Have you seen this serial called “Brain Games” on the Disney-Hotstar OTT channel? If not, you must. It will dissolve any pride you may have in your ability to take rational decisions. Episode after episode of the serial demonstrates how easy it is for even the most rational thinkers (in their own eyes) to be swayed by emotions, misinformation, and most of all their own egos, to take irrational decisions.  Of course, the commentary in the serial also provides tips about how not to be mislead and to not be swayed by letting emotions color your reason.

The root cause of this of course lies in our brain. Our brain did not evolve to enable us to think logically and find proofs of theorems or to discover new laws of physics or to play chess or indulge in any activities where logic and reason rules!

It evolved to help us survive and procreate. It evolved to respond to challenges which threatened our life – when a Sabre-toothed tiger was about  to pounce on our ancestor, her/his ability to calculate the probability of survival using Bayes theorem was far less important than the ability to flood our system with adrenaline and thus be able to run faster than she/he could in normal circumstances. In other words, for survival, being able to get into a state of panic was far more important than rationally evaluating all available alternatives and then selecting the one with the optimum cost/benefit ratio!

The problem is our life is no longer threatened by Sabre-toothed tigers. BUT the responses, triggered by our “survival instinct”, are still designed to save us from the Sabre-toothed tiger!

The threats to our financial wellbeing (which in the modern world is essentially synonymous with  “survival”!) come more from clever marketers, fraudsters (many times the boundary between the two is rather ill-defined) and even well-meaning but gullible friends and relatives!

A recent episode of this serial Brain Games which I mentioned above, described a very interesting social experiment – which has a strong bearing on our financial decision making.

The main host of the show asked several people a number of questions involving quantities i.e., questions like “What is the weight of the book I have in my hand?” or “How tall do you think that woman walking by is?” etc. The host made it clear upfront, before asking the questions that the participants were not expected to know the answers to his questions. They could still win a prize even if they failed to provide a precise answer to ALL his questions. Instead of specific number in response to the question they were asked to guess a range of numbers within which the correct answer may lie.

For example, it was clarified that, If the correct height of that woman was 165 cm but if the participant couldn’t guess the correct number and said the correct number is between 150 and 175, he would still win a prize. The exact words used in this clarification are extremely important, because they were very cleverly chosen to prime the participant’s thinking so that he will fail on subsequent questions.

I will explain why, after I have described what happened in the experiment!

The surprising observation in the experiment was 80% of the participants (people picked at random on the street) FAILED to even name a broad enough range within which the correct answer lay!

Why is this surprising?

Because the participants could have answered EVERY question that was asked with a VERY VERY BROAD range like say – between 1 and 1 trillion and the correct answer to ALL the question would have always been found within the range.

A very small percentage of the total number of people who participated actually caught on to this. Almost EVERYBODY tried to narrow down the range as much as they felt is “acceptable”, around what they guessed the correct answer to be, and in the process failed!

Why was that?

Firstly, they were led to the trap by a cleverly worded explanation (see above) in which the host (who knew the correct answer) quoted a very narrow range around the correct number. Thus, priming the mind of the participant with the thought that she was expected to quote a “narrow” range – the narrower the better! If the explanation had been “If you say the correct height of the woman is between 1 cm and 5000 cm, that will be an acceptable answer”, then the actual answers the participants gave would have contained much broader ranges, thus increasing the possibility of their winning the prize! An example of how cleverly worded messages could prime you to fail!

Secondly, quoting a very broad range like 0 to 1 trillion in effect is an admission that “I don’t know what the correct answer is”! That created a serious conflict with the participant’s ego –

For example, one of the questions was “Are you a Christian? And do you know how many distinct books there are in the Old Testament of the Bible?” EVERYBODY who was asked this question failed to provide the correct range – everyone tried to guess by quoting very narrow ranges like 7 to 10 or 12 to 15 etc.

Any random answer with a very large upper limit like 1 million for example, would have been fine. But that would have meant an acceptance of one’s ignorance about one’s own faith! Their ego wouldn’t allow them to admit that!

What is at play here?

The participants are still thinking like they have to ward off the Sabre-toothed tiger and must react instantaneously.  Most were slow to realize that they can afford to analyze the data at hand without bowing to the innate pressure to provide a knee-jerk reaction and pause a moment to consider what the appropriate response should be before blurting it out!

Every financial decision we make involves answering a question about a quantity – How much returns will I get? How much will be the inflation 8 years from now? How much will university education cost for my 5-year-old son 15 years from now? How much will I need after retirement to live the lifestyle I am currently used to?

We cannot know the answer to ANY of these questions. All we can do is guess a range of values within which the correct answer may lie. Our ego (and the prompting from the external world or marketers, advisors, relatives, and friends)  usually misleads us into seeking if not precise answers, narrow ranges within which precise answers may be found!

There is no shame in admitting that we do not and cannot know the answers to such questions, in fact the right survival (financial survival) strategy is to NOT pin your future on specific numbers which you think you can make educated guesses about but in reality, cannot know! Where you must forecast numbers, forecast broad ranges as a provisional target and at regular intervals examine whether in light of new knowledge you may have gained in the meanwhile, whether the ranges still “appear” valid.

And no matter what evolution tells you, your survival depends on avoiding the temptation to respond quickly to changing events in your environment! But on the other hand, no matter what common wisdom or your ego tells you, changing your goalposts when warranted is in fact the right survival strategy!