and thinkers of our time can humbly admit that his untrained, biased mind was costing him money, can you also admit that your probably carrying around biases that are holding you back financially?
So, what type of biases are we talking about here? Let examine a few common ones, especially as they relate to wealth building:
Confirmation Bias: This bias relates to the fact that we seek out information that agrees with our pre-existing beliefs but find it very hard to accept evidence that contradicts what we already believe. If you want to know if you have a confirmation bias about something, just measure how much time and energy you’ve spent gathering facts that support your view versus how much time and energy you spent trying to disprove your view. The best example of this is when an investor holds onto a loser stock. They don’t want to face a loss on their investment and admit they made a bad decision. They would rather keep their beliefs consistent with what they decided earlier about the stock, than experience the pain of being wrong.
You see, the more time, money and effort we invest in something the more we feel the need to continue. This is why people hang onto a bad idea or to an unhappy relationship. They would rather protect their fragile ego than be wrong.
Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true. -Demosthenes
We like to believe something is true especially with matters of money, because it’s so dear to us. But this is also the main reason why people follow “gurus”. They encourage followers to trust their hearts and put their minds on auto-pilot. Is it any surprise that the followers of Harold Camping, the evangelist who falsely predicted the world would end on May 21, 2011, still followed him after that prediction was proven false? His followers just ignored his failed prediction and got busy seeking out new information that confirmed their biases. At that point, they were so deeply invested in believing his predictions, that they would rather keep believing than lose face. Confirmation bias is a powerfully strong bias.
Do You Want To Be Right, Or Get It Right?
The healthiest thing a thinking person can do is to consistently read articles and sources of information that contradict what he or she knows – and then see whether or not the arguments being presented actually have merit or not. You see, it’s a good idea to focus on what can go wrong and the consequences. As Warren Buffett always says, build-in a margin of safety into your decisions, because surprises occur in many unlikely ways. Don’t be afraid to ask: How can I be wrong? The best attitude to have with money is this: Rather than focus on being right, focus on getting it right. Remember, refusing to look at unpleasant facts doesn’t make them disappear. It’s better to get bad news that is true than good news that is patently wrong. Jonathan Swift said “A man should never be ashamed to own that he has been in the wrong, which is but saying, in other words, that his is wiser today than he was yesterday.”
Illusion Of Control Bias: After a big stock market crash, it’s not hard to find TV commentators proclaiming a preference for being out of stocks, saying they feel more in control when in cash. Many are resolute in this preference despite decades of research showing that stock market returns far exceed the returns of cash accounts. A similar thought process applies to some people’s investing decisions. The illusion of control begins with the word ‘should,’ as in, ‘I should be able to pick the right stocks,’ or ‘someone should have the ability to time the market to achieve superior results consistently’. People can easily justify those ideas when they read about some “guru” who has done it recently (confirmation bias), but that thought process can be financially damaging. People who live under this belief have trouble coming to terms with the irrationality and variability of the stock market and the impossibility of their prediction. The outcome is typically a spiral of financial disaster and the stupid rationalization that while their belief was correct, the person who pushed the buttons wasn’t competent!
There Has To Be A Way To Predict The Markets!
Our brains don’t like uncertainty. We have a need to be in control and make sense of events. This causes us to refuse to accept what is unknown, like what the stock market will do next week. Our brain seeks the comfort of “patterns”, but rejects randomness. This is why so many speculators study nonsense like candle stick charts and ink blots, looking for “meaning” in coincidences.
To combat this bias, look for alternative, normal explanations for things. Look for general reasons, not dramatic, soap-opera-type explanations and convoluted charts for what happens in the market and the overall economy. Remember, drama gets our attention but gives absolutely no meaning to events. Don’t tell yourself a story about something just because you want “control”. Remember, a story can have many possible beginnings and endings.
Social Proof Bias: Ah, the granddaddy of all biases. This bias is best summed-up with the following phrase – “But everyone else is doing it.” We all like to think that we are rugged individualists, but the truth is people are social animals. Marketers know this, and have become adept at creating social proof bias within us – since millions of people have bought this brand of smartphone, so should you. It’s another type of thought process that takes hold when a person doesn’t want to be left out of a trend or a movement. In fact, studies show that most people imitate. They wrongly assume that others know more than they do and just follow the herd. They’re thinking is this – “I would rather be wrong in a group than right by myself.”
When Everyone Is Accountable, Nobody Is Accountable
That’s very true when it comes to investing. Just because the larger herd is stampeding into or out of the market, it doesn’t mean that’s the right move for an investor with his or her own objectives. Investors that buy when the market is high and sell when the market is down are more than likely influenced by the herd mentality. But as Warren Buffett says, “As happens in Wall Street all too often, what the wise do in the beginning, the fools do in the end.”
So, how does one eliminate this bias? By not being intellectually lazy. I know that’s an abrupt phrase, but it’s the truth. People who fall victim to social proof bias have been too lazy to research and discover the facts for themselves. Rather, they just rely on what everyone else is doing. They reason it this way – The more people that are doing something, the less that they have to take personal responsibility. That’s a terrible life philosophy. Here’s a great mantra to combat this nonsense thinking – if you do what everyone else does, you’ll get what everyone else has. What does everyone else have? Not much. Exactly.
Remember, in groups of people, everyone has different motivations and ideas and many people contradict themselves. I always say that in a group of 10 people, you’ll find 11 opinions. Be responsible for your own thinking. When everyone is accountable, nobody is accountable.
If you truly want to fix anything that’s not working in your life, I encourage you to do the mental archaeology to uncover which of your thoughts are leading to bad judgments and to have the courage to eliminate the biases which may be holding you back. In doing so, you’ll change your mind from being just a tool for survival into a tool for success!
BONUS: If you would like to learn more about the psychology of misjudgments, I would encourage you to give this vintage podcast a listen. In it, the great Charlie Munger speaks to a graduating class at Harvard about the perils of biases. Enjoy!
Be free. Nothing else is worth it.
Want more information about turning your brain into a success machine? Check-out these other articles from the blog archives:
Can The Experts Really Predict The Stock Market? The Answer May Surprise Some.
Greek Tragedy: Important Personal Finance Lessons To Be Learned From The Greek Debt Crisis
Having Difficulty Staying Positive After A Setback? Use The “Ledger System” To Bounce Back!