7 ways your brain makes you poorer

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26:33That's Vanta.com forward slash making money. There's a link in the description though, so you can just click that. The conversation that I have with people the most that kind of blows their mind is when they finally realize the benefits of compound interest on an investment. So you sit them down, you show them a compound interest calculator, and you go, if you took away 200, 300, whatever a month for 9 % for 30 years, look at that number. And it kind of blows their mind. But obviously you talk about in the book that that's a key bias or a key flaw of our brains is visualizing that process. Yeah, this is called the exponential growth bias.

27:09And essentially people just really struggle to visualize how big exponential growth can become and how quickly it reaches huge numbers. And we saw that with the pandemic as cases were increasing, even though you only had like a small number of cases, say in February 2020, politicians like the general public just couldn't recognize that actually it would only take a few weeks for it to kind of infect a really big proportion of the population. and you know I was one of those people who just hadn't really registered it and you know it's a classic intelligence track because I studied maths at Cambridge but I still was not applying my knowledge of exponential growth this was the r number they were like we need to suppress the r number because like you know we're drawing the graphs weren't they yeah and you know I think people realized like I realized it was dangerous but I also thought it won't I didn't fully realize how quickly it was going to grow and you know how even a few days could make a big difference Why do we struggle with that?

28:12Why do you use with a maths background? So I think something we haven't spoken about is cognitive reflection, which was actually what that Jack and George test was measuring. And that is when we just kind of use heuristics in the brain, so like rules of thumb. So we're going with our intuitions and these decisions rather than thinking carefully about what's actually happening. So it's not the opposite of motivated reasoning, but it's a different form of the intelligence trap, because this is almost about being too thoughtless, essentially, rather than motivated reasoning being about applying your intelligence in a one-sided manner.

28:51So if you lack cognitive reflection, we call that cognitive miserliness. And I think I was just being a cognitive miser, like I wasn't actually doing even like very rough kind of calculations in my head to kind of visualize how quickly that could grow. And yeah, this is really common. People who lack cognitive reflection, who are cognitive misers, tend to be more susceptible to lots of those biases that we mentioned. And cognitive reflection just doesn't really correlate well with IQ tests. So there's plenty of people who are super smart, but cognitive misers. So what's the opposite of cognitive bias, cognitive unbias.

29:31Yeah. Cognitive neutrality. Yeah, exactly. I guess no one's come up with that. No one's come up with that. I've coined it here, guys, you heard it first. Cognitive unbias. I would say like objective thinking as well. Okay, fine. Objective thinking, fine. Well, Warren Buffett is obviously a very successful investor and he's benefited from compounding. Most people don't realize that he didn't have much wealth until he was after six. He's been compounding his wealth for 60 odd years. So the numbers get pretty scary. and he often says it's all about temperament. He's not that intelligent, not compared to his peers, he knew smarter people and it's just all about mindset.

30:08What he's actually talking about is his ability to control his own cognitive biases, I'd imagine, or biases. Yeah, exactly. I don't know how true this is, but I'd heard that he keeps a diary each evening and he keeps track of which of his decisions were good and which were bad. In psychology, people call that a cognitive autopsy. And it's a really powerful way of making sure that you actually apply your knowledge of bias, essentially, like to constantly keep track of your mistakes. And yeah, I don't think many of us do that. We might get negative feedback, we might have like some big error, and we just put it to the back of our minds.

30:44And I think again, this comes back to that idea of self-compassion. Most people want to shy away from their mistakes because they think it reflects something bad about them. But because I don't really look at those mistakes and analyze them, they just keep on making the same mistakes again and again. When you said like, if you get people get frauded, they like keep quiet. They don't tell anyone like the shame of telling people like, I definitely got frauded before, but I just kept it quiet and I didn't tell anyone. Did you? Yeah. See? Oh, now everyone knows. Telling the world. Didn't tell anyone.

