Taming the pound

This is a companion piece to “What’s the problem with financial capability?” There I suggested some issues with the practice of teaching financial capability.  Here I cover questions asked about how to implement the ideas, and objections to changing what is done now.

• Values are important for motivation and happiness, but we shouldn’t impose values on people.

Don’t confuse “personal values” with “what a sub-section of society value”.  It’s not about imposing should’s (“you should work hard”, “should get a steady job”).  It’s about finding out what actually motivates the person.

There’s evidence (read anything by Martin Seligman) that working at something you value personally is more satisfying (read “Flow” by Csikszentmihalyi), it motivates you to achieve more and leads to happiness.

Try this, you’ve made a change now (gone to university, started your business, got your new job, quit your old job).  Imagine you’re ten or fifteen years older and are looking back, having had fantastic success, achieved what you wanted. You’re interviewed by your favourite interviewer on TV.  What do you tell them you’re proudest of, what achievements do you think made it worthwhile – what is it you’ve achieved? (there are several more exercises on this in Taming the Pound).  That’s your personal value.

Somebody may find they “value” being wealthy, that’s fine if it’s true. They will work hard and learn whatever they need to get there, so there’s no problem with motivation.  What will happen in fact is that, when the money motive is taken away, they’ll start to think about what really matters to them.  They might want to start a charity to help with a problem a relative or friend has suffered, establish a business, become an ambassador of goodwill – the point is that it’s something that’s an internal value to them.  If they (with your help) tie what they’re learning to that objective, they’ll be working for something that makes them happy, that really motivates them to learn and that will give them immense satisfaction in the journey, rather than only in the arrival.

• But people do want money, we’ve tried the “you don’t really want money itself, it’s only a tool” line and it doesn’t work.

If you say it, it’s not true; if they say it, it is. So get them to say it.

Try this.  Imagine you win the lottery and you’ve got £50 million. What would you do?  No self-editing— no matter how crazy it sounds. Write down the first 15 things that come to mind. Be as specific as you can.

After 20 minutes, look at the list and see where the desire for it has come from: “someone else has one,” “this is what I should want,” “I always said ‘when I grow up I want. . . . ’ ” Now separate the list into three “buckets”: things you feel you should want if you have £50M, things someone else (family, friends, and so on) thinks you would want if you have £50M, and things (or activities) that you really want. For example, do you feel that if you’re a millionaire you have to have a big house like the one you’ve seen in Hello? Do you want a Ferrari because the guy up the road bought a Mercedes?

Now, count up the things that come from the media and adverts.  Look at desires driven by competition with friends and family (to prove you’re the best) or enemies (to shut them up), the stuff that “experts” have told you that you ought to want, the ones you’ve been sold, the ones that your parents want. Finally, add up the ones that could fulfil your dreams, ones that you would truly value and be happy about long term. With clients, the last list is always the shortest.

Money is a tool and most people do realise it when they stop focussing on the money itself and move to what the money is a tool for them to achieve (there’s more detail on this and other exercises in Finance is Personal)  If they still just want the money, great, they know exactly how much they need and exactly what they’ll buy with it when they get it – so they’ve got a definite goal.

• Teaching better decision making is too complex, we have to focus on particular financial issues.

Since I’ve taught decision making in universities, with public and private sector organisations and professional organisations, I know it is possible.

And it’s needed, even judges and experts who have to make impartial decisions don’t actually know what influences them, like blood sugar and their own biases 

It isn’t simple to know how to counter that.  But that’s why I’m a qualified psychologist who teaches this material.  Notice that the Research Briefing points out both that “As most people are unaware of their cognitive biases, they are hard to control, but their effect may be mitigated by a variety of targeted strategies” and “training judges and educating jurors may reduce the influence of cognitive biases in court.”

That indicates that you can target those problems with strategies (i.e. there are methods to help people make better decisions) and that training can help – so you can train them.

I tend to use a lot of the literature on decision making in my work, and I’d recommend reading Risk Savvy (Gigerenzer), The Power of Intuition (Klein), The Power of Habit (Duhigg) and Influence (Cialdini) if you are interested.

• We already teach skills like budgeting, that’s what people need, so general decision making can be learned from that.

There are hundreds of ways to budget suited to different situations. Who says the one you teach (or the one they remember, if they remember) is going to work for them in their situation in ten years’ time? If you do it that way, the people you teach:

• don’t know which one to use in a given situation (like learning statistical formulae and not knowing which one to use for real work, because all the practice in learning them was a series of questions on a particular formula).

