THE FINANCIAL PHILOSOPHER

Defeating the 'Hobgoblin of Little Minds'

"A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do." ~ Ralph Waldo Emerson

This quote from Emerson comes from his essay, "Self-Reliance," which in the essay's title itself reveals the wisdom within the famous quote:  Foolish consistency in this context is a kind of mindless state (habit) that supports herd behavior and group-think; it is conformity, it is mindlessness, it is inauthentic, it is ultimately self-defeating, and it is normal.  But normal is not healthy...

The self-reliant person is not necessarily someone who resists crowds or abhors outsourcing certain tasks to others--an island unto oneself, if you will--but rather a person who does not fall into sheepish behavior. 

Here are a few general examples of 'foolish consistency' for context:

• Continuing a certain behavior because "that's the way it's always been done."
• Following the paved road of conventional wisdom for fear of following (and possibly failing in) your own path.
• Choosing a career path that pays well with little or no consideration for how the career aligns with your personal priorities, passions and skills.
• Failing to look at ideas from a different perspective because they don't match your pre-conceived (and possibly distorted) views of the world.

As author Richard Brodie says in his recent top-selling book, Virus of the Mind, "the hobgoblin of little minds" is "what keeps people from making the most of their lives."  In different words, the hobgoblin is an absence of mind--an absence of self, an absence of consciousness.

"Not choice, but habit rules the unreflecting herd." ~ William Wordsworth

To defeat the 'hobgoblin of little minds' one must be aware of their tendency to fall into the lazy and mindless habit of conforming to conventional thought and behavior.  For most people it is a matter of deconstructing and unlearning what you've learned. 

This can be done by reflecting upon your daily activities and by discovering which ideas, thoughts and behaviors are not your own -- it is deprogramming and reprogramming your mind.  Why do I continue to hold this losing stock?  Why have I always voted for the same political party?  Am I trying to please others and never pleasing myself?  If I were born in a different country or to a different family or in a different time, would I think and feel the same about things? Is there more than one side of the truth -- more than one perspective? 

How do you know?  Now go and find out...

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Related:

Mind vs Brain Part III: Habits of the Reflective Mind

The Paradox of Habit Part III: Discovering the New Shore of Authenticity

Angles

As a child, I would roll down the window in our family car while travelling on the highway and put my hand a few inches outside until I felt the pressure placed upon it from the strong and rushing wind.  The force was enough to push my arm to the back of the window. 

However, if I placed my hand flat and parallel to the ground, it would slice through the air like a hot knife through butter.  If I angled my hand by tilting it slightly upward, my hand would lift up much like I imagined a bird would fly.  The opposite was true:  I could angle my hand down and the wind would push it down. 

That was an early lesson in angles.

"Thus what we gain is Something, yet it is by virtue of Nothing that this can be put to use." ~ Lau Tzu

Today, if I think my young children are in a listening mood, I'll pass along to them this lesson that combines physical science and Taoism: 

• Resistance is the root of all suffering; non-resistance is the root of contentment.
• The rigid tree breaks in the strong wind; the reed bends.
• Swimming against a rip tide is a cause of drowning; swimming with the rip current will save your life.
• The forceful and outspoken attract adversity; the mild and reserved remain at peace.

These yins and yangs do not need to be either/or; they can be balanced and comined or they can be altered slightly.  This lesson takes little imagination to apply to our every day lives:

• Investing passively (not trying to time the stock market) most often produces the best results but a well-chosen and slight angle can produce greater results.
• Going with the crowd can be advantageous but a slight deviation from it can be better for the individual.
• The human eye prefers right and complimentary angles--it seeks patterns--but an obtuse or odd angle can be much more interesting and attracting.
• In music, the notes of a scale work together to create melodies or harmonious chords but bend a note just the right way or strike a dissonant chord and you can communicate an entirely different and powerful emotion.

The flat hand slices through the air, but a slight angle can make it fly.  Conversely the wrong angle will make the hand turn down dramatically.  In other words, non-resistance can be good; but just the right amount of resistance--the right angle--the right perspective--can be better if you can find it.

"The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over." ~ Aesop

One only needs to learn when to resist (or bend) and by how much.  I've found many advantageous angles in life but when I find one that doesn't work I can always return to the flat hand of non-resistance.

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Related:

Thoughts on Taoism, Rip Currents & Market Cycles

The Desirable Way to Dance: On Becoming Passive Instruments

Don't Try to Predict Your Own Behavior

"It's easy to see, hard to foresee." ~ Ben Franklin

How often have you accurately predicted your reaction to emotion-provoking events in your life?

