Is Your Brain Keeping You BROKE?

Summary

Podcast Summary: Money Guy Show – "Is Your Brain Keeping You BROKE?"

Release Date: February 7, 2025
Hosts: Brian Preston and Bo Hanson

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Introduction: Understanding the Mental Barriers to Wealth Building

In the episode titled "Is Your Brain Keeping You BROKE?" hosts Brian Preston and Bo Hanson delve into the psychological factors that often impede individuals from achieving financial success. They emphasize that personal finance extends beyond mere numbers, highlighting the crucial role of behavior and mindset in making wise financial decisions.

Brian Preston opens the discussion with a provocative question: "Is your brain keeping you broke?" (00:00), setting the stage for an exploration of various mental traps that can hinder wealth accumulation.

Identifying Common Mental Traps

1. Survivorship Bias

Bo Hanson introduces the concept by sharing a relatable example: regret over not investing in Bitcoin in 2016. She explains how survivorship bias leads people to overlook the volatility and potential losses associated with such investments.

Bo Hanson (01:19): "Survivorship bias is probably some well-worn territory for most of our financial mutants... the more familiar you can become with these topics, the more likely you are to unlock your financial potential."

2. Region Beta Paradox

The hosts discuss the tendency to settle for "good enough" rather than striving for financial excellence. This phenomenon, known as the Region Beta Paradox, is characterized by complacency when one's financial situation is neither dire nor exceptional.

Brian Preston (04:51): "Discomfort or bad things sometimes can drive you to action. Whereas if you're in relative okay, you just kind of just sit there sometimes."

Bo Hanson further elaborates:

Bo Hanson (04:27): "The Region Beta Paradox is simply a phenomenon where individuals will settle for less than the ideal because they are comfortable where they are."

3. Diderot Effect

The Diderot Effect describes how acquiring a new possession can lead to a spiral of consumption, prompting unnecessary additional purchases to match the new item.

Brian Preston shares a personal anecdote:

Brian Preston (12:01): "We bought a new side table to display my book, but then my mom wanted a new chair to match. This is the Diderot Effect in action."

4. Dunning-Kruger Effect

This cognitive bias leads individuals to overestimate their competence in areas where they lack expertise, often resulting in poor financial decisions.

Bo Hanson explains:

Bo Hanson (21:58): "The Dunning-Kruger Effect is this idea where someone's lack of knowledge in an area causes them to actually overestimate their own competence."

5. Sunk Cost Fallacy

The sunk cost fallacy involves persisting with a decision based on the cumulative prior investment, rather than evaluating the current benefits.

Brian Preston recounts:

Brian Preston (27:02): "I bought a concert ticket in pouring rain, and even when the concert was canceled, I felt compelled to go because of the money spent. That's the sunk cost fallacy."

6. Pareto Principle (80/20 Rule)

The Pareto Principle suggests that 80% of outcomes result from 20% of efforts. In finance, this means focusing on the most impactful decisions rather than getting bogged down by minor details.

Bo Hanson (33:58): "For many cases, 80% of the consequences of some action come from 20% of the causes."

Strategies to Overcome Mental Traps

1. Take an Active Role in Your Financial Life

Both hosts stress the importance of actively managing one's finances rather than passively allowing circumstances to dictate financial outcomes.

Bo Hanson (09:01): "You have to take an active role in your financial life."

2. Hold Yourself Accountable

Regular self-assessment, such as annual net worth statements, helps track progress towards financial goals and identifies areas needing improvement.

Bo Hanson (10:07): "One of the things you can do is do an annual net worth statement every single year to see where am I today?"

3. Simplify Financial Decisions

Simplification aids in minimizing complexity, making it easier to manage finances effectively.

Brian Preston (23:47): "Aim for simplicity as much as possible because complexity is just naturally going to happen with success."

4. Recognize and Address Blind Spots

Acknowledging areas where one's financial knowledge is lacking can prevent poor investment choices and encourage seeking professional advice.

Bo Hanson (24:35): "Recognize your blind spots... Don't try to pretend like they're not there."

5. Focus on Mastering Key Financial Moves

Concentrate efforts on decisions that have the most significant impact on financial health, such as savings and investment rates.

Bo Hanson (34:21): "Master the moves that matter. Focus on the big picture."

6. Prioritize Progress Over Perfection

Emphasizing continual improvement rather than flawless execution helps maintain momentum towards financial goals.

Bo Hanson (35:24): "Progress beats perfection. It's about, am I improving?"