• can’t remember it, because at the time it didn’t seem relevant, there’s not enough motive to remember

• it’s out of date, since 10 years after you teach kids about finding the best mobile phone the technology is different, nobody wants a phone (they have implants or wearables), there have been 3 changes of Government and 13 budgets and all the laws, taxes, protection and everything they can remember (if anything) is irrelevant.

• could apply principles to specifics for themselves if they’re motivated and you’ve taught principles, but can’t derive general principles from specific examples without some help at the time.

• We already work on real world decision making, like doing things around mobile phones so this is nothing new.

As above, picking examples like phones sounds real world, but it goes out of date quickly and it’s actually narrow, it’s tactical. Problem solving in the real world is strategic.

For example, how does being able to work out a good interest rate help with making decisions about what course to follow at university, or what house you actually want to live in?  It’s too specific a skill.

If you teach prioritisation skills, people can work out what they really want (from a phone, a degree or a house) and separate wants from needs for their own unique personality.

If you teach judgment, they can understand how they, personally, tend to make decision errors – are they too emotional, jump to conclusions and ignore evidence or do they try to be too scientific, make up complicated formulae that are actually meaningless but give them a false sense of accuracy (what happened to LTCM, look it up; also true of the basic investment theory used in markets, MPT). Or do they make different sorts of error in different situations?

If you teach about values, they can work out what they really want, and what their real goals are.

And if you teach about the brain and thinking, they can work out the best way to make different types of decision, given the situation they’re in – not simply following a rule they’ve been given irrespective of reality.

• But you can’t teach this stuff, it comes with experience.

One reason 70% of people are in debt is that they haven’t learned from experience how to make decisions well.  And reflection, one of the methods I use, is the standard method of professional development using experience in many areas, and increasingly an assessment method at undergraduate level and beyond.

It’s also well suited to learning for adolescence onwards, I’m currently using it in a project helping young offenders not repeat offending and there’s interest in extending it to ex-prisoners so that they have the skills to integrate into society effectively and be productive community members.

Shouldn’t the next generation of kids get the same opportunity?

It sounds easy to teach – just teach financial skills.  So why doesn’t that work?  A few reasons.

• We think of financial capability. 

But finance is only one tool in life, there are many others. There’s making good decisions, such as decisions about careers, health, housing as well as money.

Learning about finance doesn’t help to make better decisions generally.

Learning about how we make decisions, about how our minds work, how to separate needs from wants, to realise what our real passions are and work out how to pursue them helps with any sort of decision.

• Life success isn’t about finance.

Would you rather be happy, productive and fulfilled, or rich?  The evidence is that materialistic values, having lots of “stuff” is actually linked to unhappiness, while doing things that have a value for you , doing things for which you have a talent, using money for the benefit of others (https://www.psychologytoday.com/blog/the-path-passionate-happiness/201509/3-ways-money-can-buy-happiness) are all linked to a fulfilling and happy life (and greater business success).

And a focus on finance as the sole object limits us.  Instead of choosing to study or work in something we love, would excel at and would eventually earn above average in, we do something that pays well on average, but that bores us and end up at the lower end – and miserable but trapped in a job we can’t afford to leave.

• Finance is actually pretty simple to learn.

People say finance is difficult and because people say it, others believe it – we conform to norms (read “The Emperor’s New Clothes” by Hans Anderson).  Marketers use “9 out of 10 said….” because we listen to other people’s opinions to form our own – read “Social Proof” in Cialdini’s “Influence”.

Finance is relatively simple.  All pound coins are the same, they have no emotions, make no wild decisions, one pound plus another pound is always two pounds. Finance depends on money always being basically the same, or it can’t be exchanged properly and loses its function.

• It’s people who are complicated.

Each person is unique, they have emotions, make irrational decisions.  Take one person and add another and you could have the cure for cancer or a weapon of mass destruction.

The human brain is the most complex single entity in the known universe.  It has emergent properties (complexity), it’s not linear so the results can be massively more or less than the sum of the parts and thesame  starting conditions don’t always lead to the same conclusion (chaotic), it’s self-organising and constantly rewiring itself and most of it isn’t available to consciousness.  It also comes with no user manual!

• Learning anything depends more on motivation than complexity.

Most people can remember things they want to. People who are “bad at maths” can quote batting averages, count backwards in trebles ending on a double in darts and quote the goal scorers for the last 50 years for their team. People can remember, or instantly forget, Strictly contestants, Bayes’ Theorem, shopping lists or quantum physics formulae. Whether they remember or forget depends on relevance to their interests, not complexity.

Most things are simple if we actually want to learn them. The problem is that most people don’t want to learn finance. Hands up if you actually want to learn all the rules on pensions!

• Life is not logical, so “rational thought” doesn’t always work.