When the stock market gets volatile as it has been in recent weeks, I am reminded of the irrelevence of risk tolerance questionnaires.  If you've ever sat down with an investment advisor or financial planner, you've likely seen or heard the questions that try to predict how you might react in various stock market scenarios. 

For example: 

"If your investment portfolio were to fall by 20% in the course of one year, how would you react?  Would you A) Do nothing, B) Wait a few months to make a decision, or C) Sell your stocks immediately?"

After answering about 20 questions like this, the advisor or planner then assesses your risk tolerance and will likely label you as one of three investor types--aggressive, moderate or conservative.

"A man’s knowledge is like an expanding sphere, the surface corresponding to the boundary between the known and the unknown.  As the sphere grows, so does its surface; the more a man learns, the more he realizes he doesn’t know.  Hence, the most ignorant man thinks he knows it all." ~ L. Sprague de Camp

The problem I have with these questionnaires is that no human being can consistently or accurately predict their own behavior, especially if they've never experienced the scenarios given on the questionnaire.  I have several clients who had once thought they were "aggressive" investors--able to tolerate high risk, high volatility--but were ready to bail out of stocks immediately after a 5 or 10% decline.  This is not poor judgment on their part--it is simply human.

Consider life scenarios.  If your spouse died, how would you react?  If you lost an arm, what would you do?  If you survived a terrible car crash, what emotions would you be feeling just moments after it occured?  The honest answer is "I don't know."

"Fantasy may call the grapes of reality sour, but those who have tasted them know at last a dependable delight." ~ Dorothea Brande

Predicting behavior is at the root of most failure.  For example, something that seems difficult to endure is often not as terrible as you might imagine; but because you hesitate or fail to make an attempt at accomplishing a goal, you fail.  Conversely, you may imagine something causing extreme happiness so you pursue it.  However, if and when the thing is obtained, the happiness fades quickly or doesn't happen as you had once imagined.

Humans underestimate their ability to endure difficult times and they overestimate the happiness they will feel.  Therefore the seemingly difficult goals might never be attempted and the pursuit of happiness can be misleading.  The most accurate prediction, with regard to your future behavior, is that your prediction won't be accurate.  Embrace transcience; be content with the way things are now; be satisfied with not knowing the future or attempting to control it; and allow your imagination to be your friend, not your enemy.

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Related:

Understanding Markets: Nature Not Naivety or Narcissism

We Are All 'Naive Scientists'

The Experience-Stretching Hypothesis

Tool's Lesson on Fibonacci: Think 'Laterally'

Whether you are an investment trader, a music fan, a mathematician, a curious observer wishing to learn more about human nature, or any combination thereof, you will appreciate this lesson on the Fibonacci Sequence (more on this after the YouTube link):

The video, created by a college student to help explain the Fibonacci sequence, features images of space from the Hubble Telescope and music from the cerebral and progressive hard rock band Tool.  What makes the video and song incredibly compelling is the lyrics, which teach a lesson on pattern recognition.

For those non-traders and non-mathematicians out there, a Fibonacci sequence is a series of numbers where, after two starting values, each number is the sum of the two preceding numbers.  For example, the number sequence 2, 3, 5, 8 and 13 are a Fibonacci sequence (2+3=5, 3+5=8, 5+8=13, and so on).

Making the video and song more interesting is that the cadence of the lyrics (number of syllables of succeeding verses) follows a Fibonacci sequence.  What’s more, the meaning and lesson of the lyrics implies that humans are hopelessly addicted to looking for patterns everywhere they turn:  The "over-thinking" and "over-analyzing," as the lyrics suggest, have an effect of dulling intuitive thought and often results in missed opportunities.

Pattern Recognition: Strength, Weakness or Both?

Philosopher and mathematician, T.L. Fine, once said, "A keen eye for pattern will find it anywhere." This profound statement is neither a compliment nor an affront to humankind but it suggests that a fundamental awareness of the human tendency for pattern recognition allows for a healthy balance of intuitive thought and science.

Pattern recognition is a means of making sense of randomness.  This search for understanding, which is rooted in the desire for control and safety, can be self-defeating.   Wanting to find patterns can be considered thinking "inside the box," but the answers are not always in the box.  Additionally, being comfortable without having answers can often open doors to new ideas, new opportunities and success.  Therefore asking questions is more important than having answers.  As 19th century philosopher and spiritual leader Jiddu Krishnamurti once said, "Freedom from the desire for an answer is essential to the understanding of a problem."

