Clear Thinking: Overcoming Defaults for Better Financial Decision-Making
One of the best books of 2023—and one sure to land on my list of Advisor Resources for Financial LIFE Planning—was published near the year’s end. I’ve been following Shane Parrish’s work for years as the creator and curator of the Farnam Street blog and newsletter, so his new book, Clear Thinking, was in the cue.
In his book, Clear Thinking, Shane Parrish, known for his ability to simplify the realm of behavioral science, presents four defaults that hinder clear thinking. By examining these defaults, we can apply lessons to our financial decision-making that lead to better outcomes.
The Emotion Default: “We tend to respond to feelings rather than reasons and facts.”
Parrish asserts that emotions play a significant role in decision-making, and if left unchecked, can detract from our progress. Emotions are often instinctual and impulsive, originating from the part of our brain known as System 1. This emotional thinking can lead to impulsive financial decisions that may not be in our best interest.
Lesson: Money is inherently emotional.
Although the financial industry often encourages individuals to separate themselves from their emotions, Parrish argues that it’s impossible to do so. Money, in particular, carries significant emotional weight. Instead of ignoring or suppressing our emotions, we should acknowledge and process them. By understanding our emotional responses, we can make more informed financial decisions.
The Ego Default: “We tend to react to anything that threatens our sense of self-worth or our position in a group hierarchy.”
Our perception of net worth and the opinions of others can heavily influence our self-worth. Society often associates financial success with personal success. However, Parrish encourages individuals to detach their self-worth from their wealth and navigate comparisons responsibly.
Lesson: “Comparison is the thief of joy,” and the modern world is wired to create comparisons everywhere we turn.
Parrish advises against falling into the trap of constantly comparing ourselves to others. Rather than fixating on what we lack or how far we are from our ideal state, we should celebrate our progress and focus on the gains we’ve made. By shifting our mindset from constantly being “in the gap” to recognizing our achievements, we can find contentment and joy.
The Social Default: “We tend to conform to the norms of our larger social group.”
Peer pressure and social norms can have a powerful effect on our beliefs and preferences. Parrish shares personal anecdotes highlighting the influence of group dynamics on individual behavior. Society creates implicit expectations within various social circles that may not align with our own values or goals.
Lesson: Be cognizant of the influences of your social groups.
While social connections are important, Parrish advises being aware of the social groups we belong to and questioning their norms. By challenging societal expectations, we can make financial decisions that align with our personal values and circumstances. It’s crucial to remember that personal finance choices should reflect what’s right for ourselves and our families, rather than adhering to societal expectations.
The Inertia Default: “We’re habit-forming and comfort-seeking. We tend to resist change and prefer ideas, processes, and environments that are familiar.”
Humans are creatures of habit, often following routines without conscious awareness. Parrish suggests that recognizing our habits and questioning them is crucial for personal and financial growth. By understanding the behaviors triggered by certain cues, we can replace ineffective habits with more beneficial ones.
Lesson: Become familiar with the habits and processes that are likely to lead to financial success.
Though financial success is not guaranteed, there are foundational principles that increase our chances of achieving it. Parrish emphasizes the importance of self-awareness and understanding our emotional responses to money. By harnessing our emotions and aligning our habits with our financial goals, we can establish a path towards financial success.
Ultimately, by recognizing and challenging these default patterns of thinking, we can overcome obstacles and make clearer, more rational financial decisions. Shane Parrish’s book provides valuable insights into behavioral science that can equip individuals to navigate the complexities of personal finance with greater clarity and purpose.
Disclaimer: The opinions and views expressed in this article are those of the author and do not necessarily reflect Bloomberg’s official policies or positions.
Analyst comment
This news can be seen as positive for the market. The book “Clear Thinking” by Shane Parrish offers valuable insights into behavioral science that can help individuals make better financial decisions. This can lead to more rational decision-making and potentially better outcomes in the market.
