Maybe we should actually question things more, especially when the crowd supports it.
Kyle J Christensen
By Kyle J Christensen, Founder, Principles-Based Planner, Unique Advantage
Unique Advantage Monthly Client Email – October 2024
About the year 2000, I was living in Salt Lake City, UT and attending the University of Utah. I was on an educational path to becoming a physical therapist (what I thought I wanted to be at the time). As a part of my course requirements, I signed up for Physics. It only took me about three classes to realize that I wasn’t very interested in physics and that I wanted to switch to something different. So, needless to say, I didn’t learn a lot about physics. At this point in my life, I think I’d really enjoy studying the topic. I’m bringing this up because I don’t know how most of the things I use daily actually work. I just trust them and use them. I don’t need to be convinced to get on an airplane, use my cell phone, microwave, air conditioner, etc. Maybe I should know more about these things. I certainly couldn’t tell you the side effects of using these things, other than they make my life much more comfortable and convenient.
Maybe I should require a little more proof and trust a little less. After all, we do live in the information age. If there’s something I wanted to learn more about, I’m sure there’s a book about it and that book could be delivered to my house within a few days. As it relates to financial decisions, in some areas people should require more “proof” and in other cases, maybe they should require a realistic level of proof.
When it comes to justice in the United States, there are certain levels of proof required (called “burden of proof” or “standard of proof”) to convict a person of various types of crime. The burden of proof is not the same for every type of crime. For example, some require only “a preponderance of evidence”, while others, more serious crimes, require “proof beyond a reasonable doubt”.
Sometimes people want to act like every decision (or every financial decision) they make is based solely on “proof beyond a reasonable doubt”, which is the highest level of proof. They want to act almost as if they carefully weigh out all the pros and cons of every decision, and then make the most logical one every time (like Spock). I’m not saying that isn’t a good idea, but my experience in working with hundreds of people over the past twenty-five years suggests that that almost never happens. Most of the time people choose to save time and effort, and they just trust that the person making a recommendation to them is correct. In fact, I would say that only possibly a few financial decisions that a client ever makes are based on a high level of proof.
Here are a few examples of Proof Beyond a Reasonable Doubt:
– There’s no doubt that you are legally required to obtain certain levels of auto insurance liability coverage in your state (although most people couldn’t tell you what that level of coverage is).
– There’s no doubt a bank will not lend you money for the purchase of a home without proof of “full replacement cost coverage” homeowners insurance on the house.
– There’s no doubt that if you evade taxes and get caught, you will pay fines and may go to jail.
I’m fascinated at the level of “proof” that many clients require from me when making certain financial decisions related to their financial plan. Albeit that requirement of proof is not holistically applied. In other words, it usually only applies to some things, namely those things that are not promoted by most people around them (or by “the crowd”). For example, no proof is needed to convince someone they should buy auto insurance. Part of the reason is because it’s required by state law. But that also is a two-edged sword. Because auto insurance is required by state law, and most people choose to abide by the law and get it, they also choose their policies based on what seems to be “the cheapest”. So, the fact that no one really needs to be “sold” on auto insurance, isn’t necessarily a great thing. By contrast, little proof is required to convince someone they should save money (where they should save is another story).
Incredible amounts of proof seem to be required for anything “out of the ordinary” or not promoted by the crowd (except when it comes to private investment offerings that promise/project super high interest/growth rates –people just write checks out all day for stuff like that, without knowing the first thing about it). And an unattainable level of proof is required when a trusted family member or friend (whether an actual expert in personal finances or not) opposes a recommendation. The financial planner could give hours upon hours of reasoning behind a recommendation, and a close trusted family member or friend (again, regardless of their expertise) could shoot it down with four words, “I wouldn’t do it.”
The point of me writing this article is that 1) maybe we should invest a little more time and effort into the logical side of all our financial decisions and 2) maybe we should actually question things more, especially when the crowd supports it. At the same time, 3) maybe we shouldn’t have unreachable/unreasonable standards of proof required in order to make any financial decision.
I realize that, ultimately, a person makes their decisions based on trust. There’s no practical way to know beyond reasonable doubt that any financial decision is correct until it’s proven personally. Even financial decisions that seem correct for someone else may only be correct for that individual, as everyone has a unique financial situation (including distinct skills, knowledge, desires, goals, and family circumstances). A person can’t know that a financial decision was exactly right until they prove it for themselves, any more than a person can become a great fisherman without actually fishing.