31:13I'm telling everyone. But I just kept it quiet. And I was now, as a result, I guess I'm super, super paranoid about. So now any investment I'm going into, I do like way more due diligence and I like research the CEO and I think about what could go wrong. Whereas before I used to just like, my son was like, this is a good investment. I throw money at it, throw money. Like, yeah, cool. I'm going to be rich. It's going to be great. But now since the day I lost the money, I was like, okay, I was probably just like cognitive bias thinking this is going to be fine. I know like the CEO of the company is going to be fine, but really just because you know someone doesn't mean that you can't get frauded.

31:44so it was in crypto yeah yeah so I think for me I kind of just it made me more kind of put barriers up and like you don't want to get burned again so do you think that happens as well or yeah I think you have to like tell the world and be like I got frauded so now I won't do it again do people learn from do people yeah so that's it so it's kind of related to what I was saying but there's this other kind of cognitive trait that we look at which is the growth or the fixed mindset which was studied in education, but actually applies to kind of anywhere where we apply our brains, essentially. So, people with a growth mindset would be more likely, they recognize that their abilities can kind of develop over time.

32:25And so, if they make a mistake, it's like, well, that is painful, but they also see that they can learn from that mistake and they can avoid it in the future. People with the fixed mindset believe that all of their abilities are kind of innate and like central to who they are, but they can't really be changed at all. So if someone like that makes a mistake that they find quite shameful, that's going to trigger like this sense of threat because it's like it's questioning something very core about their personality. So those people with the fixed mindset are less likely to then analyze their mistakes.

33:00They're more likely to either just defend their behavior or just turn a blind eye to it, but they're not so likely to learn from the mistakes that they've made. So you want to have the growth mindset, not the fixed mindset. What split do you see? I mean, you might not even know, but what percentage of people are growth versus fixed or do we all start off as fixed? Yeah, I'm not sure for certain. I imagine it probably is roughly 50-50. But I think, again, this can depend on context. You might have a growth mindset about, I don't know, your music playing abilities, that you might have a fixed mindset about your financial decision making.

33:38You might just think, I'm no good at financial decision making and never will be. Or you might think I'm an absolute genius at this. But also that this is not something that can be improved with practice. You just think you're either naturally good or you're not good at all. So many people say to them, I'm no good with money. I'm bad with money, yeah. That is a very common line, isn't it? And with your book, one thing that was kind of eye-opening for me was, if you think you're good at something, that can make you a lot worse. at it because you slip into like an autopilot state where you make rushed and bad decisions.

34:11Yeah, exactly. And so this is something called the curse of expertise, where that really shows up. And it's where you find that super qualified people sometimes end up making worse mistakes than novices. Do you have any examples? Yeah. I mean, one that really struck me was with forecasting, like geopolitical forecasting. So there was this huge kind of tournament run by Philip Tetlock in the US where he just got loads of people, amateurs and professional pundits to predict all kinds of world events. And some people came out as like super forecasters. So they were just tended to be very accurate in what they predicted and they were also self-aware.

34:53So if they didn't feel confident in something, they, you know, were generally more likely to be wrong than if they felt really confident in their predictions. But there was a group of experts who were professional pundits would appear in newspapers on TV. And they were not just bad, they were actually worse than if they'd guessed randomly. And that's because they had their method or they had a particular really fixed worldview that meant they weren't really updating their opinions at all. And we see this in all kinds of expertise. It's called earned dogmatism, where you reach a certain point in your career or education where you begin to feel like you've kind of earned your stripes and now you don't really have to question your judgments anymore.

35:43So you stop listening to other people's points of views and you kind of just, you get very entrenched in your thinking. Very dangerous in medicine or science or anything like this where they're constantly changing. Exactly. Yeah, there's all kinds of biases like that in medicine. Also doctors are susceptible, kind of understandably, but I mean, they shouldn't be because it's not rational. But like, if you have a really difficult patient, they're just less likely to take their symptoms seriously. If you have like a super attractive person come into the doctor's surgery and say they're ill, doctors are less likely to take them seriously.