Balance Linear And Lateral: Seek But Remain Open to Discovery

Returning to the message within the Tool song, aptly named Lateralus, too many people think and live linearly (in straight lines, black and white, inside the box), whereas thinking and living laterally (randomness, color, outside the box)–embracing the unknown–is healthy.

Perhaps the wisest solution is to balance the linear with the lateral.  There is no stopping your nature to seek and find patterns; and to eliminate this nature is nothing less than attempting to become something other than a human being.  Just be aware of your nature, and its potential limitations, and you’ll open doors to intuitive thought–expand beyond the narrow-minded linear thought–balance responsibility with adventure–seek but remain open to discovery.

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Related: Beware of Confirmation Bias

Financial Wealth: Real or Perceived?

"The liar uses the valid designations, the words, to make the unreal appear as real; he says, for example, 'I am rich,' when the word 'poor' would be the correct designation of his situation." ~ Friedrich Nietzsche

The common application of the word 'rich' is a term that describes a person's relative financial status compared to other people in his or her immediate environment.  For example, a poor person in America may be considered rich in a third world country.  Rich, therefore, is a classification or designation adopted by the conventions of a given group or society. 

Financial wealth is more of a perceived state than a real one. The true goal for many people is to appear rich.  If, for example, you see a person wearing expensive clothing, driving an expensive car and living in an expensive house, they appear rich.  The reality may be that their sense of self is so small that they must project a large physical representation of self.  Therefore this person must earn and/or borrow more money to meet and exceed the conventional meaning of rich.  In my personal view, this reveals the true nature of the person: They are not rich, they are poor. 

"And, moreover, what about these conventions of language? Are they really the products of knowledge, of the sense of truth? Do the designations and things coincide? Is language the adequate expression of all realities?" ~ Friedrich Nietzsche

Rich, in my humble opinion, is a person who may acknowledge the conventional meaning of the word but does not ascribe to it.  In other words, a truly rich person is equally content with any amount of material wealth, assuming this amount is at least enough to purchase what is required to meet the basic physiological needs of food, shelter and clothing.

What is your definition of rich?

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Related:

What is the Price of Pursuing Happiness?

(Why You Need to) Get 'Rich' Quickly

Japanese Nuclear Crisis: A Lesson in Fear

"Fear always springs from ignorance." ~ Ralph Waldo Emerson

How much nuclear radiation exposure will cause sickness?  What amount will cause death?  Will dangerous levels of radiation reach other countries, such as the United States?  The primary cause of fear and panic in Japan, which extended to a 16% decline in Japan's Nikkei Stock Average this week, is not the danger of nuclear radiation exposure:  The fear and panic is a result of the unknown.

For some perspective, consider some points made on the ABC News report, Radiation Reality Check:

• Radiation is all around us and even inside us at all times; it is a part of nature.  Such common items as the potassium in bananas are radioactive.
• The average human being is exposed to 3.5 millisieverts of radiation annually.  This amount of exposure is equivelent to 67 chest X-rays.
• A person would need to be exposed to roughly 1,000 millisieverts of radiation to cause sickness.  A fatal dose is in the range of 5,000 millisieverts.
• At the scene of the fire at the nuclear power plant in Japan, the radiation level is approximately 400 millisieverts.  At this level, a person would have to sit there for 2.5 hours to get sick.

Although there is no present danger of serious illness or death from radiation exposure, the Japanese people certainly are justified in their concern over the potential of a worst-case, Chernobyl-size event.  But should Americans be buying iodide pills, geiger counters and emergency kits online?  Should world financial markets decline in response to an unlikely yet terrifying possibility?

"Courage is knowing what not to fear." ~ Plato

People do not fear risk; they fear imagined consequences.  The risk of being struck by lightening is extremely low but we imagine the horrific consequence and run for shelter in fear at the sound of thunder.  Making matters worse, this misguided fear often distracts us from other perils that are real and present.  For example, death by drowning in a rip current occurs more often than shark bites, which rarely result in death.  The former is overlooked because the latter is more vivid and horrifying; thus the ocean swimmer's risk is increased because of fearing the wrong thing. 

The human imagination is powerful; it influences thought and emotion, which directly affect our actions.  But if a room is dark, must there be a monster inside?  What opportunities might you miss because of fear that provokes an image that may or may not be real?