In a casino, rationality (if you’re sensible) rules. You know the odds, the payoff, when the gamble ends and you know that the game doesn’t change in the middle.  Learning probability and statistics (like Bayes’ Theorem) is necessary. So from “A Beautiful Mind” to the Nudge Unit, we’re told to be “logical” and that the use of thinking that is “irrational”, “intuitive” of “heuristic” (mental short-cut) is a Mortal Sin.

In real life (and financial markets) you don’t know the odds, the payoff or when the gamble finishes (if indeed it does finish). The game regularly changes in the middle, due to technology, the budget, competitor action etc.

Tell me, which one is actually a gamble?

That’s a reason you have banking crises, market slumps, pension funds that disappear, sudden debts – people assume that the theory that works in a lab or casino applies to life and that is simply not true.  Read “Risk Savvy” by Gigerenzer.

• Humans are well adapted to real life.

We evolved over 250,000 years or so to deal with life as it actually is – without casinos, John Nash, misinterpretations of Kahneman and Tversky and behavioural economists worshipping a painted idol called “rational thought”.

Everybody alive exists because our ancestors thought fast enough to survive.  Try applying Game Theory or Bayes’ Theorem to the question of whether it’s good odds to try to chase lions from a kill – see how many descendants you have when it takes you 45 minutes to work out whether to fight or run.

• Unfortunately, the life we’re adapted for is hunter gathering – which most of us don’t do

Modern life isn’t what we evolved for, so we have various adaptations that served us well in the past, but don’t always help now.  They’re what behavioural economists keep moaning about, the “irrational” human mind, not realising that that’s the way it is and you can’t just change it and become a Vulcan and “logical”.

For example:

We have optimism bias, (http://eprints.lse.ac.uk/29133/, read “The Optimism Bias” by Sharot) because we need hope to get us out of bed (or our cave) in the morning.  We think we’re more in control than we are which is why so many projects are late and over budget, homework is handed in late, we never do as much on our day off as we expected etc.  We genuinely expect to pay loans back, we just don’t quite manage it in reality.

We evolved to think short term as going hungry today might mean dead in a week, so money today is much more valuable to us than money in a week, a month or a year.  That’s a reason pension provision is inadequate, £100 now has more value to us than £10,000 a year in 40 years’ time, http://digest.bps.org.uk/2012/07/prepared-to-wait-new-research.html).  So we genuinely feel we need the money now, we only want to have the money in the future, so we have to borrow it now.

We learned to keep track of favours, obligations, debts etc. as mental accounts, so we treat money on credit cards as different to cash (http://web.mit.edu/simester/Public/Papers/Alwaysleavehome.pdf) although it’s all, ultimately, of the same value objectively.

Having mental accounts and similarly having confirmation bias and being loss averse make perfect sense if you are a hunter gatherer (read Fiske, Structures of Social Life, Barkow, Cosmides and Tooby, The Adapted Mind and Pinker, The Blank Slate).  But in modern life you’ll probably pay more on credit card than you will in cash (nearly everybody does), you’ll distort the evidence to fit what you believe to start with instead of actually testing whether you’re right (we all do) and you’ll miss out on opportunities that rational thought would indicate you should take (most of us).

Notice, none of the problems are about money, they’re about how we operate as people

• And there are a scores more reasons that it’s difficult to teach “financial capability”.

As examples:

Our habits are strong and hard to change (read “The Power of Habit”, by Duhigg).

We’re often ambivalent about whether we really want to change (read about Motivational Interviewing for change).

We have trouble deferring gratification (look up, “the marshmallow experiment”) and use the wrong tactics to do it.

We often apply the wrong tactics, at the wrong time and keep hoping for a magic solution to change instead of actually working at the right things (read “Changing for Good”, by Prochaska, Norcross and DiClemente).

We don’t know our own minds (look up, “the rope bridge experiment”, an example of how we don’t actually recognise the emotions that drive our behaviour).

We learn unconsciously – our “money stories” are very powerful, what we’ve learned early on about money stays with us (read about “life scripts” in Transactional Analysis and chapter 2 of “Finance is Personal” by Stephenson and Hutchins).

• So what could we do?

Teach general skills, like decision making, prioritising and judgment that have multiple uses.

Teach how the brain works and how it can be controlled so it helps us, rather than confuses us.

Focus on motivation, what we value, happiness, fulfilment.

Teach ways to build motivation, to separate wants from needs for the individual and how to change habits and behaviour.

Teach the control of impulses, allowing people to put off gratification (such as saving for things).

Treat money as simply one tool in a whole toolbox to help achieve a happy, fulfilled life.

In short:

• We think of financial capability. 

De-emphasise finance and emphasise human capability.

Recognise that we’re the complex, important part and that money is simple, relatively trivial and our servant, not our master.