Why am I too scared to invest my savings?

It was massively empowering for me when I discovered the following – there are certain things my mind does, that can be really bloody unhelpful, it’s part of being human so I have no choice about it, the only remedy is to learn about these mental shortcuts and gremlins so I can avoid getting in my own way.

I am programmed and conditioned to feel and react in certain ways, given certain sets of circumstances. I have learnt things and attached meaning to them and they have become part of my autopilot. They are not even my subconscious; they are part of my unconscious mind. They surface as judgement, reaction, foregone conclusions or gut feelings.  Some *researchers call it system 1 thinking and compare it to system 2 thinking which is more purposeful and logical.

For example, someone offers me ice cream, instinctively I say yes – I love ice cream, why wouldn’t I? Then I remember I am overweight, and I enjoy being thinner than I am, I recall the number of calories in ice cream and estimate I will need to do 2 hours of exercise or skip a meal if I am to eat the ice cream without gaining weight. I now have a choice to make because I engaged both system 1 and system 2 thinking, but the first thought was easy and the second took effort.

Seems like human beings are riddled with these things called heuristics and biases that make it hard for us to think statistically, mathematically, and logically. Instead, we rely on instinct and emotion and take short cut thinking routes based on existing patterns and previous experiences.

In many instances, this shortcut thinking literally saves us from danger. If there is a loud noise when we are balancing a couple of takeaway coffee cups on top of each other on our way back to the car, we will instinctively try to locate it. If it turns out to be an out-of-control vehicle hurtling across the car park toward us, it will be handy that we looked up in time to get out of the way, but if the distraction has ruined our balance and we have tipped scolding coffee all down ourselves because of a random inconsequential noise, this system 1 thinking maybe less appreciated, but importantly it was instinctive, it wasn’t a choice.

When it comes to finances, a couple of the most troublesome mental shortcuts (heuristics) are Prospect Theory and the Affect Heuristic. These are just two of twenty that need to be acknowledged and understood, but these two hunt as a pair and can cripple us when it comes to making the commitment to invest.

Prospect Theory is also sometimes called loss aversion. Research shows that human beings feel the pain of a loss or bad experience 2.5x more acutely than they enjoy a good experience or a gain.

Example – you invest £ 1,000 in a stocks and shares ISA and within a few weeks it falls in value to £900 and you are seriously pissed off. If it had gone up to £1,100 you would be mildly impressed, but the emotional value of the loss scenario would be much more intense. 

This overweighting of bad experiences sits in your unconscious mind and makes you disproportionately afraid of undesirable outcomes (or averse to loss) to the extent you rob yourself of the equal opportunity to gain. In fact, you may well make the decision to give up any hope of gain rather than enter into the possibility of loss because of the power of this gremlin in your unconscious.

Combine the above with Affect Heuristic, which is our overreliance on a good or bad feeling about something when making a decision, and you can easily see how your hubris is keeping you stuck. You know you should learn to invest and keeping money in the bank is not a good idea over the long term, BUT you are relying on your feeling about whether it is a good idea or not, and your loss aversion weighs in with an exaggerated contribution of the possible downside and undervalues the potential upside. Before you know it, you have pushed the decision away again and remain stuck in this loop.

If you are interested in learning more about this subject, I highly recommend the book *Thinking Fast and Slow by Daniel Kahneman. You will meet other mental shortcuts that can derail us such as Mental Accounting, Gambler’s Fallacy, Endowment Effect and biases that infiltrate our decision making like Confirmation, Default and Familiarity biases.

If you think you may have become a victim to this sort of wafty thinking then please be kind to yourself because it only means you are human – it is natural, we are not naturally good at statistical and logical thinking. If you would like to get better at this type of thinking and decision making you first must be aware of the flaws and then be willing to make a purposeful effort to override the system 1, easy thinking, but again be kind and patient with yourself because it is not always easy to do. Sometimes when I am offered an ice cream, I have scoffed the lot before system 2 gets a look in!

I find this whole subject fascinating and spend a lot of time trying to help people spot unhelpful, but unconscious thinking that threatens to cause unhealthy financial behaviour. I enjoy coaching Women’s Wealth members in more effective decision-making capabilities. If you would like some guidance and support in changing your thinking patterns and adopting some beneficial behaviours, then please use the appointment tab and pick a slot in the diary for a chat about how we might help.


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