As Franklin D Roosevelt once said, "All we have to fear is fear itself."  With regard to large numbers of people, do not fear what the herd fears, fear being trampled by the herd.  If you hear someone yell, "Fire!", your best initial reaction is to sit still.

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Related: Quotes on Worry, Fear, Anxiety & Suffering

What is the Price of Pursuing Happiness?

"...the most insignificant thing can accidentally become worth more than all the well-prepared joys put together." ~ Soren Kierkegaard, Either/Or : Part 1 Kierkegaard's Writings

If happiness "happens," what does that say about all the time and money we put forth for the purpose of manufacturing it? 

In addition, the energy spent on the acquisition of more money for the ultimate purpose of pursuing happiness has a non-financial cost that you must consider for yourself. 

The tragedy is that money can buy pleasure (e.g. chocolate cake, a vacation, the acquisition of material objects) but pleasure is quickly consumed and leaves us hungry for more. Paradoxically, we seek to fill the empty spaces but instead we make the spaces larger and increasingly difficult to fill.  We continue, then, to seek happiness but never fully realize that happiness can not be found -- it happens to us, it is accidental.

Here are a few more timeless thoughts, followed by some links to related posts, for more perspective on life and the awareness of the perils and pitfalls of chasing happiness: 

"Don’t seek happiness. If you seek it, you won’t find it, because seeking is the antithesis of happiness." ~ Ekhart Tolle

"Wealth and rank are what people desire, but unless they are obtained in the right way they may not be possessed." ~ Confucius

"We often say of others who claim to be happy despite circumstances that we believe should preclude it that 'they only think they're happy because they don't know what they're missing.' Okay, sure, but that's the point. Not knowing what we're missing can mean that we are truly happy under circumstances that would not allow us to be happy once we have experienced the missing thing. It does not mean that those who don't know what they're missing are less happy than those who have it..." ~ Daniel Gilbert

"The most exquisite paradox… as soon as you give it all up, you can have it all. As long as you want power, you can't have it. The minute you don't want power, you'll have more than you ever dreamed possible." ~ Ram Dass

"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things you only hoped for." ~ Epicurus

"He that is of the opinion money will do everything may well be suspected of doing everything for money." ~ Benjamin Franklin

"Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver." ~ Ayn Rand

"Happiness is not best achieved by those who seek it directly." ~ Bertrand Russell

"The trouble is not that we are never happy—it is that happiness is so episodical." ~ Ruth Benedict

"If only we’d stop trying to be happy, we could have a pretty good time." ~ Edith Wharton

What is the price of pursuing happiness?  Perhaps a better question to ask is What might you gain if you stop pursuing it?   

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Related:

The Experience-Stretching Hypothesis

10 Potentially Perilous Paradoxes: On Investing, Planning & Life

The Non-Financial Cost of Retirement

How Happiness Happens at Work & Home

Wall Street Never Changes

"Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes." ~ Jesse Livermore

The 662-page Financial Crisis Inquiry Report issued this week by the federal government is an exercise in the naivety and arrogance of man.  A financial crisis is just as much an occurance of nature as is a hurricane:  They are both inevitable, yet necessary for the balance of nature.  The great storms can be predicted to some degree but they may not be prevented; and the scientific study of the aftermath only gets in the way of life that is happening now.

I'll have much more to say about this next week...

On Perception & Perspective

"Perception is strong and sight weak.  In strategy it is important to see distant things as if they were close and to take a distanced view of close things." ~ Miyamoto Musashi

Our perception, or how we see things, often and to our detriment, becomes our reality... a false sense of reality.  Where mistakes are made is when we lose proper perspective.  As the ancient western philosopher, Epictetus, once said, "Men are disturbed not by things, but by the view which they take of them."

"You cannot see the mountain near." ~ Ralph Waldo Emerson

The mountain looks large when it is near; however, you can see it in its entirity from far away.  Additionally, there is no need to even perceive 'the mountain' as a challenge, especially if instead we focus on one rock at a time; enjoying the 'journey.'  Having the right perspective or view of things helps shape a healthier reality.

Drawing perception from things that are near, however, can cause problems.  The recency effect in psychology, for example, is a cognitive bias resulting from the tendancy to recall items that occured recently or that were at the end of a series of events rather than items that occured longer ago or were in the middle or beginning of a series of events.

For example, if an investor experiences six months of declines in equity prices followed by six months of increases, the investor is likely to conclude that it was a good year for stocks and go on to assume a continuation of rising prices, even with no otherwise supporting evidence.  This is not a 'positive attitude,' it is fallacious pattern recognition.