Tools and Resources Highlighted

Financial Order of Operations & Net Worth Tool

Brian Preston and Bo Hanson recommend their "Financial Order of Operations" and a net worth tool as essential resources for tracking financial health and facilitating communication about finances with loved ones.

Brian Preston (11:10): "The net worth tool is going to be that great dashboard to not only let you see what has changed... but also the communication tool to talk to loved ones."

Personal Anecdotes and Examples

Throughout the episode, both hosts share personal stories to illustrate the mental traps discussed:

• Brian's experience with cryptocurrency investments and options trading highlights survivorship bias and the Dunning-Kruger effect.
• Bo's example of lifestyle inflation through the Diderot Effect demonstrates how small purchases can lead to significant financial strain.

Conclusion: Mastering Your Financial Mindset

Brian Preston and Bo Hanson conclude by reiterating the importance of understanding and overcoming mental barriers to achieve financial independence. They encourage listeners to:

• Own Their Financial Lives: Take control rather than letting circumstances dictate financial outcomes.
• Continuous Learning: Utilize resources like their books and tools to stay informed and proactive.
• Adapt and Evolve: Learn from mistakes without dwelling on them, focusing instead on steady progress.

Brian Preston (37:11): "Own your financial life or it will own you. Take control of your brain too, because that mindset is doing a lot more work than you probably realize."

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Key Takeaways:

1. Behavior Matters: Financial success is significantly influenced by mindset and behaviors.
2. Identify Mental Traps: Recognize cognitive biases such as survivorship bias, Region Beta Paradox, Diderot Effect, Dunning-Kruger Effect, sunk cost fallacy, and the Pareto Principle.
3. Active Management: Regularly assess and actively manage your financial situation to stay aligned with your goals.
4. Simplify and Focus: Keep financial strategies simple and concentrate on the most impactful decisions.
5. Utilize Tools: Leverage available resources to monitor and communicate your financial status effectively.
6. Embrace Progress: Focus on continuous improvement rather than seeking perfection in financial decisions.

By understanding and addressing these psychological barriers, listeners can enhance their financial strategies and work towards a more secure and fulfilling financial future.

Transcript

[Brian Preston]

Here's a question. Is your brain keeping you broke?

[Bo Hanson]

Brian, I am so excited to talk about this because oftentimes when it comes to personal finance and it comes to making wise financial decisions, it's more about the behaviors and the mindset than we have, than it is about the math or the dollars and cents. And frankly, a lot of folks when it comes to personal finance, they get the behavior part wrong.

[Brian Preston]

Yeah, there's mental traps. There's all kind of things that, you know, have you, you have a stutter start, you don't get. You know, you also get distracted. You also end up buying more than you anticipated buying. There's all kind of ways that we have seen our brains actually work against us. So we wanted to kind of walk you through all these traps that are out there and how you can make sure you're on the right path.

[Bo Hanson]

Yeah. If you can dial in the behaviors and avoid some of those mental traps, you are well on your way to moving in the right direction. But the first thing you have to be able to do is recognize those mental traps. For example, have you ever been in a conversation or maybe you. Have you ever said this? If I, if I would have just bought 10 bitcoin in 2016, today, at its current price, I would be a millionaire.

[Brian Preston]

I mean, this one is. And there's so much has happened 2016. You think about the eight years that has come and gone. We've had periods where there's tons of volatility within crypto. Even if you did this, you'd have probably made 100%, 200%, 300%, or you went through the crypto winter where your money sat flat or lost money for an extended period of time. But somehow, because of everybody having this survivorship bias, they skip all those other traps and things that their brain probably would have led them to, why this wouldn't have worked in the first place.

[Bo Hanson]

But honestly, survivorship bias is probably some well worn territory for most of our financial mutants. You've likely seen this or heard of this, are familiar with it, and the more familiar you can become with this topics, the more likely you are to unlock your financial potential. One of the things that you can do right now to unlock your financial potential is make sure you subscribe to the channel. So you know when we're putting out brand new content. So what we want to do is we're going to walk through some descriptors. Hey, does this sound like you? Because I want to show how real this can be for all of us. Now all of us can Fall into these mind traps that potentially could keep us broke. So you ready for the first one, Brian?

[Brian Preston]

Yeah, let's jump into the first one.

[Bo Hanson]

All right. Does this sound like you? If you stay at a job that you don't love but don't hate, okay, it's good enough. Or maybe if you carry just a small credit card balance because it could be worse and I can afford it and the monthly payment isn't that painful. Or maybe you feel like you're in a situation where you don't need to optimize because you're comfortable. The high income, like it doesn't matter if I'm doing all of the right stuff and following all of the right rules because I have enough income that I can make the ends meet. I think a lot of people, maybe.

