Overconfidence and its opposite — a lack of confidence — are two psychological phenomena that together are the greatest tools of wealth destruction ever known. The cost of them to our collective wallets and the macroeconomy is in the trillions of dollars in lost wealth: money that is rather lost either to excessive corporate profits of the Big Brand Banks or just never realized at all.
The really galling thing is that we only have ourselves to blame. No one is holding a gun to our head here — we make stupid decisions about money every day quite willingly and repeatedly and you will likely spend your life a far poorer person because of it.
The cause of being overconfident in our own abilities to manage money is due in large part to an effect called ultracrepidarianism. This is the belief that because you're an expert at one thing, you must be equally proficient at others, and are eager to share advice in those fields.
If you have read Stephen Dubner or Nassim Nicholas Taleb, you know of this but you may have missed the word itself. Dubner has pointed out that "Doctors are really good at that," but you can see it everywhere, especially in politicians, famous celebrities and influencers.
Overconfidence in our ability to manage money is the more easily identifiable and obvious problem. It leads us to make big bets on the stock market in the belief we know the market better than others, or sink money into a sudden purchase or subscribe to unnecessary and obsolete products and services like expensive “premium” credit cards.
Lack of confidence, however, is the more insidious and wider phenomenon. This leads to the 3 great sins of personal finance — all of which are sins of omission not commission. It's what you don’t do that hurts you; procrastinating on personal finance is a costly mistake.
Lack of confidence and tendency toward inaction have many and varied causes. The worst of all is The Status Quo bias. This is the bias that keeps you with the same bank for decades despite the poor value and returns on your money that they give back. It’s the bias that keeps you from trying new things and changing even relatively simple things to your own advantage.
The worst thing about Status Quo bias is that its effects are subtle and play out over years and decades and can never be recovered. This is the dark side of compound growth — which is rarely acknowledged except by Einstein:
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
Here is an illustration of how time and small but poor decisions compound to lose you money.
So, if you are an impressive 20 year old with a keen sense of money and you start saving and investing (the investing part is the crucial element here) $167 per month, you would have reached a $1m portfolio by the age of 61. Delay that until you are say 30 (the average age to start saving for retirement is 32) and you would have to be investing $500 a month to achieve the same wealth at 60.
If you don’t think this applies to you or that the problem is overstated, consider this: over 80% of the $12 trillion dollars or so held in cash deposits in the US are with the Big Brand Banks who typically pay some of the worst returns on the market. These average deposit accounts for both checking and “savings” offer APYs between 0.01-0.02%. Compare that to alternatives, which have historically reached between 2-3% (not the case currently in the very low interest market but the point still stands). Furthermore, the average person earning over $160K a year keeps $42K in their checking account earning next to no interest.
In contrast, money invested over the long term into the S&P 500 would have returned an average of over 10% over the last 40 years. That is 1000x the returns of a Big Brand Bank account and the difference in wealth only grows each year because of compound interest.
We are all guilty of inaction in the face of personal finance choices we know we can and should change but don’t. And because the costs are effectively hidden from us, we suffer from the boiling frog syndrome — when we realize the cost or need the money we should have had, it’s already too late.
What is the cure to the biases that our primitive brains force upon us? Financial literacy? Maybe, but that's a slow and expensive process, and there’s limited data to suggest it's actually effective. Plus, it's incapable of solving for the overconfidence bias — why learn when you think you know everything already
Stephen Dubner suggests that the path to curing ourselves of our natural tendency to make bad decisions is to accept what we don’t know. We don’t have to learn complex mathematics, financial investment theory, study the markets, or do detailed product analysis. Instead, we have to embrace the fact we are naturally and evolutionarily hard wired to be stupid with money and then put into practice things that will ensure we overcome our financial shortcomings.
It’s extremely difficult to admit a lack of knowledge; as Dubner recognized, the three hardest words in the English language are "I don't know." The admission can be especially tricky for smart, well-educated, successful and well-paid professionals. If nothing else, be comforted by the fact that we are all in the same boat, just some of us are not aware of the waves around us.
So if we accept the way biases and brain wiring make us bad with money, what can be done? The solution is surprisingly simple: it’s the get rich slowly model of wealth creation, just as relevant today as it was when J.D. Roth wrote about it in 2006.
However, the simplicity of the task hides the amount of energy and manual work that it takes to do this — consistently over time for years and decades. Most of us start the process but few keep doing it because life always gets in the way. The solution is to use tech to hack our own psychology for us. That’s what we’ve done at Unifimoney in an effort to make the simple yet arduous task of managing money easy.
Using product design and tech, we automate the process of managing money optimally so our customers automatically and by default model best practices in financial management — effortlessly.
A hybrid high-interest checking account with all the features and functionality you would expect from a checking account except the savings levels of interest. This guarantees all your money is working hard for you all the time without the added task of moving money between multiple accounts.
A credit card (not yet publicly available) designed to provide a 100% redemption rate so you maximize your returns from your spend — by eliminating the unused rewards (usually around 80% of miles go unused), our cashback becomes an automatic discount on your spend. You get all the protections and security of a credit card with a built in discount to help grow your wealth as you spend.
An investment platform that automatically and by default drip-feeds small change from deposit interest, credit card cashback and a minimum contribution into your Robo investing account every month. If and when you want to invest yourself, we also provide commission-free trading.
And tools like our ROI tracker and Spend Meter that keep you informed of your progress and creates a virtuous feedback loop.
Many of us believe our expertise will separate us financially, when in fact simplicity and automation is the most reliable way to build wealth. As Stephen Dubner explains, the key is “thinking like a freak” — through a truthful accounting of our financial knowledge, we can avoid the mistakes we make due to our inherent and hardwired biases. At Unifimoney, we’ve built a financial superapp that automates many of our worst personal finance mistakes out of the equation.
The above does NOT constitute an offer, solicitation of an offer, nor advice to buy or sell specific securities. The opinions listed above are not the opinions of Unifimoney Inc. or Unifimoney RIA, Inc. but represent the opinions of independent contributors. These contributors may or may not hold positions in the stocks discussed. Investors should always independently research any stocks listed and form their own opinions, while recognizing that any investments made may lose value, are not bank guaranteed and are not FDIC insured.