Tag: rational

Be Rational in a World Full of Temptations

“Unfortunately, people need good advice, but they want advice that sounds good.”
— Jason Zweig

In an age where we have access to vast amounts of news—often contradictory—that tries to capture our attention in every way, this statement takes on even greater significance. The fact is, “desire” (what we want) and “necessity” (what we need) lead to completely different and often conflicting paths.

This divide is especially evident in personal finance, where emotions and impulses can often override rational decision-making. We may know what’s best for us in the long run, but it’s easy to get swayed by the allure of quick gains or easy solutions. This is where the challenge lies: how can we stay rational when we’re constantly surrounded by temptations?

The Dilemma: Desire vs Necessity

What we desire is often tempting: quick profits, instant results, risk-free promises. However, what we truly need for long-term financial health requires patience, discipline, and careful planning. In other words, the choices that benefit our financial future most are often the ones that are less immediately gratifying but ultimately more sustainable.

A Practical Example: Personal Finance

  1. Advice we would like to hear: Follow this easy strategy, buy this financial product, give your money to this trader, and in a short time, with no risk, you’ll get rich.
  2. Advice we need: Understand your short-term and long-term financial goals, build a strategy consistent with your plan, diversify your investments, and don’t let emotions take over.

In the first case, the desire for quick and easy gains is strong, but this approach often leads to unnecessary risks and impulsive decisions that hurt long-term financial health. In the second case, rationality and planning take center stage. The idea of planning, diversifying, and maintaining disciplined behavior is less exciting, but it’s far more useful for building a solid financial foundation.

Rational vs Emotional: The Inner Battle

As Daniel Kahneman, the Nobel laureate in economics, points out:
“The real difficulty is that we don’t really know what we want. We want what we want when we want it, and we forget what we really need.”

Kahneman explains that we have two systems of thinking: System 1, which is fast, emotional, and intuitive, and System 2, which is slow, rational, and reflective. When it comes to personal finance, System 1 pushes us toward immediate gratification (like investing in a “hot” new financial product without understanding the risks), while System 2 encourages more thoughtful decisions, such as investing in a diversified portfolio with a long-term strategy.

However, it’s not always easy to listen to System 2, especially when we’re bombarded with emotional triggers and temptations. That’s why it’s essential to be aware of our natural tendencies and learn to manage them.

Simple Steps to Stay Rational

  1. Set Clear Goals: Define your short-term and long-term financial goals. What are you saving for? Retirement? A house? College tuition? When your goals are clear, temptations become less appealing.
  2. Diversify Your Investments: Don’t put all your eggs in one basket. Diversification is one of the keys to reducing risk and building long-term financial security.
  3. Manage Your Emotions: Fear and excitement are powerful emotions. Learn to recognize them and don’t let them dictate your decisions. Remember, the market is cyclical, and in the long run, patience pays off.
  4. Use Technology: Leverage tools and apps that help you track your progress and stay on course. Automating savings, for example, is a great way to avoid falling prey to short-term temptations.

Conclusion: The Choice Is Ours

It’s not easy to make rational decisions in a world full of emotional triggers. But as Kahneman shows, we can train our rational thinking, especially when we’re aware of the emotional biases that often guide our choices. The real challenge isn’t knowing the right path, but walking it, despite the temptations along the way.

So, the next time an “easy choice” seems too good to pass up, stop for a moment. Reflect on what’s truly best for your financial future, and ask yourself: is it desire in the moment or necessity for the long-term that’s driving my decision?

The best choices are the ones that help us build a solid future, not the ones that provide instant gratification.

Overestimate the Present

One of the things you often hear from motivational gurus is that the most important thing is neither the past nor the future, but the present.

“Do not dwell in the past,
Do not dream of the future,
Concentrate the mind on the present moment.”
(Buddha)

I agree on the importance of being focused on the here and now in life, but when it comes to investments, this advice doesn’t quite apply. In fact, in the world of investing, the present doesn’t really exist.

Why? Because investment decisions are inherently tied to the past and the future—not to the present moment.

The Present Doesn’t Exist in Investing

Imagine you’re asking: “How much does this investment return?” This question might sound familiar, but it’s actually meaningless when it comes to investments that carry risk. The present is a snapshot in time, and when it comes to risk, there is no “return” in the moment—only a historical one or an expectation about what could happen next.

Let’s break it down:

  • The Past: “How much has it returned?” This refers to a historical fact. It’s something that has already happened, and we can measure, discuss, and reflect upon. Past performance is useful for analysis, but it’s not a guarantee of future success.
  • The Future: “How much will it return?” This is the critical part. The future is what you’re ultimately investing for. But the future is unpredictable—it’s an expectation, a forecast, not a certainty.

The challenge lies in the fact that, as investors, we make decisions now that affect the future, all while being influenced by the past. This “anchoring” effect, as psychologists call it, can make it difficult to make objective, future-focused decisions.

The Real Power of Time in Investing

Understanding the relationship between past, present, and future is key to making smarter investment choices. While the present moment may seem all-important in many aspects of life, in investing, it’s the combination of understanding past performance and anticipating future outcomes that should guide your decisions.

Take, for instance, the common mistake of focusing too heavily on current market trends. The “here and now” might suggest an immediate investment opportunity—stocks are soaring, or a particular sector looks hot. However, if you’re driven only by the present moment, you might overlook long-term trends or historical cycles that tell a different story.

This is why balancing the three dimensions of time is essential. Here’s how you can apply this to your investment strategy:

  1. Learn from the Past: Review historical performance, but understand it’s not a prediction of future returns. It can, however, help you avoid common pitfalls and make informed decisions.
  2. Manage Current Expectations: The present provides a snapshot of the market, but remember that it’s full of noise. What’s happening today may not be indicative of what will happen tomorrow.
  3. Be Mindful of the Future: The future is where your wealth grows, but it’s uncertain. Focus on managing risks and aligning your investment decisions with long-term goals, not short-term fluctuations.

A Practical Example: The Stock Market and Long-Term Growth

Consider the stock market. In the short term, it can be volatile. If you base your decisions solely on the present moment—let’s say reacting to daily price movements—you might miss out on long-term growth opportunities. However, if you anchor your investments to your long-term goals and historical trends (e.g., the market’s historical ability to grow over time despite short-term downturns), you’re more likely to make decisions that benefit you over the long haul.

Conclusion: Don’t Forget the Three Dimensions of Time

So, when you’re navigating the world of investments, remember: the present is only part of the picture. By looking at past trends and keeping a clear focus on future potential, you can make smarter, more informed decisions that align with your financial goals.

How do you currently approach the “present” in your investment strategy? Take a moment to reflect—are you anchored too much in the here and now, or are you considering the bigger picture?

Investing isn’t about the present. It’s about understanding the forces of time and making choices that will pay off in the future.