[Brian Preston]

This describes them that third one hits what I've seen a lot. I mean I've had, I can tell you I've had attorneys that came to see me who had multiple six figure incomes. And then you look at their, their net worth statement. You where are the assets?

[Bo Hanson]

Yep.

[Brian Preston]

And I think they were way too comfortable with. Maybe they started saving investing right out of college, but they never increased it or they let their lifestyle expand. They just got too comfortable in their current situation that they never created change.

[Bo Hanson]

And this phenomenon of being comfortable with less than optimal is known as the region beta paradox. A quick summation or summary of this idea is that good is the enemy of great. If things aren't super super bad, then maybe things are okay. Or if you want like the Webster definition, the region beta paradox is simply a phenomenon where individuals will settle for less than the ideal because they are comfortable where they are. I think a lot of times, especially in this country, it's easy for the average American to fall into this trap. Hey, I don't need to be saving aren't that bad. I'm not in that much debt. I don't have that much of emergency fund. But I'm okay. And so long as I'm okay, okay is good enough.

[Brian Preston]

Well, I think discomfort or bad things sometimes can drive you to action. Whereas if you're in relative okay, you just kind of just sit there sometimes. That's why you see rags to riches stories. You don't see as many middle class or comfortable middle class to riches is because I think sometimes you need something that's the catalyst for you to take behavioral and make changes in your life.

[Bo Hanson]

Talking about this idea amongst our content team and one of our content writers is an avid runner, he said, oh yeah, this is a great example. Let's assume that your knee is hurting. Well, if it just kind of hurts sometimes, you're probably as a runner, not going to go to the doctor to get it fixed. You just kind of push through it and you can deal with it if it's a small hurt. But as soon as your knee starts hurting so bad that you have to change or you'll no longer be able to do the thing that you enjoy doing, well, that's when you move into the position of actually taking action and taking change. Well, the failure to do that, the failure to have that cataclysmic change is what caused you to live inside of this beta region, this suboptimal region. We thought maybe visually we could show this on a graph to try to explain how this plays out. So let's use some examples and let's assume that for those of you out in podcast land, we have a graph. And along the X axis you're moving from a bad present situation to a good present situation. And along the Y axis you're moving from the bottom, from a future bad outcome towards the top, which is a future good outcome. Well, if you are someone who maybe you're staying at a just okay job, the present is neither that good or that bad. So it's unlikely you're going to make a change. You probably don't feel a lot of impetus.

[Brian Preston]

Yeah, I mean, you're really close to both lines and you're also in that bottom left quadrant. It's just like it's okay. It's not, you know, it's not great. It's defin definitely. It's just, it's not even really good. But it's okay. But if you're comfortable, you might not be making changes.

[Bo Hanson]

But if you are working a dead end job and you can't stand it and you recognize there's no potential and that dead end job encourages you to make a change to where now you have a more positive future outcome, you're going to move further away from the baseline because that job is so bad it actually elicits or encourages you to begin to make a change that would be moving outside of the Rita Bajan paradox. Or let's look at another example, Brian. What if you just have a small amount of consumer debt? Okay, so my present situation isn't great, but it's not super bad. But really the future outcome isn't all that bad either because I can afford anything. 20 bucks a month at a time, 100 bucks a month at a time. Well, if you don't make a change, you're going to settle for suboptimal. Whereas if you're someone who finds themselves in the situation where you have a huge debt that forces you to confront your finances, your very bad present situation is going to make you make a change to move outside of that beta region into an area where you likely have a future better outcome.

[Brian Preston]

Yeah, I think about you hear about the frog in the pot of water and then you slowly turn the heat up or the death of a thousand paper cuts. I think this is what gets people in trouble with this region. Beta paradox. I don't know why it's called not called the beta region. I don't know why they didn't put this in alphabetical order, but we'll just go with it. But it does really prove, and I love the visual because it actually draws in graphically where that region is on the graphs where people are just so comfortable, they don't typically make change. They're just stuck in their comfort. And they're not. The temperature goes up in life, they're getting left behind on things, but they don't actually take action where somebody who's in a much more dire situation will take action. And that's what we would just want you to be aware of this so you can always take inventory of where you are on your life journey.

