Guest Author – James Andrews
Sleep Training
Sleep training is one of the first hurdles you overcome as a parent, and boy, is that an experience. I vividly remember sleeping training our first child. We read all the parenting books we could get our hands on, asked friends and family for advice, and then strategized with each other to establish a unified front for this milestone. Surprisingly, the process turned out to be textbook. Our first responded positively to the structure and, within a few weeks, was fast asleep for the entire night – freedom at last!
Then came boy #2.
Fresh off the win of sleep training our first, we thought we were textbook-perfect parents who had mastered the art of sleep training. Like the first time, we refreshed ourselves on the books, researched various articles and mapped out the plan, only to discover the uncomfortable truth that two boys who come from the same parents can be (and usually are) vastly different people. The plan failed spectacularly. I recall one sleepless night where we tried the “cry it out” method only to discover our second had such a fit that he threw up all over the bedsheets – this was not working (and was not the first time). The game plan that worked so well with our first, our map of reality, did not match the new territory.
Maps for Decision-Making
In the same way, the “map” portrayed in the parenting book did not hold up to the reality of sleep training our second boy. There are many other maps we rely upon to help us navigate future decisions. For example, the exercise routine you used in high school may no longer be realistic in your adult years. This leads us to the simple truth that maps do not always perfectly reflect the terrain they represent. In the world of philosophy, foundational truths like this have often been categorized as Mental Models. Mental Models are a framework by which we can make sense of the world and improve our decision-making. Some examples of Mental Models would be (1) Understanding your circle of competence; (2) The Simplest solution is typically the most effective, or in the case of this article, (3) Maps for Decision-Making.
This principle was originally identified by scientist and philosopher Alfred Korzybski in 1931, who discovered the simple truth that the description of the thing is not the thing itself. The map is not reality. (By “Maps,” we mean any abstraction of reality, including theories, models, and “Rules of Thumb”). While this appears simple at first, the outcomes can be profound. Maps, or models, are necessary tools by which we navigate through life. They allow us to simplify complex problems and make quick decisions based on a framework established by those before us, just like a parenting book can help guide a new father with examples and lessons. But often, we forget that maps have limits. There are only so many variables to be quantified before the model itself becomes useless. This natural limit creates an unfortunate side effect: relying on a tool that is unable to represent all the outcomes. This is like driving with a GPS that doesn’t include all the cliffs. It works until you find yourself driving off the edge.
Mapping out your Finances
In the world of finance, we find all sorts of models: stock trading techniques, banking formulas for maximizing value, various portfolio allocation strategies, and the list goes on. And while these models are helpful, if not necessary to a degree, they also don’t operate in the real world. They are created in a computer model that has a limited number of assumptions. Added to this is the dilemma that our own human psychology will bring our innate biases into the equation. Charlie Munger, partner to Warren Buffet, made the humorous observation that the human mind acts something like the sperm and the egg – after the first good idea gets in, the door closes.
In other words, when we find a model that works – we tend to overapply it to other areas of our lives.
I experienced this firsthand early in my investing career. About 15 years ago, I opened an eTrade account to begin my foray into stock trading. As I evaluated my target stock pick, I went deep into a detailed analysis of the opportunity. Researching income and balance sheet trends, learning the retail market in China for this specific jewelry business, listening to their Board Meeting notes and consolidating these notes in such a way that I had a framework by which I could apply to future opportunities. Fortunately for me, the work I put into the trade was a success! As I came off the high of my first profitable trade, I couldn’t wait to repeat the process for my next target. And so, after careful diligence, I chose my next stock and applied the same model as before. As you may have guessed, this investment dropped like a rock. Tremendously. In hindsight, I can see I was using a framework for the retail industry (my first pick) for the manufacturing industry (my second pick). In other words, I was using a map of Seattle for navigating Sacramento.
How to apply the Mental Model to your situation
So, how does this apply to you? While this is by no means an exhaustive list, below are a few examples of how I think about this Mental Model in the context of my personal wealth and how I advise clients.
- The Financial Plan: The financial plan is a very common tool Advisors use as the “map” for their client’s life. And while this is a core and necessary tool, we must be grounded in the understanding that the model is not real life. While Advisors should do their best to account for surprises, it is by no means an exhaustive stress test. Inquire with your advisor for a variety of “what if” scenarios to understand the limitations of the analysis. For example: Care for a parent, surprise disability for a spouse, sustained unemployment for 6-9 months, medical emergency for a child, increased spending in retirement by an additional 15%.
- Investment Allocation: For those of you who enjoy the process of stock picking. Is the model you used in the zero-interest rate environment a few years back still applicable today? Are you using a map of Seattle when you should be using a map of Sacramento? For those families who are more passive with their portfolio structure, there is a general “rule of thumb” in our industry for a 60% stock and 40% bond allocation that is so common among investors that it has become a standard benchmark in Wall Street. Ask yourself why this allocation would be the best for you. Is your time horizon for the funds greater than 7-10 years? Do you have immediate cash needs that dictate a greater portion into less volatile investment types? How does this translate to your long-term goals in relation to short-term risks?
- Charitable Giving: Is the 10% standard giving target best for what you’re trying to accomplish? What would happen if you gave 5% or 15%? Is the cause you’re donating to truly advocating for things that are important to you, or is this simply what your friends and coworkers support? Perhaps you should evaluate splitting the donations across multiple beneficiaries.
Just like parenting books are helpful tools that equip me to raise my boys, they are by no means an accurate representation of the surprises I will encounter in the real world. Don’t let the same be true for your wealth. Rules of Thumb, general principles shared by others, and cultural norms are all helpful guides by which to navigate decision-making, but we must understand that our reality may be different than what is assumed on the map and what worked in the past may no longer hold true today. Ask yourself “why” often, check that the assumptions that worked in the past continue to hold true today and indulge your curiosity to seek a deeper level of understanding.
James Andrews
Private Wealth Advisor
jandrews@thebahnsengroup.com
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
