We’ve all been there, in one form or another. Something really bad happens to us, financially speaking, and all of a sudden, our life is forever split into two eras: BE (‘before-the-event’) and AE (‘after-the-event’). How our lives proceed from that moment on depends on many things, but in my experience the most important of these is our own response to it.
If you suffer a significant financial setback, there will of course be immediate and practical consequences. You may need to re-balance your personal balance sheet (i.e., sell stuff to raise cash), rebuild your wealth over time, or re-calibrate your spending plan to adjust to a different income level (e.g., substitute beer for champagne). Yet as difficult as those things might seem, they are the easy part. The difficult part is coming to terms, personally and emotionally, with what you have experienced, and doing so in a way that doesn’t keep you captive to the experience – and possibly repeating it – for the rest of your life. Indeed, whether you fully recover financially is likely to depend on how good a job you do at recovering emotionally.
Money and the Mind
As Daniel Kahneman has described in his Nobel prize-winning work, we all have two different brains: our ancient or “lizard” brain, and our modern or “rational” brain. As much as we might identify with our modern, ‘rational’ selves, it is our lizard brain – our quick-to-react, intuitive, ‘unthinking’ capacity for action – that determines most of our behavior and that enables us to respond effectively and in real time to the world around us. Without our lizard brain, we simply couldn’t function. The problem is that our lizard brains are uniquely unqualified to deal with money.
As a result, we are at risk of becoming our own worst financial enemies. And at no time is this truer than in the aftermath of a financial trauma. Chalk it up to the fact that our deep ancestors are those who survived the trauma of being chased by lions across the African savanna. Our lizard brain reacts strongly, quickly, and decisively to negative events. It “learns” – without deep introspection – to identify sources of pain and danger and directs us to avoid them in the future. Our lizard brain “tells us” that if we stop to think about and investigate a strange sound in the bush, it is likely to be too late; we will get eaten.
Avoiding Emotional Oversimplification
Here’s the problem: our lizard-brain-driven, intuitive, emotional responses to the world of money are almost invariably unhelpful, and frequently downright dangerous. If we’re not careful, a financial trauma will create in us a permanent, counter-productive response to money. In order to move beyond the trauma – and be truly free of it – we need to use our rational brain to examine, analyze, digest, and possibly re-program the emotions(s) that our lizard brain embedded in our synapses as a result of the experience. Consider the following examples.
Fear. Mike was a successful executive during the 1990s in Silicon Valley. His broker, on whom he relied for investment advice, recommended that he invest almost exclusively in tech (dot-com) stocks. After all, why would someone as smart and successful as Mike want to waste his money on boring and under-performing stocks like consumer goods companies and REITs? For several years, all went well. Mike and his wife’s portfolio dramatically outperformed other approaches and Mike had lots of fun bragging to his colleagues about what a great investor he was. Then, all of a sudden, everything changed. Tech stocks plunged as much as 90% (some more) and, as a group, they never recovered. Mike and his wife lost virtually all of their wealth. It was a horrible financial blow, and one that had professional as well as personal consequences.
Here’s what Mike’s lizard brain “learned” from that experience: “Stocks are nothing but a gamble. They might go up for a while, but in the end they always crash. If you own stocks, watch out and sell at the first sign of trouble.”
Mike cashed out of his portfolio at the bottom of the market in 2002 and could never bring himself to leave his cash ‘safety net’. He missed the stock market boom in 2003 – 2007 but felt vindicated during the 2008-2009 financial crisis market. Though he gave in and bought several funds after the crisis, he sold them again immediately when the market pulled back in 2011. As a result, he missed the 100%+ stock market gains since 2009. He is also losing 2.0%+ of his purchasing power each and every year to inflation.
If Mike were open to examining his fear from a rational perspective, here’s what he could learn: Though stock prices are volatile, the stock market as a whole has never failed to eventually rebound from a price decline. Mike’s 1990s portfolio of individual stocks, all in one particular industry, and all purchased at historically unsustainable prices, was one of the riskiest portfolios that he could possibly have owned. Shame on his broker for not telling him, but he had plenty of other, not-so-risky choices of stock portfolios. Most of those alternatives, had he stuck with them, would have eventually left him with at least twice the wealth he has now.
Recrimination and Self-Doubt. Financial trauma during childhood is particularly difficult to recognize and transcend. Susan was a happy teenager living in an upscale California suburb when her executive father suddenly died of a heart attack. Unfortunately, Susan’s Dad didn’t have life insurance, and his death resulted in the family going from “being well-to-do” to “being poor” almost overnight. On the verge of adulthood, Susan internalized the experience – including her subsequent struggles to regain a middle-class life – particularly personally. Like many children of divorce, Susan came to believe that her family’s misfortune was somehow “her fault.”
Here’s what Susan’s lizard brain “learned” from that experience: “Dealing with money is a disaster for me. If something goes wrong, it must be because of something I did. If I make decisions, they’ll turn out badly, so I shouldn’t try.”
I’ve worked with a number of “Susans” over my career. They come to us because they are paralyzed and don’t want to make financial decisions. They are convinced that can’t do anything right and don’t want to even think about their money. If they can examine their experience rationally, however, they may come to see that their painful experience was not of their making. Further, they may realize that subsequent financial problems they may have had were more likely to have been the result of their non-involvement with financial matters rather than the opposite.
Anger. Some time ago a middle-aged couple came to talk to us about possibly working together; we call it a “get-to-know-you” meeting. After a while, it became clear that the wife was doing all the talking, while the husband was being unusually silent. So I tried to draw him out, asking about various kinds of financial experiences he had had. What I got in return was a response I hadn’t anticipated.
“You people are all alike,” he said, seething with anger. “You’re all crooks. You sold my brother an investment and then when it tanked you had the nerve to tell him that he should buy more. You’re never gonna touch any of my money.”
That was obviously the end of the interview. The husband was going to nix anything that his wife was open to exploring with an advisor because his lizard brain – through the medium of his brother – had taught him that “all financial advisors are crooks.” Was the brother’s anger justified? Perhaps. We couldn’t ascertain the facts of the situation, though we briefly tried, because our visitor didn’t know any of the specifics. He just knew his brother thought he had been ripped off. But his anger was preventing him from understanding what had happened to his brother in a way that was productive. His blanket condemnation of a whole class of individuals was like many other forms of discrimination: probably relevant in a small minority of cases but not true as a general rule. Yet, by listening to his lizard brain and unthinkingly “protecting himself” from the whole class of professionals who are expert in money matters, this man was cutting himself off from rich potential sources of help, advice, goodwill, and support – all of which could have been offered with only his own best interests in mind.
The Words of the Sage
Warren Buffett, the Sage of Omaha and one of the richest men in the world, once praised Charlie Munger, his long-time partner, by saying: “He’s given me a lot more advice than I’ve given him. He lives a very rational life. He doesn’t waste time on senseless emotions.”
I think that Buffett is onto something big there. If you want to improve your financial life, you’ll be wise to let your rational mind deal with its lizard counterpart. We’ve all had bad financial experiences – some of them traumatic – but carrying around irrational fear, guilt, and anger is a pretty sure way to sabotage your financial future.