[Bo Hanson]

And we don't want you to stay here. We recognize that for financial mutants, if you stay in this beta region, you're not going to reach your full outcome. So we have to come up with ways. How do we move away from this? How do we not fall into this trap? Well, the very first thing you can do is you have to retrain your brain. You have to refocus how you think about making financial decisions. And one of the very first things that you can do is take an active role in your financial life. Brian, you talk all the time about how you have family members and friends and loved ones, and one of your biggest pet peeves are those folks who just, they kind of just let life happen. They don't actually take an active participatory role in improving their financial circumstance.

[Brian Preston]

Yeah, I mean, I don't even mind sharing is that. And I really talked about this in depth in Millionaire Mission is that some of like, people find out that I'm an entrepreneur and they're like, man, good for you that you made. No, what happened to me is I had the clarity of trauma, is that when I lost my father, it really put things in focus. I might very well have stayed in that second job that I was at because it paid well. Yes, it was very demanding, but it was good enough. I might have stayed there. It wasn't until I had something in my life that really gave me the clarity of focus to say, man, you've got to fix things. That shifted my mindset and drove me to action. And that's one of the things I love about the financial order of operations. If you're taking an active role in your financial life, where are you in your financial order of operations? So you can figure out if you're behind and you can't figure out how you can get out? Maybe it is that, do you need to go back to school? Do you need to get a different career? Do you need to make different consumption decisions on how you're living your life? The financial order of operations will help you kind of figure out and triage your financial situation.

[Bo Hanson]

And I love that it motivates you to take the next step. If you're in step two, your goal is to go to step three. If you're in step three, your goal is to go to step four. So if you're constantly taking an active role in your financial life, you will constantly be advancing and moving through the financial order of operation. So not only do you need to take an active role, one of the other things you have to do is you have to hold yourself accountable. Are you checking in with yourself regularly? Again, what you want to do is avoid that circumstance where good is the enemy of great. Are you actually pursuing your financial goals? Or did you set a goal five years ago and you had some really good traction to start out, but then it kind of fizzled? Well, one of the things you can do, and we love doing this exercise, is you can do an annual net worth statement every single year to see where am I today? And am I today closer to my goals today than I was last year? And if I'm not, how can I change? What can I improve my financial circumstance to begin to move, move more towards those goals that I have? And we have a great tool that you can use.

[Brian Preston]

Yeah, I love bragging on our net worth tool because this is one of those activities. And by the way, it's not just to be a financial mutant. I think a lot of people, if you're just looking for a communication tool so you can talk to your significant other because maybe they're not as financially minded as you are, the net worth tool is going to be that great dashboard to not only let you see what has changed how much debt have you paid off? How much financial assets have you built over the last year? You're going to get that executive summary or that dashboard, but you're also going to have the communication tool to talk to loved ones as well.

[Bo Hanson]

All right, so, Brian, we're talking about financial traps that you can fall into that could potentially keep you broke. Let's talk about this next one. Now, I'm going to describe this. Tell me if this sounds like you. Have you ever had to replace your end table and your chair to display your fresh, shiny new copy of Millionaire Mission? Brian, this seems very, very simple.

[Brian Preston]

Well, it's so funny. Y'all wonder where content comes from. And I kid you not, this stuff writes itself. I'm on my way into work this morning. Morning talking to my mom. And she says, son, the weirdest thing, because we were talking about how great Christmas was and all this, she goes, I've got that signed copy of Millionaire Mission you gave me. And she goes, I want to display it.

[Bo Hanson]

What a proud momma.

[Brian Preston]

I know. Look. And it makes me happy as a son. I love knowing that my mom has gotten to read this book because she's in there, too. You know, anybody who's read the book, you know there's a lot of life stories in there. And she was like, and I want to display it. But the side table, it just wasn't good. So we bought a new side table so we can display the book. And she goes, but I'll be honest, now that we've replaced that side table, the chair is just. It looks old. So we're going to be buying a new chair. And I was like, mom, you have no idea. The timing of you telling me this story could not be better is because this morning, I mean, this afternoon, we're actually recording a brand new show on how your brain can work against you. And I'm going to screw this up. But what we're describing here is the Diderot effect. And really, I've done. We've talked about this before. It's kind of like you give a mouse a cookie, this is the way life is, is that you do one thing. It seems like more and more consumption is required to keep up.

[Bo Hanson]

Yeah, the tendency is, with the Diderot effect, to buy more things after acquiring something new. So once you have a new thing, all of a sudden all of your old things no longer match new things. So it sends you on this spiral of consumption that before you wake up, before you know it, you are in a much worse spot simply because of one consumption Decision. This actually comes back from. Was he a French philosopher?

[Brian Preston]

Oh, he's French. You know how you know he's French?

[Bo Hanson]

How do you know?

