"Don't do as I say (or as I do)" — Jason Hull on how handle money

The grand panjandrum of Hull Financial Planning offered this insightful essay in his newsletter.

When I worked at Capital One, the recruiting department was going full steam ahead at trying to hire every McKinsey consultant and Harvard Business School grad that it could find. The mentality at the time was that they were going to hire the smartest people they could find and put them to work at solving every problem that the company faced. It was, after all, one of the most analytically rigorous companies in the financial services sector. I had a team of PhDs and analysts who could outthink me with 99% of their brain cells tied behind their backs.

Yet, the super smart people who got hired to come up with brilliant and innovative solutions for Capital One found themselves bogged down in a bureaucracy and culture which would have made the U.S. government proud. Furthermore, a lot of them had trouble adapting to the environment and found themselves stuck in place.

Why was this the case? Because smart people are really good at solving specific problems, but when they fail, they have trouble reflecting on the cause of the failure and in adjusting their behaviors to adapt and succeed the next time. As Harvard's Chris Argyris showed, smart people are great at being pointed in a direction and solving a problem — what he terms single loop learning — but they're terrible at learning from failures — double loop learning.

How does this relate to personal finance?

Monkey Brain doesn't like to admit defeat or failure. Whenever Monkey Brain is presented with a situation that didn't go right, he likes to lash out at anything he can get his monkey hands on — other people, bad instructions, the moon not being in the fourth quadrant of Pluto, whatever he can find.

I often get questions like "got any tips on personal finance?" or "should I invest in Facebook's IPO?" While I can give you a point answer, all I'm doing is helping you to enter into the single loop learning cycle. After all, you're reading this article and you're interested in what I have to say; therefore, you're exceptionally smart, right?

What happens is that people fall victim to their biases when provided with a single answer that then goes contrary to their expectations. Let's say that you ask me if you should invest in Smith Company's IPO. If I tell you no, and then Smith Company's IPO doubles on the first day, Monkey Brain is going to take the one instance and extrapolate conclusions about how inapplicable my advice is and invest in every IPO you can. You'll have fallen victim to both the self-serving bias, which blames external events for failures, and to the recency effect, which causes you to remember selected events which serve your view of things. Because you're a very smart person (you are, aren't you?), you're much more susceptible to these biases than the average person is. Your bigger brain means that your Monkey Brain is bigger too!

That's why I take the approach of teaching rather than giving specific answers. I don't want you coming back to me with the same questions over and over. I'd rather teach you how to figure them out on your own. It's why I have the challenge of getting you into double loop learning and getting you to think about situations and how to apply what you know and what I teach you to your own personal financial situations.

It's also why you can't just go to a guru, read a book, and assume that you know everything. You're entering into single loop learning, and the moment that something doesn't go exactly as is outlined in a guru book, you're going to throw it all away and start over.

Instead, you need to get into a double loop learning mode to truly understand how personal finance affects your life. Question assumptions and learn how to adapt analytical thinking to situations as they arise rather than using the same mental model over and over again.

Otherwise, Monkey Brain is going to spend all of his bananas on every IPO and penny stock he can find, and if he runs out of bananas, he's going to really rattle your cage.

[via Diana Brewster, a world-class local web developer who prefers to stay under the radar]