36:17Because they're like, we associate being attractive with being healthy. And so you're like, oh, you don't really look ill. You look fine. Yeah. Right. But again, these are not conscious decisions, but it's just swaying, you know, their decisions quite subtly. So how do we recognize these biases then if like, if highly educated, smart people, if it's ingrained, if they're absolutely everywhere, how do we spot them? That's what's so optimistic about the research is that actually there are loads of ways to raise your awareness. So I think just, you know, like I'm not saying it just to plug my book.

36:53Like reading about them is a good place to start, obviously. You should plug the book. It's really good. Thank you. But like having the vocabulary to be able to label exactly what went wrong with your decision making is really useful. But then the problem is you, you know, you might learn it and then you forget it or you just don't apply it because of that cognitive miserliness. So you have to build things into your routine to make sure that you are more systematic. So the cognitive autopsy that I mentioned earlier, where you kind of go over your wrong decisions and try to work out kind of what had led to those mistakes.

37:29That's one way you can do that. Obviously, you know, that's good for learning in the future. But to prevent errors kind of in the next decision you make, another option is to perform a cognitive pre-mortem. So that is where you're actually trying to... I think it was so morbid all these times. Right, exactly. It's like autopsy pre-mortem. Yeah, I mean, actually, these terms came from this guy, Pat Crossgrey, who was working with doctors to reduce cognitive bias in medicine. Because you were killing everyone. Right, exactly. Well, yeah, I mean, he was really troubled by the potential for diagnostic error to actually lead to deaths.

38:09But yeah, so the pre-mortem is where you actually try to imagine the worst possible scenario, like the worst outcome of your decision, and look at all of the potential errors you might be making kind of that could lead to this worst outcome. and then looking for, you know, ways to avoid them or looking for analyzing them more specifically to kind of finding more data to say whether that is likely or not. This is essentially just stopping you from being that cognitive miser. So we've spoken about a couple of techniques you can use to kind of avoid cognitive bias. But I think also more generally, you can be a bit smarter about how you listen to your intuitions.

38:52because you had asked earlier, is it that we should always think deliberatively, always be intuitive? How do we know which situations to apply that in? But what the research shows is that we can train our emotional intelligence. So, we just analyze our intuitions more rationally, essentially. So, there's lots of ways to do that. I think some people, So intuitions occur because it's like the non-conscious part of your brain is processing a lot of information that you can't think of consciously. And then that is triggering changes in your kind of body's physiology. So that might be if you think it's a really good investment, you might have like a little leaf of your heart, like you're getting excited.

39:38Or the opposite, you might start feeling really anxious if like your subconscious is telling you like back away from this. and some people just aren't very good at reading those intuitions at all which is its own problem so practices like mindfulness can actually be good to kind of connect to your intuitions but then more specifically you want to be like super emotionally literate in how you describe those feelings and how you pinpoint the causes of those feelings because what happens a lot is that you might misread this kind of intuitive feeling through those biological signals. And the cause of it might be something completely different.

40:18So I think there's studies showing that people's investment patterns change depending on whether their favorite football team won the day before or not. Because they're like, if it won, they're like, I feel great. I have a really good feeling about this investment. But it's like, that's just because you still feel happy from a kind of hangover from the day before. But if you have like, if you're emotionally literate and actually just having a big vocabulary of emotion words, so not just like I feel crappy or I feel good, but you know, I feel jubilant or happy or content or, you know, you might feel fear or you might feel dread, you know, like having those specific words, just that seems to help people to tap into the emotions of their intuitions and to be more specific and to trace the source of that.

41:09So there were studies of people on these kind of fake stock markets. The people who were more emotionally literate in that way made the better decisions. They were better able to read the risks and the potential benefits of an investment compared to people who had the kind of cruder emotional vocabulary. Yeah, because we apply the word anxiety to a whole broad spectrum of emotions it seems nowadays. People say, oh, I'm anxious. Like you said, they might have dread or fear. Exactly. Yeah, it's a big problem. And some people I know, they'll just be like, how was your day? And they'll just say, oh, I was manic.

