To Have and Have Wasted Money
Going Broke…
In the Psychology of Money, Morgan Housel tells the story of a tech executive he encountered while working as a hotel valet. The exec had patented a crucial piece of Wi-FI routers at a young age, and was a successful serial entrepreneur.
This executive had money. He once handed a hotel worker a thousand bucks to go buy gold coins from a jewelry store.
He promptly took those coins and skipped them into the Pacific Ocean.
Surprise, surprise: years later, he went broke.
…or Making Millions
In contrast, Housel offers the story of Ronald James Read. Read was as unassuming as they come. He was a gas station attendant and janitor his whole life. He bought a two-bedroom house for $12,000 at age 38 and lived there until he died.
Ronald Read died with over $8 million in the bank.
What explains the difference outcomes?
Consistency.
Change Is Hard
TL;DR: your brain is lazy. It evolved to like and seek out familiar things more than unfamiliar ones.
One way this tendency appears is the pressure to be consistent:
- Internally — Once you make a choice or take an action, you want to believe what you first did was right. Your brain also doesn’t want to have to weigh the pros and cons of a situation every time you encounter it. So your brain feels the need to keep making the same choice.
- Externally — If you want to change your identity, you risk external push back. Friends may look at you funny for acting a new way. Your significant other may not like who you change into.
As a result, humans fall victim to “Consistency Bias,” which is our tendency to be the same person, doing the same thing, whether it makes sense or not.
Consistent Personal Finances
On one hand, consistency can bankrupt you like it did the tech executive. You can never predict black swan events, and wasting your money increases the odds those events will ruin you.
Similarly, the sooner you start making better financial decisions, the sooner you’ll feel pressure to be consistent with those smarter decisions.
This doesn’t necessarily mean living as frugally as Ronald Read; ultimately, what personal finance choices you should make depend on your values. But it does mean that you’ll make yourself better off in the long run by starting to make wiser finance decisions now.
Compounding is a magical force, but it’s not just financial. Thanks to Homo Sapiens’ consistency bias, compounding is also a behavioral force.
Food for Thought
- Sub-optimal personal finance decisions put psychological pressure on you to keep making sub-optimal financial decisions. Where are you making those choices now?
- Consider the reasons you didn’t choose the option in your long term interest last time. How can you set yourself up to choose differently next time?
- You can also tap into your consistency bias by telling friends and family that your goals and values are. Your brain will feel pressure to be consistent with that image. What can you do now to set yourself up to make better personal finance decisions?
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Homo Sapiens’ psychology can either limit or enhance your success.
You choose.
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