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Are you in control of your finances?

Thursday, April 19, 2018

Try this thought exercise, which is an adaptation of a common experiment.

Imagine that you had to go to the grocery. You need to buy a bottle of jam. You go to the lane and you see three to four shelves of different bands of jam and variations of flavours within each brand. Let’s further assume that you have never bought jam before and you have no idea which is the best flavour of jam that you should buy.

Which brand and flavour would you choose? Why?

The reality is that you probably would not have a clue what to do and since you need to actually buy a bottle before you leave the grocery you are likely to simply pick up a bottle on some random basis that appeals to you, put it in your shopping cart and head to the cashier.

This thought experiment seeks to highlight to you the challenges you have with making choices. It is extremely relevant in this entire Cambridge Analytica / Facebook debate about manipulation and electioneering. It is also relevant to your finances and how you manage your financial affairs.

Most people equate choices to both freedom and control. The more choices that are available to you to greater your level of freedom since you have a greater variety from which to choose exactly what suits you best.

The more choices that are available also gives you a sense of being in control since you can decide what you want at any point in time and make variations to those choices as your mood and circumstances changes.

This sounds great. A variety of choice is a wonderful situation to be in. So what can possibly go wrong?

Spoiled for choice

Now let your mind wander to your cable subscription service.

Out of the 50, 100, 150 even 200 channels, how many do you watch?

How many different channels have you had time to explore and to develop a taste and a liking for? If you do, in fact, migrate from one channel to the next—assuming your lifestyle does not change—and you are watching the same amount of TV it means that you would spend less time on another channel.

The point is the idea that we need or even should have more and more choices is an illusion. Yet it is an illusion that can have dire consequences for how we think, how we live, our peace of mind and our financial health.

So long as you are in the mode of wanting more then you will be in a mode of wanting more choices. The problem is that our brains can only process so many choices and make so many decisions. The more decisions we ask our brain to determine the more we become tired, worn out and exhausted.

When you spend your time trying to figure out the best brand and flavour of dishwashing liquid or soap or toothpaste you are spending a lot of your energy on things that are essentially meaningless to your overall well-being.

The problem with this approach to life is that you are constantly searching, evaluating and exploring options because you want more of something. That mindset leaves you open to exploitation and manipulation and this is where firms that utilise big data and machine learning come in.

Your actions create a profile about you that allows for an understanding of “what makes you tick”. Messages are crafted that can be equated to “dangling a carrot on a stick”. If you are in search of a carrot then you run like crazy towards the carrot and soon enough your wallet is open and your money is spent.

Analysis paralysis

There is another angle that comes from having many choices.

In the original version of the jam experiment people were asked to choose from 24 different flavours of jam in one instance and six in another. Of those who had six flavours to choose from 30 per cent bought a bottle. Of those that had 24 flavours to choose from only three per cent bought a bottle.

When you have too many choices you either randomly select something based on some made up basis because evaluating each choice is an exercise in futility and a waste of time or you decide not to choose anything because you can’t make up your mind.

In trying to make a choice from a wide variety of options you are open to being coerced or even worse manipulated because the process is difficult and your anxiety to bring the process to a conclusion means that you can act impulsively.

The other likely occurrence is that you become paralysed and end up not making a choice and walk away. This may be all well and fine if the decision is around which bottle of jam to choose. It has significant consequences, however, when it comes deciding which financial services product to utilise.

From a current account in a commercial bank to an insurance policy on your life to a trust to house your estate when you die, there are many different financial institutions. Within each institution there are many different products and variations of each product to suit various needs and tastes.

In terms of investing your money you have so many different options and if you decide to invest in stocks then you have a number of companies which morphs into thousands if you decide to look outside of T&T.

The end result of all this is that you either spend too much time or too little time engaged in your financial affairs. People who are interested in making the “right” choices spend significant amounts of time and research trying to decide on “the best” place to put their money and trying to find “the best” investment at a point in time.

Other people are simply overwhelmed by the choices and the complexity and decide to do nothing. Here they take each day as it comes and decide that things will take care of themselves.

In between these two extremes there is the opportunity for those with a genuine desire to improve their lives falling victim to a marketing machine that positions products in front of them that are not suitable for their needs or which they do not understand.

This is actually why you have regulators for banks, insurance companies and others that provides financial services. The challenge, of course, is the very thin line between regulation and the limiting of choices that may properly suit a specific niche.

If you had a choice between 24 flavours of jam or six, my advice to you would be to make a concisions decision to go with the six flavours. You have a better chance of making a decision. Once you have made a decision using the information that is available try to stick to that particular range because you know and understand the choices that you are making.

If you apply this same logic to your consumption of financial services then you have a greater chance of success. Take the time to get a good understanding of a few options and then act on them. Over time as you gain more experience you can expand your horizons but just be sure to approach it in the same way as a new cable channel.

Have the conviction to work from a suit of limited choices. That’s what true freedom and control is about. There is a word for this state. It’s called being satisfied.

Ian Narine can be contacted via email at [email protected]


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