In the world of art and entertainment, illusion is a useful and often necessary tool or effect to manipulate an emotional response. What about the world of personal finance, where there are elements of both art and science? I'm sure many people, especially in light of the current economic crisis, could testify to the fact that their financial plans look quite different today than they did three years ago -- that the illusion, the reality of error and the phantom of truth are evident now.
Financial plans, whether formal or informal, are essentially a collection of quantitative data from the past, combined with a snapshot of present emotional perspective, that provide a basis upon which to act today and in the future.
While there is nothing inherently wrong with using the past to make certain assumptions about the future, financial plans become increasingly illusory when these assumptions are made in the presence of extreme emotion.
"Any occurrence requiring undivided attention will be accompanied by a compelling distraction." ~ Robert Bloch, author of suspense thriller, Psycho
When I think of illusion, I often think in context of movies and the movie director's use of suspense to leverage the imagination of the movie audience with the intention of maximizing and manipulating an emotional response.
If a movie director fills a scene with eerie music, a woman taking a shower and a silhouette approaching with some object in its hand, what does your imagination do? Is the silhouette a loved one holding a bottle of shampoo or is it a psycho killer with a butcher knife about to claim a victim?
This is the art of suspension -- it is a form of illusion -- and it is the creative manipulation and leverage of the imagination. When something is suspended, according to Webster's Online Dictionary, it is held "in an undetermined or undecided state awaiting further information." Lacking this information, our imagination provides it for us and creates an illusion -- accurate or not -- and we react accordingly.
"Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces." ~ Sigmund Freud
This piece of wisdom from Freud explains much of human nature and may be applied to financial behavior, especially in the wake of the current financial crisis.
We can not change the past so there is no use in complaining or despairing over it; and much of our future success depends upon how we learn from our past mistakes; therefore it makes perfect sense to consider examples of faulty assumptions (illusions) made in the past that are colliding with reality now:
- All recessions are "average."
- Real Estate is an appreciating asset and never falls in price.
- Stocks always provide positive returns over periods of 10 years or more.
- My job is secure because I am an "essential employee."
- My income will perpetually increase at the rate of inflation plus 2 percentage points.
- The old rules no longer apply.
Can you think of financial planning assumptions that you, or someone you know, made in the past that you now recognize as illusions? Equally as important, are you aware that you may be forming more illusions now -- just in an opposite way as you did three years ago?
Money/Bernanke Illusion from MOIllusions