“Prominent media journalism is a thoughtless process of providing the noise that can capture people’s attention.” – Nassim Nicholas Taleb (Author)
Helping clients “filter the noise” is an increasingly valuable aspect of our work. We live in a very noisy world – “news” abounds on all types of electronic devices in a quest to keep us up to date. The difficulty is that our brains have limited capacity to process all of this information at once. We pick and choose what is important and what is not. Reacting to short-term “noise” can unravel even the best financial plans.
Ignoring the Hubbub
One of the best ways to ignore the “noise” is by focusing instead on longer term goals. Sometimes the “noise” is not just news but tax policies or popular investments. Over the years, we have had many clients come to us with “hot investments” that have short-term tax benefits. While some of these investments or strategies are quite complex, we always ask clients a simple question: What specific long term problem does this investment solve? Often, the answer brings us right back to the real motivation: short-term tax “savings”. If you invest $50,000 to “save” $10,000 in taxes and the rest is lost, what have you really saved? Very often, reacting to something near term in order to maximize return or maximize tax savings, ends up costing you both in the longer run.
Finding Your Long Run “Patient” Self
I recently came across some research by Drew Fudenberg (Harvard) and David K. Levine (Univ of Washington) published a few years ago in The American Economic Review, (A Dual Model of Impulse Control, pages 1449-1476, December 2006). They do a good job of describing the struggle we all face balancing short and long run issues. They describe our short run selves as sequential . That is, our short run selves only exist for a brief period and then melt away, replaced with another short run self. The researchers frame our short run selves as “impulsive” and our longer run selves as “patient”. It is easy to see how the noisy world can push our impulses and move us towards decisions that conflict with our long-term “patient” objectives.