41:45And that is their answer every time. But you really need to be specific. Like, was it, were you feeling angry with your colleague or were you just feeling like under pressure because were you stressed in a positive way because this project means a lot to you or were you stressed in a negative way because you have too much to do and you don't think you can do anything to the best of your abilities. Being able to read those distinctions is what I'm talking about. And do you think in the moment that you're about to make a financial decision, you should be assessing your headspace in that way then and saying how do I feel right now?

42:18And is there anything in this day or yesterday that could have impacted the way I feel? Yeah, interrogate that intuition and to just think, to recognize that you feel how you feel. and what direction it's kind of pushing you in, but then to ask kind of why it's pushing you in that direction. And actually, a parallel line of research had looked at this with doctors' diagnoses, which, as I've said, can be very biased. So sometimes, like the researchers said, I try to get the doctors to just ignore their intuitions altogether and just think for it in this very logical way, like fill in this table, analyse the information, and come to your decision without using intuitions at all.

43:00And their decisions were not very good either. But what they found was much better was if they asked the doctor to, first of all, note down what their intuition was, like what they thought, you know, what their guts were telling them this patient had wrong with them. And to then kind of interrogate that intuition and to look for the reasons why it might be right or might be wrong. But first, at least acknowledge it. So I think, I mean, that's the take home really of what I'm saying is we need to recognize our intuitions but then we need to analyze them in a logical manner rather than just kind of going with them going off your gut all the time yeah exactly do you have any practical tips on how to do this because i know like most people aren't very good at self-reflection or like especially exactly especially in the moment when you're feeling those emotions you might think about it later on how did i feel but i feel like later on you've you kind of got like a rose-tinted filter so you might oh i wasn't that angry or i wasn't that scared or oh i was probably just hungry but like how do you stop and say i was trying to how do you analyze your it's really tough if you're time pressured that's always an issue but if you can afford to take a break and kind of mull it over i think having that distance is really good um if you can't do that because like you're being asked to make your decision you know like within the next minute there are psychological techniques that kind of create a bit of emotional distance and like help you to get into that more reflective means of thinking.

44:23Now, one of those is called self-distancing. And there's lots of ways to apply it. Like some researchers shown that just kind of imagining your friend facing the same kind of dilemma and imagine giving advice to your friend gives you that distance. Asking yourself how you'll feel about this decision in the future. say in a year's time or five years time or 10 years time that can give you that distance sometimes just talking to yourself in the third person like linguistically can do the same thing so just being like um david is contemplating blah blah blah and just yeah it makes you sound a bit like elmo from sesame street you said a foreign language as well yeah so if you speak a foreign language that also gives you I'm not French.

45:14I speak Spanish. What else I got for you? Je ne comprends pas. That's all I knew in French. I do not understand. Said that. Just said that. It's got you through life. And you've got a point for every question, mate. So this is known as the foreign language effect. And actually, like, so you might think, like, what's the point of that if I'm not fluent? But actually, you don't have to be fluent. But you do, you have to have enough vocabulary to describe, you know, crudely what you're thinking of life. So you have to have a certain level of proficiency, but you don't have to be perfect. But yeah, that had shown, for example, there were really compelling experiments looking at loss aversion, those investments where people, even when the odds are stacked in their favor, they'll ignore making the investment.

45:59The research has shown that if you present that in someone's second language, so triggering them to think in their second language, it almost completely eliminates that bias. So they're much more rational in making those decisions. Do you think this is why we always say as UK people that other places are more direct, but actually they're just engaging in their second language. So they remove a lot of the emotion out of their, you know, the way they speak and... I think so. So there are cultural norms. It's not just the foreign language effect. But actually, you know, if you think about it, like if someone swears at you in a foreign language or you swear in a foreign language, that has just a lot less of this kind of emotional impact compared to if it's like this word that you used when you were a kid and your mum like shouted at you for saying that word.