[Brian Preston]

Is because when I read this, it's Denis Diderot.

[Bo Hanson]

It is not Denetero.

[Brian Preston]

Then I was quickly corrected because that's just because I'm from Georgia. That's not how you say his name. You say Denis.

[Bo Hanson]

Denis Diderot.

[Brian Preston]

No, you said that differently. I said Denis.

[Bo Hanson]

Denis Diderot.

[Brian Preston]

Diderot.

[Bo Hanson]

That's right. You nailed it. And this is what Denis said.

[Brian Preston]

That's Dennis.

[Bo Hanson]

Denis said I was absolute master over my old dressing gown, but I have become slave to my new one again. This idea that I bought this new thing and now this new thing that I bought requires me to buy more new things and more new things and more new things. But this is not just limited to antiquity. This happens very much today. Real life with us. I mean, we see this with young people all the time. Brian.

[Brian Preston]

Well, I want to talk about Denis Dunhi a little bit more is because I actually went and read a little deep because this stuff, this happens to everybody. And this scarlet robe that came into his possession ruined his life. He had to. He had to get rid of his chair and buy a leather wrapped chair because it just. There was so many things. And I was like, this is lifestyle creep 101, keeping up with the Joneses that I see everybody talking about and think about this, all of us, you get out and you get your first big person job. And what do you feel like, Bo, you did this. I hate to pick on you, but you did this too. You might go buy a new outfit for your job. And then you say, you know what? The outfit's not enough. I also need to go buy a new car because I look ridiculous getting out of that busted up car with this new outfit. And then I can't park that nice new car that I just bought because I got this first job to. I need just that apartment. I need a nicer apartment. I need a nicer townhome. You see how this just keeps building upon itself, guys, we gotta do better. How do we retrain your brain so you don't fall into these consumption traps?

[Bo Hanson]

And it happens so easy. You see that one decision for that young person just to go get the new outfit spiral to now. Their lifestyle is far beyond what is reasonable for where they are in their station. So one of the ways that you begin to retrain your brain is you have to either remember, or if you've never done this, define your why. Why am I ultimately making this decision? If I'm a young person starting my first job, why do I need that expensive new outfit? Is it because it's an expectation at work? Is it because it will allow me to do my job better? Or am I trying to impress people that don't even really care what I'm wearing anyways? So you have to reframe. Are the decisions I'm making ultimately moving me towards my long term goals or are they just distractions?

[Brian Preston]

Well, and I think you can, you can even go a step further. You can be intentional. You know, I often say on the show is that we want to make your good habits as easy as possible and your bad habits that much harder. Why not make sure that you know, for the good habits, automatic savings and investments for the bad habits, like spending. This is definitely consumption. When we're talking about the Diderot effect is why not go and have for scarcity built into your life to where it's making you have a dollar, you know, a landing place for every dollar in your army of dollar bills with your budget? I mean, there's a way to do this better.

[Bo Hanson]

Yeah, there are little tricks that you can play. Maybe if you want to make a certain purchase, you're going to wait a specific period of time. Okay, I'm not going to buy it. I'm going to wait a week and see if I still won. Or maybe if I'm going to buy large things instead of buying all of them in quick succession, I'll buy one today and I'll enjoy it for a while. And then, then I'll buy another a few months later, and then another few months later so that I don't stay on that hedonic treadmill. If you can implement these strategies and these tips and these tricks, there's a really good chance that you won't fall into the Diderot effect, into the consumption spiral that allows your lifestyle to rapidly go out of place. Because it's not always about the huge decisions that you make. It's often about the small decisions. And on consumption, you can make one small consumption decision at least to another slightly bigger and slightly bigger and slightly bigger. And that's letting small decisions work against you. But there is a way that you can let small decisions begin to work for you. Because if you are young and if you are starting out, what seems like a small insignificant decision to save just a little bit of today for a great big beautiful tomorrow can actually turn out to be a huge windfall for you later in life.

[Brian Preston]

Well, and that's why if you go to moneyguy.com resources, we do have an illustration, an actual resource that shows you what 1% can more can do for you. And here's the thing. A lot of my young listeners and viewers, you guys, you look at the people who are ahead of you in their 30s or 40s, and you go, it's crazy to think I could save and invest 25%. And in your 20s, it is definitely aspirational. But if you go look at this resource, you'll see if you just could do 1% more, it is going to make you better and get you that much closer. And here's another thing. If you're in this part where maybe you start off and you can only do 5% because that's where your employer matches every time you get a pay raise, why not put into effect that you're going to take 60% of that pay raise to go towards additional savings, 40% towards expanding your lifestyle. If you went with that type of split, I think incrementally, you'll see you're getting closer and closer to building that 25% savings and investment behavior and once again, making the good habit that much easier and the bad habits, because every dollar has a purpose that much harder.