"There is no truth. There is only perception." ~  Gustave Flaubert

Is perception reality?  Is perception wrong?  One man's trash is another man's treasure.  For every fearful seller of stocks there is an opportunistic (or greedy) buyer on the other end of the trade.  Who is wrong and who is right? 

Which is the greater investment philosophy -- Buy & Hold or Speculation?  Which is the greater political philosophy -- Liberalism or Conservatism?  The short answer is all of them and none of them.  The remainder is for you to decide (or perceive).

"We must not, therefore, wonder whether we really perceive a world, we must instead say: the world is what we perceive…. To seek the essence of perception is to declare that perception is, not presumed true, but defined as access to truth." ~ Maurice Merleau-Ponty

The lesson to be learned today is simply to be aware of your own biases, your own perceptions, and what might be influencing you at a given moment in time.  To follow a 'gut feeling' is not wrong, especially if there is time to doubt it before accepting it as a basis to make a decision.  Be aware of your own biases; allow doubt to strengthen your convictions.  Find a counter-argument that either leads you further into doubt or further into conviction.  Just be careful not to perpetually seek confirmation of your biases; otherwise, your perspective, for better or worse, will never change and neither will your perceptions.  To paraphrase Francis Bacon once said, ""If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties."

Understanding that you perceive the world is to understand that the world you perceive is only the beginning of understanding:  To arrive at the full picture of truth, you must honestly fill in the spaces of doubt left by perception.  To have a healthy perception (sense) of reality you must consciously select your own perspective (view).

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 Related: Beware of 'Confirmation Bias'

Self-Actualization is Success in Life & Money

"Musicians must make music, artists must paint, poets must write if they are to be ultimately at peace with themselves.  What humans can be, they must be.  They must be true to their own nature.  This need we may call self-actualization." ~ Abraham Maslow

What is the purpose of my life?  What is the purpose of my money?  What makes me successful? 

If the three questions were circles in a Venn diagram, the place where they overlap would be self-actualization.  One's degree of success, if success is prudently defined, is the measurement of progress toward self-discovery, toward self-actualization, where one knows (and is acting as) the authentic self.

As most of us may attest, it is difficult to be authentic, to feel and act as yourself, when you are starving, insecure, emotionally distraught, socially displaced or underappreciated; and absolute financial poverty can certainly contribute to all of these conditions.

Money's utility, however, is best suited to help us acquire the most basic of human needs, the physiological needs of food, shelter and clothing.  Those needs that are higher, with reference to Maslow's Hierarchy of Needs (pictured above), such as safety, belonging (love), and esteem are not purchased with money; they only appear that way.

The importance of money, material wealth and social status are taught by social conventions and ingrained into the human psyche by messages received and repeated often, such as those of mass media and marketing.  To say, "I need more money to feel important," or "If I had more money, I would be more secure financially, emotionally and socially," is a function of what you have learned as a product of your environment.

Where people often make mistakes in life and in money is to measure success by monetary, material or social means; to make life goals financial goals.  If money can truly meet the human needs of safety, belonging and esteem, then there would be no such thing as a financially wealthy person who is insecure, unloved or poorly regarded.

While perception is reality (one's feelings are subjective and not necessarily "wrong"), it is a false perception to believe that more money equates to more fulfillment.  Conversely, but speaking to the same point, some of the wealthiest people in the world, such as Warren Buffett, are self-actualized people making large sums of money, not because they had once aspired to obtain great material wealth or social status, but because they are being and acting authentically as themselves.

"One cannot choose wisely for a life unless he dares to listen to himself, his own self, at each moment of life." ~ Abraham Maslow

In my humble opinion, the higher needs in Maslow's hierarchy, the needs of safety, belonging and esteem, come naturally as a by-product of being, knowing and acting the authentic self.  The answer to the three questions, "What is the purpose of my life?" and "What is the purpose of my money?" and "What makes me successful?" are all the same: self-actualization.

If we may agree that a general, overarching goal in life is to be successful, it is prudent to define success in some way that involves you being you, with little or no regard for financial or material wealth.  Once you have reached the level of financial security that enables you to meet all of your physiological needs, any money that you obtain above that level may become a tool to aid in your self-actualization.

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Source: Motivation and Personality, by Abraham H. Maslow

Related Post: Mind vs. Brain Part II: Priorities, Pursuits & Productivity

Photo of Dave Gilmore Credit: Gary Williams