Maybe we should rely more on the “preponderance of evidence” as the appropriate level of proof when making important financial decisions. This would require a certain level of explanation and learning (particularly of financial principles that have stood the test of time and apply to everyone). It would require an investment of time. It’s much easier to “just trust” someone and do what they suggest because you like and/or respect them. But I would say that that’s also how countless people have been scammed financially over humankind’s history. I would also say that because people have a lack of curiosity (probably in their desire to “save time” and effort) and too low of a standard of proof on many things (auto insurance, homeowners insurance,401(k)’s, etc.), they often end up with something much less than they had hoped for.
I would suggest that “Preponderance of evidence” should not include opinions from non-experts. Opinions from non-experts are never presented as evidence in a courtroom. Only opinions from experts are viable testimony in courtrooms. And even those can be skewed or biased. So, if you’re going to seek out opinions, either talk with someone who has experienced the financial tool in question personally (and take what they say with a grain of salt because their exact situation is different than yours), or talk with someone who deals with that financial tool every day. If I wanted to learn more about China, who would be the better person to talk with? A neighbor who visited once or read about it on a website, or a Chinese person who lived there? My family and I had the privilege of living in Oklahoma for seven years. We met so many great people and have fantastic friends there. If I asked 100 people from different places in the country what they think of Oklahoma I can guarantee you that their opinions, for the most part, would be way off from reality. I say that because I’ve heard a lot of opinions from people about Oklahoma and most aren’t positive. Having lived there, I can say that it’s one of the most beautiful places in the country full of fantastic people who have strong faith in God, the best BBQ in the country, tons of rolling hills, gorgeous lakes, huge forests of oak and maple trees, tons of wildlife, a long Fall season (four distinct seasons), and has some of the best fishing and hunting in the United States. Yes, there are tornadoes, but that’s how they keep people out (haha).
What about “the experts”? There is justifiable skepticism regarding financial advisors. This skepticism is warranted because, for the most part, financial advisors work for, are paid by, and are trained by financial institutions. Even the regulators overseeing these advisors and institutions have been shown to act in the best interests of those financial institutions (watch the documentary, Inside Job, if you don’t believe me). In fact, the regulators of licensed securities representatives have their communications (emails and anything else they want to send to clients) edited by “compliance officers,” whose primary job is to protect the financial industry, not necessarily the client. This is a tough issue, and it’s precisely why I wrote the book, Principles-Based Planning, A Better Approach to Financial Planning. One of my major goals is to change the way financial planning is done, because I recognize the fact that the agenda of financial institutions and that of my clients is at odds. No financial institution is looking for ways to give you and me more money. They’re all looking for ways to gain more control and more use of more of our money. There’s no arguing that fact. Whether you become financially free or not is not something they are concerned about.
Some would say that the way the advisor gets paid should be the most important factor in your decision on which financial expert you will work with. There are three ways financial advisors can get paid:
1) They can be “fee only”.
2) They can be “fee-based” (which means they charge a fee and get paid commissions).
3) They can be “commission-based”.
I would argue that it doesn’t matter how your advisor gets paid. That doesn’t determine whether they are biased or unbiased (note: All advisors are biased). More important factors (than how they get paid) would include their knowledge, their ability and willingness to invest the time to teach and help you, and the philosophy and principles they espouse.
What about the crowd? How could something be wrong if the majority of the 320 million people in America think it’s a good thing? Easily. In fact, most people are dead wrong when it comes to money. Most people in this country today don’t even have $1,000 in savings. So, yes, the crowd, when it comes to money, is a terrible way to judge whether something is good or bad for you financially. In fact, whatever the crowd is doing should be cause for extra suspicion and inquiry.
At the end of the day, most people are extremely uninformed when they make tax, insurance, legal, debt, saving, and investment decisions. Unfortunately, the financial education we all need is not included in our formal education system (and if it was, it would probably be written by the financial institutions themselves and would therefore be garbage).
The good news is that you can invest the time to become more educated. Read books. Learn about economics. Track all of your income and expenses. Learn principles that apply to money and have stood the test of time. Use a real expert in personal finances and stop relying entirely/mostly on people who aren’t (i.e. your coworkers, your parents, or your hair stylist). This isn’t a trivial matter! This is your livelihood on the line! It’s worth the time and effort. Trust in the principles of success you already know to be true (i.e. all things that are worthwhile require hard work, knowledge, and skills). And if anyone comes along telling you those things aren’t required, run from them. Have a reasonable standard of proof that is required for all your important financial decisions, not an unreachable and unreasonable standard. If you do these things, you will make much better financial decisions and you’ll have better results.