[Bo Hanson]

I love it. All right, so we're going through some mental traps that can potentially make you broke or cause you to not be your optimal financial self. I want you to see if this sounds like you. Are you someone who buys stocks because you do tons of research by going to Reddit and checking out WallStreetBets. Does that describe your investing?

[Brian Preston]

Wait a minute now, look, I want to take this. I want to make it real, because I don't think financial mutants are getting their. Their financial advice from Rory and Kitty.

[Bo Hanson]

Okay?

[Brian Preston]

But I know you and I, we have fallen into some of this effect ourselves. Is that when you were taking your CFA curriculum? By the way, congratulations. BO is brilliant. Pass all three CFA exams on first attempt. Anybody who's on the inside knows that's a big deal. But here's where this thing went sideways for us, mentally. While Beau was studying the curriculum on stock options, he came up with this great trading strategy we could do because he had just studied and learned a few things about options. He's like, I think we can do this. So we threw a few thousand bucks of my money.

[Bo Hanson]

That's the best part.

[Brian Preston]

Other people's money, of my money into US Option strategy. And here's the worst thing happened. We made. We actually make about 150% on that first trade, very first trade. We thought we were geniuses. The rest of the story is every bit of money that we put into these option strategies turned into zero is because the second, the third trade that we did were bust and didn't work out. But we did learn from this. And this is actually a phenomenon. And I'll let you keep going, but I wanted to bring this back to us so people know it's not just the Wall street bets people. This can happen to financial mutants, too.

[Bo Hanson]

What about this? Are you ever at Thanksgiving and all of a sudden your broke uncle starts to give you financial advice of what you need to do with your finances and tells you all of these financial decisions you need to begin making. Or maybe you want to begin day trading or options trading because you watched some social media reels and now you know how it works or you're an expert. Well, if this sounds familiar, if you feel like you have fallen into this trap before, it's likely you have been a victim of the Dunning Kruger effect, which is this idea. It's a phenomenon where someone's lack of knowledge in an area causes them to actually overestimate their own competence. In my case, I was a level one CFA candidate. I had made it through the options practice test. I knew very little about investing, but I had assumed I was certainly an expert. So we ought to implement this trading strategy to make all this money.

[Brian Preston]

There's one thing about knowledge before it becomes wisdom, and I think about this all the time with what we do for a living. And I think the more knowledge that becomes wisdom, the more insecure I become with giving advice that I can say is definitive because I just know how many facets, how many variables, how many things influence specific things financially. And the more knowledge I have, the more apprehensive I am about how deep the hole of knowledge actually is to become an expert. And I think that's why you have to be careful. This is why we pick on our teenagers, any of you who are parents of teenagers or college age students. We see this effect all the time where people become experts very quickly without all the experience, without the expertise. And this is just a phenomenon that seems to happen to us humans. We get way overconfident very early.

[Bo Hanson]

And you see this all over social media. It's one of the reasons why our REACT videos do so well. Someone comes out and they tell you, you know what, you don't need to hold any cash because here's how you can optimize every single dollar or someone Says, hey, you got to do real estate. The only way to make money is to get into real estate and to bur the real estate so that you can make all this money. Or people tell you, hey, I know what's going to happen after this next election and if this person is elected, then this is going to happen. If this person happens, then this is going to happen. People are assigning a inappropriate level of confidence to the decisions they're making. Even though they are not experts in that field, they just have not recognized that. So what are some things that you can do? How can you retrain your brain to not fall into this trap? Well, the first thing, and we love this one, is just keep it simple.

[Brian Preston]

Yeah. I'll tell you one of the things I've done as I've matured in my financial life is that anywhere I can simplify my life, I desire, I crave it. By the way, when I talk to anybody who's in their late 40s, early 50s, all I could have, and I know several of these people, like even my younger self. When I was in my 20s, I wanted the complex tax returns, I wanted the complex stuff in my financial life. And now I'm on this, this where my life has become complicated. And here I am yearning for as much simplicity as possible. I'm gonna go ahead and save you the work. Don't try to shoot for complexity because you think that's where the sexy sizzle of what wealthy people do is. Aim for simplicity as much as possible because complexity is just naturally going to happen with success. So keeping it simple is going to be very effective and helpful for you.

