Since this is a finance blog, I’m going to try to tie these concepts back to financial decisions where applicable, but since I’ve become increasingly frustrated with how people around me (and in the media) think, I had to write about the topic. Let’s start at the top. Humans, through millions of years of evolution, have always been hardwired to try to find patterns and assume cause and effect, even when upon further logical analysis, none exists. Why? Because it was always safer than the alternative! Here’s the evolutionary/survival example:
Caveman spots some moving grass in the distance. It could just be the wind or a small animal. Or it could be a lion or a rival tribe. He runs. See, there’s no harm in spotting a pattern or a risk when there was no real risk and reacting with caution. But by ignoring a possible pattern or risk, that creature is eaten and no longer procreates. That’s how evolution works from a survival and propogation standpoint. In the modern world, at least for humans, the old rules of evolution no longer apply. People aren’t being killed by predators and in fact, the opposite is now true. People pretty much reproduce in numbers based on completely different factors (usually highly correlated to poverty, locale). As such, false pattern recognition and seeking causality when none exists is still hard-wired in our brains but we should now be educated enough and think logically to know how to overcome this bias.
- Religion – I know, this several readers, but belief in religion is pretty irrational. Attributing a positive event in your life to god and then ignoring the horrible stuff that happens is disingenuous. Entire books have been written on the topic, but for the vast majority of religious believers, they got their religions from their parents and/or their geography. If you were raised as a child devoid of any religious teachings and then shown a Bible, etc. as an adult, the vast majority of people would not think anything of it. But we indoctrinate from childhood so it sticks. The guilt and the fear of being judged as a “heathen” and going to hell overrides any sense of rational thinking. I mean, how can you read any decent book on evolutionary biology and still believe a woman was created from the rib bone of Adam? (It’s even more mind-boggling to me when women are devoutly religious since most major religions are pretty mysoginistic). Of the hundreds of religions out there, if you assume even one is correct (of course, everyone assumes it’s THEIRS!), then the rest are abviously wrong since they have their own beliefs, dieties, prophets, etc. I just believe in one less. I now KNOW that life, events, the actions other people take, etc. are all just based on random chance and decisions people make for themselves. It is not a supernatural being dictating the trillions and trillions of interactions that occur throughout the universe at any given time. When someone wins an Olympic gold medal, it’s because they worked hard and were genetically predisposed to favorable attributes, not because “God” blessed them. When someone wins the lottery, it’s random chance, not a God blessing them with fortune. Oddly enough, people rarely thank god for all the horrific tragedies that occur daily – you know, child rape, the Holocaust, 9/11, etc (the theological answer for that is the “God works in mysterious ways”??). But the concept here, tying back to the intent, is that people look for a REASON that things happen when there may be no reason at all. It used to be “the gods” under Greek mythology and other polytheistic belief systems, now it’s “my god” under monotheistic beliefs and someday it may be something else that’s prominent. The reality is the universe is complex, dictated by random chance and natural phenomena.
- Vaccines and Autism – If I pick one of the most wildly misunderstood issues in America (and the UK, especially), it’s the claim that vaccines cause all sorts of maladies ranging from autism to death. A typical example goes like this. Parent vaccinates child. Months later, child develops some sort of disorder. Based on the now-proven fraud committed by the British “dr.” Wakefield and the Jenny McCarthy internet trolls, parents immediately attribute this result to a prior vaccination (even though this same malady occurs in equal numbers of children that don’t get a single vaccine). So, when you show them the factual evidence that broad studies conducted by independent bodies across borders and disciplines all demonstrate the same thing – that there is no difference whatsoever in autism and other maladies between two groups: unvaccinated vs vaccinated children… they still say, “well, the vaccine did this”. That’s like saying that on a day my kid wore a red shirt to school and he developed a cough, it was the red shirt that caused him to get sick. Even after the demonized thimerisol was removed from all childhood vaccines (save for some flu shots which many parents opt out of), cases of autism still continued to skyrocket. Why? Clearly it wasn’t the thimerisol! So, the anti-vaxxers said it had to be something else. I know adults who won’t get the flu shot because they said one year they got the shot and then got the flu, so the shot must have given them the flu. This is in spite of the fact that the shot is usually 70-90% effective (so, obviously, even some people that got the vaccine will still develop flu, albeit with milder symptoms) and that the way the vaccine works, it cannot give you the flu (recombinant, attenuated/inactivated virus, etc). People just have a need to assign a cause and effect or to try to assign causation whenever there is correlation, even if the facts are abundantly clear. This reminds me of smokers who say you don’t die of lung cancer until you stop smoking because someone they know smoked for 40 years, then quit, then developed lung cancer. People, please!!!
What’s this have to do with Finance? A ton! People often make the worst financial blunders and decisions based on irrational thinking. Here are some very common financial mistakes tied to irrational thinking or trying to find patterns and causality when none exists:
- Timing the Market – They think that because the stock market went up last year that they should sell their stocks this year. They think that because a mutual fund outperformed the market last year, they should invest in that fund this year (could it be just plan luck? or could it be that the fund held stocks with higher Beta and is also prone to crash more than the general market in a downturn? For proof of these fallacies people continue to fall prey to, just understand how investors are Fooled by Randomness).
