Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital
Consider something you’ve always wanted to do but that you’ve put off doing because it scares you. In fact, just think of something you’d eventually like to do but haven’t yet, since you may not even be aware of all your reasons for not having embarked on that journey just yet. Maybe that something is having a child. Maybe it’s starting a business. Or perhaps it’s writing a book, getting serious with a romantic partner, or any number of other aspirations you’ve yet to reach. Let’s say for discussion’s sake that the thing you are considering is starting a business. You ask yourself…
“Should I or shouldn’t I start a business?”
Easy enough, right? You make a t-chart, list the pros and cons and then make a decision! Well, let’s examine how you go about dissecting this question. You do your best to dispassionately weigh the pros and perils, but if you’re like most folks (and you are, remember, you’re not special) there is a flaw in the system. Drawing on his background in evolutionary psychology, James Friedrich has concluded that as we evaluate important decisions in our life, our primary aim is to avoid the most costly errors. That is, we make decisions that make us “not unhappy” rather than “blissful.” We want to be “not broke” more than we want to live abundantly. To use the above-mentioned example, you’re far more likely to focus on the potential perils of failing at business than you are the happiness and freedom that might accrue to you.
The evolutionary roots of this system of self-preservation make sense. It was not all that long ago (in terms of evolutionary time) that our forebears were called upon daily to make life and death decisions. For people living on the savannahs of Africa, choosing to zig when you should have zagged could spell the end. Historically, decision-making has been very wrapped up in preserving physical safety and ensuring that physical needs were met. In this life-and-death scenario, minimizing risk at the expense of self-actualization is only logical. However, in the intervening millennia, things have changed and our thought patterns have not kept pace. At least in the US, we now live in a service economy that produces more ideas than it does “things.” We have moved from an agrarian to an industrial to a knowledge-based economy and our ability to cope with personal stressors has not kept pace.
What we are left with is a brain and a decision-making modality that is ill-suited for our modern milieu. We are programmed to choose safety, even at the expense of joy, in an environment where safety abounds and joy is hard to find. Daniel Kahneman and others have shown that people are twice as upset about a loss as they are pleased about a gain. Unless we learn to train our brains to evaluate risk and reward on a more even keel, we will remain trapped in a life of risk-aversion that keeps us from taking the very risks that might make us happy.
Because of the asymmetrical means by which we evaluated risk, it could be truthfully and plainly said that there is never a good time to invest…or have a baby…or start a business…or fall in love. After all, each of these requires us to make ourselves vulnerable, either personally, financially or both, to an unknown future with a very real downside. Markets crash, kids talk back, and businesses fail. But a life lived in shades of grey is the only thing less satisfactory than a life lived at risk of loss. There will always be worries, some founded, others not and investors who are paying attention will never have a sense that it is “all clear.” This uncertainty, this pervasive not knowing, is the hallmark of both life and capital markets and those that have mastered both come to love and embrace it.
The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.