46:46So it's that kind of thing. With our native language, each word has much more resonance because of all the experiences we've had, which is great. Like, you know, in lots of ways, it makes a story you hear in your own language so much more vivid. But sometimes you don't want that. Sometimes you want things, you want to just like turn down the emotional volume just a bit to allow you to get into that reflective state of mind and that's where the foreign language effect can really work in our favor that's fascinating really i like the idea of like imagine if you're giving your friend advice because especially with like relationships lots of my friends have loads of advice for everyone else but then when they're in a relationship i'm like you're literally doing the things that you told like me off or told my sister off or told your friend off for doing and you're in the same situation but you're doing the opposite so it's like yeah everyone has good advice for other people yeah in relationships but when it's own they can't see that they're the problem just in life like i see the wood for the trees that's what yeah i speak to other youtubers and like you know i we basically have the same conversation with each other from different but we're just they're they're stepped away from the situation so they don't they're not wrapped up in the emotion of it so they can just give you the advice it's like you're speaking in a mirror basically it's just one side of it's quite emotional at that point yeah exactly so taking another's perspective is also a good way of avoiding uh bias as long as you trust that other person.

48:04But yeah, that phenomenon of giving other people better advice than you would give yourself, that's called Solomon's paradox in psychology. And it's been proven really robustly that our decision making is wiser when we're thinking about someone else's problem compared to our own, unless we use psychological distancing to overcome it. Why? Why are we so useless? So this is because if you're really immersed in the emotions of the situation, you have that emotional drag. And that is triggering all of those biases and things like motivated reasoning. It's just making your thinking like a complete mess, essentially.

48:46How is that useful, though? Why is that there in that moment when you need your brain the most? Why does it let you down in that sense? Yeah, it's frustrating, isn't it? I mean, I'm trying to think in evolution if it would have been a definite disadvantage in that some things we've got that don't work out great for us in modern life is just because it also wouldn't have necessarily affected our survival. So I wonder if it's - So one example that I have is we want to be socially accepted, don't we? Because maybe from an evolutionary perspective to not be would be death because you'd be kicked out of the tribe and you'd be dead.

49:23Yeah, yeah. Whereas now, like putting yourself forward is really valuable, like sticking your head above the trenches, especially online. But you will face hate online because if a million people see you, you know, at least a hundred of them are going to hate you. So you kind of have to fight against that internally. It's like a really hard battle every time you put yourself out there. Yeah, exactly. And so that's also why we suffer from groupthink because, you know, Groupthink. Yeah, where we're - It's French. where we're amplifying each other's biases because you know they're all kind of aligned and no one's no one dares to question what the status quo because we have that fear of being excluded um but you can set up that the kind of correct culture in your group where actually you know it's it's the social norm to be able to disagree and then that will help you to avoid that group think.

50:21Yeah, like certain companies have that within their core values. Ray Dalio says that that's the core value of his hedge fund is to anyone can raise an idea, anyone can criticize anyone from the top down. Whereas I've worked in like dictatorships essentially where it comes from the top and you don't question it. Yeah, exactly. So that's, you know, very, that bears out with the research. And what's ironic there is that often it's the companies with the kind of culture of positivity are the most guilty of that kind of dictatorship that you say you know like a cult yeah you know where they start off all happy and like for god and then they all kill each other yeah exactly because it's like you know often in those companies they're like i don't want problems only solutions but it's like sometimes there's a problem that really needs to be tackled but you don't have an immediate solution but if you're kind of screaming at people because they're being too negative um that is not going to solve the problem speaking of group circles i really want to know the answer to this question okay yeah can we read it out again just to try and just just as if we can get last ditch attempt it so jack is looking at anne but anne is looking at george jack is married but george is not is a married person looking at an unmarried person yes no or cannot be determined i mean jack could be looking at george as well as anne so I'm going to say yes I mean Jack is looking at he could just be I can look at both of you right now so wait it was yes and I think you said cannot be determined I'm definitely right so some kind of bias going on in there even if you tell him he's wrong now he'll be like he's wrong he's wrong I'm right okay so the right answer is yes Scott Gibbon mate but just joking so but most people say cannot be determined.

52:12And that's because scientists call it a lure in that it's the intuitive answer, even though it's wrong. And you have to kind of override that and think about it a little bit more objectively and deliberatively. Now you can do that by... So if I get the question again. So the unknown here is, is Anne married or unmarried really? And so you just have to consider both of those hypotheses. So if Anne is married, then Anne is looking at George who isn't. If Anne isn't married, Jack who is married is looking at Anne who isn't. So in both cases, a married person is looking at an unmarried person. That was so much more simple than like, we really should have got that.

