Tim, Anna and their two children were a typical family of emigrants. Home ownership seemed smart, and Tim got a whiff of real estate bug.
Its paper assets boomed, but market volatility and unforeseen job losses sparked a mountain of debt that ended in bankruptcy and disgrace.
Stories of others who got wind of the “next big thing,” entrusting their savings to someone they played golf with, made millions in cryptocurrencies, or became overnight “do-it-yourself” investment gurus, permeate our lives and ours social feeds.
This “noise” adds to the choices we make every day, but it also shows that many of the stories we hear as children radically shape our lives.
Fictional characters like King Midas, Ebenezer Scrooge, and Mr Burns of the Simpsons were all money-conscious.
Meanwhile, the humble Aladdin, Oliver Twist and Charlie Bucket from Roald Dahl’s Charlie and The Chocolate Factory tell stories about how you went from dishwasher to riches.
The messages of money we absorb, the role models we observe, and the circumstances in which we were born and raised shape the stories we tell about money, its role in the world and in our own lives.
For some of us, these messages are pivotal moments that instill certain core financial beliefs. For others, these narratives grow slowly and imperceptibly with age. Everyone has a narrative, but often we don’t realize what it is until asked to articulate it.
While our personal narratives are often based on years of experience and can include a large number of characters, they can usually be reduced to a simple word such as worship, avoidance, vigilance, or status.
Our ability to reduce larger experiences to core beliefs and insights helps us understand an incredibly complex world.
This is the fascinating point where social psychology (our experiences) and cognitive psychology (our brain) connect. When events happen to us, we take them with us into our store of experience and unconsciously look for patterns in order to develop rules of thumb.
Behavioral economists call this “heuristics” – mental abbreviations that enable us to solve problems quickly and efficiently and to make judgments. They can be wonderful and make our lives easier by reducing the cognitive load we have to bear when our brains make decisions or get into unknown situations.
The downside is that taking short cuts or prejudices can often lead to wrong decisions. This is not uncommon, only human and a consequence of the evolution of our brains.
For example, a coin toss that lands upside down three times in a row doesn’t make a number more likely on the fourth toss. The likelihood of future events like this does not depend on what happened in the past.
Another abbreviation is “confirmation bias”. This is our tendency to pay more attention to information that supports what we already believe. Nobody likes to be wrong.
The messages of money we absorb, the role models we observe and the circumstances in which we were born and raised shape the stories we tell about money, its role in the world and in our own lives
Sam Instone, Co-Managing Director of AES
Rewriting our personal narratives can be annoying and requires mental and emotional effort. We would rather be assured that the conclusions we have already drawn from our decisions are correct. This can disrupt our financial lives and beliefs by making us feel that our personal views about money are not just opinions, but are deeply and deeply true.
Once we have formed a personal narrative based on the monetary messages we believe in, we will pay much more attention to the information and events that support them, ignoring examples that call them into question.
Mental abbreviations take hold of our personal narratives and help turn them into core beliefs. Our decisions are heavily influenced by it. If you want to change your financial behavior in a positive way, you need to review your core beliefs.
You may think core beliefs are obvious to us, but that’s not always the case. Often they lie deep in our unconscious understanding of life. If your beliefs about money aren’t immediately obvious to you, how can you expose them?
According to Sarah Newcomb in her book Loaded: Money, Psychology, and How to Get Ahead Without Leave Your Values, writing your financial history can help.
These questions can help you with your orientation:
- If money was a character in your life story by now, would it be a friend, foe, or foe?
- How did your parents feel about money?
- Who have been your greatest financial influences (good or bad)?
- Were there crucial moments that triggered strong emotional reactions around money?
- How do you feel when you think about the money in your life?
Your monetary history already affects your financial decisions because it is based on your core beliefs.
By finding and articulating your story, you will become more confident and get one step closer to exposing your subconscious thoughts about money. Then, and only then, can you decide whether your beliefs do you good, or whether you need to question them or even change them.
Sam Instone is co-head of asset management company AES
Updated: September 24, 2021, 4:00 a.m.