[Bo Hanson]

Another thing that you can do is recognize your blind spots because we all have them, especially as investors. If you're someone who doesn't know how to look at a corporate balance sheet, or you've never reviewed an income statement, or you don't really understand how financial and capital markets work. Going out and trying to pick stocks may not be the best idea for you. Perhaps you should just buy a low cost index fund or maybe a target retirement index fund. Recognize there are things that you don't know. There are blind spots that you have and that's okay. Don't try to pretend like they're not there. Acknowledge them and build a plan that can work without falling prey to your blind spots.

[Brian Preston]

And then this kind of ties into what I already talked about is I do like when you get to a complexity where your simple life, even if you desire it, has become very over, you know, overly complex. There's Nothing wrong with bringing in somebody who's done this hundreds of times, if not thousands of time to help you navigate it, because you just. You might not know where your blind spots are. And just. Just make sure you don't get sold something. Have an understanding. Do these people have your best interests? Are they doing fiduciary standards? There is a better way to do money. And that's kind of one of the things that I think has made us so successful, BO is that we started the money guy show to be an education place. And we didn't even think about this as a marketing idea until a few years into it. And all of a sudden, you guys, the financial mutants, started reaching out to us, saying, hey, can I work with you? And like, oh, my gosh, this thing is actually, I guess we've educated enough people in the abundance cycle where people learn, applied and grew and had success. And that's why we've now leaned into it. And we realize, hey, we get to work with people all across the country. And we love helping fellow financial mutants know how to navigate this and focus on simple where we can. But also, how do we streamline the complex to bring it as close to simple as possible?

[Bo Hanson]

I love it. But even. Even with all of this and even recognizing this and even being financially astute, even being a financial mutant, there are still traps that you can fall into and still traps that you ought to be aware of. All right, let's see if this resonates or sounds like you. Have you ever picked up a book and you kept reading that super boring book that you did not enjoy because you already bought it? Does that sound familiar to her? Or maybe you bought a stock and it lost tons of value, but because you bought it at X price, you're going to hold onto it until it comes back.

[Brian Preston]

Well, I even have one that I mentioned in the content meeting this morning. There's this beautiful amphitheater down in South Franklin I've been to once, but I sat only in the parking lot. And what makes me upset about this concert is, is that as I got into the car to go to the concert, it was pouring. I mean, it was cats and dogs. And I got in the car knowing it was cats and dogs, knowing it was gonna be cats and dogs for the next three hours. And you know what they did? I sat in the parking lot, and then they.

[Bo Hanson]

You were gonna go to it.

[Brian Preston]

They canceled the concert. And I still think that the only reason I did that is because of sunk cost fallacy. I had bought that ticket, paid a Chunk of money for it. And by God, if they were going to perform, if Harry was coming on that stage, I was going to be there. But I should have known that was not going to be a good experience. Even if Harry came out there and had his umbrella on, I was going to get wet out there in the stands.

[Bo Hanson]

Did you say which Harry this was? There's a lot of Harry.

[Brian Preston]

Harry Connick.

[Bo Hanson]

Harry Connick Jr. Got it. Okay, so, yeah, that describes the sunk cost fallacy. So this is a phenomenon where one is reluctant to abandon a strategy or a course of action because they've already invested heavily in it, even when abandonment would be more beneficial. I mean, we talk about this all the time with eating spoiled leftovers. You got leftovers in the fridge you already paid for. You eat them. Brian gets sick, he doesn't want to do it anymore. That's a thing that happens. So. But we see this not just in our everyday lives, but we see this all the time with investors. And a lot of times, sunk cost fallacy is incredibly impractical. Let's say that before you found the money guy show, you decided, I want to start picking stocks, and I'm going to be a stock investor. And you decide that I'm going to buy $10,000 of a single stock. I went and found a company. I like it. And then let's say over the next 48 months, the next four years, the value of the stock goes from $10,000 down to $7,500. So you have a 25% loss in that stock over 48 months. And you think to yourself, okay, well, I've lost this much money. I can't sell. I can't get out of it. I'm not going to do it. I got to wait for it to come back up. I have to wait for it to improve.

[Brian Preston]

How about this? This is one, a quote that I love that really it is personifies, you know, sunk cost fallacy is that you hadn't actually lost anything until you sell. I mean, that is sunk cost fallacy, if I've ever heard is you don't lose anything unless you actually sell it.