53:03Well, you did, but you didn't understand why you got it. You just got it. Yeah, yeah. That's just blinded up, but I'm going to take it. One in the wind column. That's interesting. Yeah, it's so annoying that because, yeah, the question was obvious, but you instantly start focusing on George and stuff for some reason, you know. Yeah, exactly. But I think what this captures, it's like that cognitive reflection. So it's, you know, are you overriding an intuition and thinking more carefully? But it's also what we often forget to do in our decision-making is to just imagine different scenarios, like two separate hypotheses.

53:40But even I tried to. Yeah, I couldn't really. Well, I was going like, you know, you're trying to and you can't. And I was like, surely the answer can't be like, it can't be determined because that would be a really bad question if you can't figure out the answer. But I was like, that's going to be my answer because you can't figure it out. So I gave that answer the first time I saw it. Great minds think alike. and then demo just does his own thing yeah one of my favorites is um how many animals did moses take on the ark oh a lot oh no he took none they could walk themselves on is that your answer okay actually i think specifically is how many of each species oh two well no he took one of each species no right because if you took one they can't procreate two by two the animals went two by two hurrah hurrah yeah so two two so they can have let's not jump to conclusions here mate let's think about this because yeah we can't get done again can you ask the question again and then we'll go for that how many animals feature species did Moses take on the ark Moses didn't take anything on the ark oh no see I was thinking about this this is why I get a big box mate I was looking at the species and I was looking oh yeah it was Noah you're getting trying to trick us this is what I mean you've got to listen to the question mate is there a go listen to the question one more it's full of tricks yeah one more um i'll have to look so in a lake there is a patch of lily pads every day the patch doubles in size if it takes 48 days for the patch to cover the entire lake how long would it take for the patch to cover half of the lake see i got this yeah so i know this answer yeah you know answer then 48 days yeah it takes It takes 48 to - It doubles every day.

55:2147 days. Come on, come on, I finally got one. I was like, I was initially gonna say half of, yeah, I was like, what's half 48? 24, yeah, I was gonna say 24, but now I was like, no, that's too easy. So again, 24 is the kind of intuitive law. Yeah, it's like if there's a drink and you drink half of it a day, how long does it take to drink in it? It's like - Forever. You can never get to drink. Yeah, exactly. So it's kind of compound interest again, actually. Oh yeah, yeah. In reverse. fascinating stuff honestly the book is amazing and it's it's full of those tidbits and what what i got you read it and you think oh thank like i'm not alone in my in my ways do i mean and sometimes when you trip yourself up i think you you kick yourself really hard whereas what you do is you apply the science to the the traps in our own mind you know yeah thanks i mean because i think um my publisher were a bit worried that it was um it sounds too negative like smart smart people would be triggered by it.

56:16But I think the optimistic message is actually that once we are aware of these errors, it's comforting to know other people are doing the same things. And then we can learn to improve. We can all be smarter. And actually, even if you don't have a super high IQ, by applying all of the things you learn in this book, you're going to be outpassing all of the people who might have a PhD or a better education than you, but you're applying your intelligence much more smartly. If you missed anything in that episode, don't worry. We do a really good summary of everything that's gone on and what we discussed in our newsletter.

56:52You can sign up using the link in the description. And don't forget to subscribe to the podcast and leave us a review. It really makes a difference and lets us know what we're doing right. This is not financial advice. The reason it's not financial advice is because it's not tailored to you. Like we say a lot on the podcast, investments can fall and rise. In fact, this is almost a guarantee. Remember, past performance is no guarantee of future results, so your money is always at risk with investing. Also, remember other fees may apply. I'm Damo. I'm T. The episode was recorded by Jack Hobbs. It was produced and edited by Ruth Edwards.

57:25Johnny Hunter is in charge of all our marketing, and it's all brought together by Will Stollerman.