Some of the most profound truths are those, once revealed, that seem self-evident. And that may also be the most potent gift possessed by the greatest writers and thinkers—the ability to reveal something we already know with such clarity that we can act on it.
Perfection is the enemy of progress.
One of my favorite contemporary thinkers, Shane Parrish, recently shared a quote from one of the greatest writers of (at least) the 20th century, C. S. Lewis, that can be a helpful guide in any number of pursuits, especially financial wellness. Implicit in his counsel is the answer to the question, “How do we fix broken financial plans?” Let’s check it out:
“You can’t go back and change the beginning, but you can start where you are and change the ending,” Lewis said.
How much time and how many calories do we spend wondering what could have been rather than acknowledging what is and progressing forward?
The good news, at least, is that if you’ve suffered from this tendency, you’re in good company. Through behavioral finance, we’ve learned that we, as humans, have some tendencies—maybe even biological hard wiring—that can manifest as suboptimal in pursuing our best interests financially.
For example, from Kahneman and Tversky, we learned that we feel the pain of loss (at least) twice as intensely as equivalent gains. This tendency (dubbed “loss aversion”) may lead us to amplify our financial failures and inhibit us from more confidently pursuing preferable outcomes.
Yet, at the same time, we demonstrate a propensity to put good money after bad. Arkes and Blumer suggest that we may cast rationale aside and continue to invest in bad investments, doubling down to prove that our original hypothesis could have been—should have been—right. A better understanding of the “sunk cost fallacy” helps us acknowledge when it’s time to part with our past and pursue a preferable future.
You’re likely aware of the “status quo bias”—the fact that we tend to be more comfortable enduring a less-than-perfect present that we know than charging into a better future that we don’t. And Dr. Hal Hershfield has helped us understand why—that we, as humans, struggle to view our future selves with the same level of familiarity as our past and present selves. He’d suggest we may even see our future selves as strangers, which could certainly help explain why many struggle to save for the future…because we don’t even see that act as something we are doing for ourselves.
These tendencies can manifest as suboptimal, however, that doesn’t mean they must. In fact, Dr. Meir Statman does an exceptional job of helping our understanding of behavioral finance evolve—by pointing out that these inclinations that are often accompanied by seemingly pejorative words like “bias” and “fallacy” aren’t unfortunate accidents and have likely helped us, as a species, survive. And it is through our acknowledgment of reality and a better understanding of the human condition that we can identify the formerly unknown and exercise our volition to our own benefit and those we love.
So how, therefore, can we fix broken financial plans?
1) Start with the present, because it is the most accessible.
No matter how sophisticated the analysis, the first step in every financial plan is to answer the questions, “Where am I?” and “How am I doing?” This is the reality check, and while a skilled financial advisor can be helpful in each of these three steps, it may be especially important here because of the benefit of an outside perspective. Please also acknowledge that this is one of the reasons so many people don’t ultimately benefit from a healthy relationship with a financial advisor—because revealing ourselves as we are can feel exceptionally vulnerable.
2) Examine the past, because it reveals our personal tendencies, for better and worse.
We don’t want to get stuck in the past, but only through its assessment can we determine our optimal course forward. Or, as Søren Kierkegaard illuminated, while life “must be lived forwards,” it “can only be understood backward.”
3) Act into the future.
That might seem like a strange way to articulate the third step in this triune prescription, but it’s quite intentional, because all the illumination and understanding we can muster through self-analysis is useless without action designed to improve our futures. As a necessity in honing our craft, we, as financial advisors, conduct a great deal of hypothetical analysis—and we have our own biases and tendencies that may lead us, and our clients, to arrive at surprisingly high degrees of satisfaction upon completing said analysis. But such satisfaction is bordering on dangerous, because an unimplemented financial plan is worthless.
You can’t change the beginning of your financial plan, and I encourage you not to judge yourself based on the past. Instead, view your financial planning as an opportunity to rewrite the ending and judge yourself not on past performance, but your future trajectory.