Family Financial Discussions - The Beginning is the Most Important Part of the Work
Family financial discussions are the beginning of our work with clients because we’ve learned that these discussions reinforce a truth that “every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”
That’s the key takeaway from the first chapter of Morgan Housel’s remarkable book, “The Psychology of Money.” The book is one of the best we’ve read about investing and personal finance, because it approaches the topic from a refreshingly human perspective.
Traditionally, authors have treated money as something like a hard science: If you do A, B and C, then your reward will be D. Housel reminds us that we humans are not computers, and that we make financial decisions based more on our personal experiences than on objective financial truths. He argues persuasively that working with an understanding of our psychology, rather than denying or ignoring it, is the key to financial success.
We believe “The Psychology of Money” is so important as a teaching tool, that we’ve chosen to summarize many of the chapters in a series of ICW Journal Insights. We’d encourage you to pick up a copy of the book and read the whole book. Chapter one, entitled “No One’s Crazy,” argues that society lacks a single set of agreed-upon truths when it comes to money.
“People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons,” Housel writes.
If you were born in 1950, our family financial discussions with you might reveal you spent your formative years learning that the stock market is a place where your money stagnates. If you had the luck to be born in 1970, our family financial discussions with you might reveal you learned that the stock market is a powerful engine to grow your wealth.
If you were born in the 1960s, our family financial discussions might reveal you learned that price inflation is something to fear. If you were born in the 1990s, on the other hand, you probably wouldn’t understand older folks’ fear of inflation.
Family Financial Discussions Create the Context for What Follows
Our experiences can differ not just in terms of our age, but also our gender, race and socioeconomic status. More than our innate intelligence, it’s the context into which we’re born that determines our understanding of how money, and indeed the broader world, work.
If we have different viewpoints on money, it’s not because you’re crazy, or I’m crazy, Housel writes. It’s because our experiences are different.
So if human psychology figures heavily into our understanding of money and our financial decision making, what happens when our less-than-rational brains are put in charge of saving and investing for our retirement or funding our children’s college education?
We certainly haven’t evolved to make optimal retirement-investing decisions at all times. Heck, the 401(k), which is the centerpiece of many Americans’ retirement-funding strategy, didn’t even exist until 1978. Roth IRAs are 20 years younger than that.
In the first chapter of “The Psychology of Money,” Housel explains the very subjective mental models that drive our decisions. In doing so, he sets up a contrast with investing and finance, which is inherently logical and mathematical.
How to bridge the gap? We’d argue that the answer is two-fold: First, know thyself ‒ and acknowledge you may not always have the analytical detachment needed to make the best decisions. Second, be open to advice, from a highly qualified, emotionally-dispassionate professionals whom you trust.
If you would like help exploring and understanding the investment implications of your “mental money models,” we may be able to help. That’s just part of what we do when we engage and consult with our clients in their family financial discussions and add to the body of their personal wealth knowledge.