For many millions of Britons, 2023 was a financial wake-up call. A combination of inflation, higher interest rates and concerns about the economy all contributed to a sense of unease about household finances. 

According to a recent survey, 57% of British adults say the cost-of-living crisis is a major financial concern. Running out of money was a major concern for 38% of respondents. Not saving enough for retirement was the third-biggest worry, affecting 26% of people, with anxiety peaking among those aged between 41 and 55.

Such fears are entirely understandable. The question is, what can you do to allay them? Inflation and the state of the economy are out of our control. So too are the financial markets. And no one is immune to life events like marital breakdown, or losing your job or business, that can seriously harm your financial wellbeing.

Mind your behaviour

But there’s one thing we can control that has a huge bearing on our financial future, and that’s our own financial behaviour. By having a plan, controlling our expenditure, investing enough money and maintaining a long-term focus, we maximise our chances of achieving our goals.

It sounds so easy, doesn’t it? In practice, though, it can be anything but. Why? Because, when it comes to money, we’re all prone to self-sabotage. In the words of Benjamin Graham, the investor and academic who was a mentor to Warren Buffett, “the investor’s chief problem, and even his worst enemy, is likely to be himself.” 

This is a strange phenomenon. After all, football players don’t deliberately score own goals, and batsmen don’t hit their own wicket on purpose. So why are the financial crises people face so often self-inflicted?

How to Overcome Optimism Bias in Investing - Your Own Worst Enemy

The Chimp Brain versus the Human Brain

A book by psychologist Steve Peters called The Chimp Paradox provides the answer. There are, Professor Peters explains, two different brains in all of us. The first he calls the Chimp Brain. This part of the brain is driven by emotions and instinctive responses. It learns from our past experiences, and it’s responsible for our immediate reactions, such as fear, fight or flight.

Then there’s the Human Brain. This represents rational, logical, evidence-based thinking. It’s associated with the frontal part of the brain, particularly the prefrontal cortex. This is where we process information, think critically, plan, and consider the consequences of our actions.

In his book, Professor Peters explains how these two brains often compete with one another. Most decisions, including financial ones, are best made by the Human Brain. The problem is, the Human Brain works slowly and requires effort. 

The Chimp Brain, which is based on the limbic system — one of the oldest parts of the brain in terms of evolution — is far more powerful and jumps to conclusions very quickly. That’s why the chimp within us tends to get the upper hand, and why it often (though not always) results in us making poor decisions.

“The Chimp is an emotional machine that will hijack you if you allow it to,” the author writes. “It is not good or bad; it is just a Chimp.”

Slow down, you think too fast

The Nobel Prize-winning psychologist Daniel Kahneman makes a very similar argument in his classic book Thinking, Fast and Slow. Kahneman’s specialism is behavioural finance, or why we make the financial decisions we do.   

Humans, says Kahneman, have two different “systems” they use when making decisions. System 1 is fast, intuitive and emotional. It operates automatically and quickly, with little or no effort and no sense of voluntary control. It’s responsible for snap judgments and quick decisions. It is, if you like, the Chimp Brain.

By contrast, System 2 is slow, deliberative and logical. It requires effort and is responsible for complex calculations and conscious, rational thought. This is the Human Brain.

Like Steve Peters, Kahneman says we rely far too often and too heavily on System 1. The reasons he suggests for why we do so are also very similar — not least the fact that it requires much less effort.

But, says Kahneman, the main reason why investors in particular favour System 1 is that it satisfies our inbuilt need to make sense of complexity. The Chimp Brain, remember, is all about feelings and emotions. We want to feel that we’re in control, that it’s possible to explain past events and to predict the future. We dislike uncertainty so we cling to narratives that seem compelling.

The problem, says Kahneman, is that the real world doesn’t work like that. “The sense-making machinery of System 1,” he writes, “makes us see the world as more tidy, simple, predictable, and coherent than it really is.”

Don’t monkey around

Where, then, does this leave us, and particularly those of us who are worried about our finances and our ability to pay for the life we want to lead in retirement?

In short, Peters and Kahneman teach us three main lessons.

First, recognise that all of us are hardwired to struggle with financial decisions — and that includes you. “We can be blind to the obvious,” writes Kahneman, “and we are also blind to our blindness.”

Secondly, think about your own relationship with money. How have your past experiences shaped the way you spend or invest? What behavioural biases are you prone to that could land in difficulties? Are you, for example, irrationally fearful of losing money on the stock market? Or do you have the opposite problem? Do you think you’re a better investor than you actually are?

Finally, instead of rushing into making a decision, slow down and ask yourself: Is it my Chimp Brain or my Human Brain that’s winning the argument here? Am I taking this course of action because I’ve thought about it carefully and decided that it’s the logical thing to do? Or am I doing it simply because it makes me feel better?

Again, all this is far harder in practice than in principle. It requires research and serious soul-searching and, ideally, the help of a financial planner who understands behavioural finance.

But whatever you do, don’t let your inner chimp dictate your financial strategy. Your goal instead, is to learn to control it, and you can start by having a thorough understanding of how your mind works.

DO YOU HAVE A PLAN?

At rockwealth, everything we do is designed to help our clients to lead the lives they truly want to and enjoy the deep sense of satisfaction that comes from realising their hopes and dreams.

If you’d like to learn more about proper financial life planning, and what it can do for you and your loved one, why not get in touch?

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