- Multi-Level Marketing Schemes – This one is particular insidious because MLMs prey on the young, inexperienced and often, the poor. I almost fell for one once but after researching it a bit and asking some probing questions (which could not be answered by the “associate”), it because clear to me what a scam it is. We’ve all probably met someone by now pitching how you can “build your own business” and “be your own boss” and get rich by getting in early on a pyramid scheme. But I’ve seen so many of these play out with friends and family, where they pitch in tons of time and money selling anything from jewelry parties to cosmetics and they never get rich. In fact, when you account for all the time and energy they put into these endevors (not to mention the embarrassment), it’s always been a net loser in the dozens of experiences I’m aware of. Usually, these companies hide behind lawsuits from their sleezy lawyers for anyeone who names their company directly, but you can use your imagination. There is no legitimate, successful MLM venture out there that’s a net positive for members when you add up all the suckers that dropped out and took a loss on their time and money. Logically, how could a system like this work and benefit millions of people? When hundreds of MLMs exist? There are only so many suckers to go around. It is irrational to think you’re going to get rich from an MLM.
- Paying for Extended Warranties – People will often think back to the single stupid product they bought that was out of warranty and use that as justification to continue to pay for highly priced extended warranties for life. This is completely irrational. The only reason manufacturers (and retailers conspire to) off rebates is because they are HUGELY profitable! Do you think they’re looking to be net neutral on repairing and replacing stuff they already sold you? Of course not, this is a huge profit center. Over a lifetime, if you buy thousands of dollars worth of products (probably into the six figures when including cars), you will shell out several thousand in warranties. Now, if you even get to enact a warranty, chances are there are still hassles involved and it may only cover parts instead of labor, etc. But you will have shelled out thousands of dollars unnecessarily for very little benefit.
- Ridiculous Medical Claims, Supplements and Diet Fads – It’s a shame Dr. Oz has turned into such a quack. He seemed like a decent, legit spokesman for the medical industry years ago and then he went completely off the deep end. Of late, he’s always pitching some new “miracle” cure or supplement, which turns out to be supported by no legitimate clinical evidence. He, and others in the naturo-quack industry use a lot of weasle-words like “may” and “could” when describing the “possible” benefits of various things they’re pitching. That way, they’re pretty much making false claims but not lying legally. They’re catering to peoples’ craving for an easy fix to their problems from weight loss to muscle gain. But there’s never any actual solid evidence to back up their claims. Aside from wasting money on useless vitamins and supplements, consumers are often harmed! You may find this hard to believe, because I grew up hearing about how you always have to load up on vitamins to ward off the common cold, but Vitamin C has NO BENEFIT WHATSOEVER (fact) along with most other vitamins and supplements.
- Correlation is NOT Necessarily Causation – Another comment fallacy is when two things are correlated, people believe there is a causal relationship. Let me explain. I once saw a claim from one of these whacky natural news sites that eating garlic and onions prevents cancer. This was based on some sort of analysis of people that revealed their diets vs. cancer rates. They then went on to claim that eating these foods prevents cancer or can even cure cancer. While this was not backed up by any legitimate controlled experiment, let’s just say for a minute that the correlation IS there. I’d actually believe it’s possible. Why? Well, people that tend to know what the heck they’re eating, especially if it’s a vegetable over processed foods, tend to eat healthier in general. If you eat a salad a day with some onions or saute your chicken in garlic when cooking, that’s healthier than ordering out McDonalds and eating candy each day. So, not only are you eating healthier, but you’re also thinner and such. So, the people that don’t eat better in general are obviously more prone to various forms of cancer. But did that mean onions or garlic necessarily “prevent” cancer? Of course not! While there may be a correlation, there is no causative effect whatsoever. There are all kinds of correlations that occur over time which no causative effect whatsoever.
- Economics and Political Debate – While we all think politicians are idiots, the irrational decisions they make (and the ones the constituents support) have negative consequences for the country and the economy as a whole. Rather than looking at the actual evidence and cost/benefit, many policies are put in place which prey on emotion. This holds true for everything from criminalizing recreational drug use to prosecuting pricing based on market conditions (see why Price Gouging is Good) to some of the ridiculous green policies enacted over the years.
- You’re Biased, Just Admit it – The way many of my American friends form an opinion on any topic is they go in with a pre-concieved notion first, only seek out evidence and examples that appear to support that stance, and then use that to further bolster their argument. They completely discount and ignore anything that does not fit the thesis, regardless of the validity or strength of the actual evidence. But they’re not being honest with themselves. Something like half the country believes in creationism which is one of the most irrational beliefs one can imagine. This is in spite of the reams of evidence (fossils, geology, carbon dating, basic biology, genetics, linguistics) and common sense. When you talk to someone with this belief and present a very simple truth, they just discount whatever you said and say, “they have faith”. So, I’ll take truth over faith any day. I can say I’ve been honest with myself by changing my mind based on newly digested evidence on too many topics to list. See, I grew up in a very conservative household and initially held the party line on everything from what crimes we prosecute to sexual orientation issues to religion. But now, as an adult who has actually read books and lived in the real world? I have formed my own opinions and come to realize that much of what I was taught was either false or I beg to differ from an opinion standpoint. I try to be honest with myself and weight the evidence on its merit, not on preconcieved notions, emotions or other peoples’ opinions. Do you?
What Are Some Irrational Beliefs or Financial Moves that Drive You Nuts?