[Bo Hanson]

So one option is to continue to hold that and wait for the stock to recover. But is that indee the optimal solution, the optimal scenario? Or might you instead say, you know what I'll do? I'm going to sell this stock at a 25% loss, and instead I'm going to buy something that is a little more predictable, a little more consistent return. I'm just going to go buy An s and P500 index fund. And we know that the s and P500 index over the course of the last 50, 60, 70 years has annualized something like a little over 10%. Well, if I were to do that in the S and P, just return the annual performance that it's had over the last 50, 60, 70 years, I could be back to my $10,000 in 34 months. That's less time than it took for me to lose the 25%. Oftentimes when it comes to sunk costs, we don't realize that in the bottom where the cost is maximized, we can actually improve our situation and improve our lot by changing our circumstance rather than sticking with the quote unquote loser that we started with.

[Brian Preston]

Bo, I think you have to put it in there because when I look at this and I think of sunk cost fallacy, I immediately get the visual. I've heard you use this with clients is that you think about you're riding a bicycle into this valley and it springs a leak and all of a sudden one of the tires is now running a flat and that's the bottom. After you've lost 25%, how are you going to get out of that valley with that bicycle?

[Bo Hanson]

Yeah. What you would never do is say, oh, you know what I'm going to do? I'm going to ride back to the top of the other side of the and then I'm going to replace the tire. No, you would put a brand new tire on your bicycle at the bottom. And with that brand new tire, you're likely going to make it to the top of the hill much quicker in a much more easy fashion. Investing is the exact same way. So if you can recognize the sunk cost fallacy and you can be true to yourself about it, there's a really good chance you can put yourself in a better situation. So how do you retrain your brain? Well, the very first thing you have to do is ask yourself the tough question. Yeah.

[Brian Preston]

And this goes right into your bike example is if you ask yourself the tough question, if I got these dollars today, would I buy this stock or investment again, knowing what I know right now? And that's exactly right. Why would you just keep letting those dollars go after bad decisions when you have the opportunity today to make a change and go for the better?

[Bo Hanson]

The other thing that you can other way you can retrain your brain is don't be so hard on yourself. Everyone. All of us have made financial mistakes. If you even listen to Warren Buffett talk, he'll tell You. It's not that I so much made all the right decisions. I've made tons of really bad decisions. What I did, though, is I made a number of very good small decisions and I avoided making the catastrophic bad decision. So even if the best investor ever, Warren Buffett, can acknowledge he's made mistakes and he's had to adapt and improve on those, then you can do the same. Give yourself a little bit of grace. Just because you made a bad decision yesterday does not mean that you have to continue making that same bad decision.

[Brian Preston]

Well, yeah, those. All the bad. Look, I've written an entire book with all of my mistakes and bad decisions, and I still have ended up in a pretty good place. We just did an episode of Making a Millionaire where we had a couple who were defining a lot of their life elements on this one decision or one bad thing. And then we had to remind them, look at how good your life is. Because even you had one mistake or this big mistake, a series of things, you can make lots of mistakes and still be extremely successful. That's how powerful your army of dollars still can be. So with that, I would focus on the big picture. What are the big things you can actually control? Don't let what's happened in your past be what defines you. You have the opportunity right now to be better and improve.

[Bo Hanson]

I love it. All right, so let's talk about another one. Again, this is another behavioral idea that if you can recognize this, you can turn it from being something that works against you to something that actually works for you. And it's known as the Pareto Principle. And for those of you who have heard, this is often referred to as the 80, 20 rule. And it's this idea that for many cases, 80% of the consequences of some action or something come from 20% of the causes. 20% drives 80%. We see this in our working lives, in our relational lives, in our health lives, and often we also see it in our financial lives.

[Brian Preston]

Yeah, I mean, I use this as. Not as, oh, it's just showing you can lay back and not worry about it. I think it's just showing that those small decisions can have huge impacts when you stack them one on top of another. That's why financial decision making, it really goes back to the point I just made previously, is that. But it really is the combination of those small, simple decisions building upon themselves and building your great big beautiful tomorrow.

[Bo Hanson]

And so how do you retrain your brain to recognize the 20% that matters versus the 80% that doesn't? Well, the first is master the moves that matter. Focus on the big picture. We talk all the time here. A lot of people talk about the latte effect. The latte effect. Latte effect. Well, when it comes to big financial decisions, it's not often the lattes that are breaking people. It's the lambos. So make sure you understand the decisions that have significant impact on your financial life and make those well so that you're focusing on the actual pieces that impact your financial life.

[Brian Preston]

Well, it's even, I think, so many young investors, they start focusing on getting into the details once again, majoring in the minors of what stock or what hot investment they're going to get into. Really the thing they ought to be focusing on, what's your savings and investment rate? Because that. That is going to be more impactful in the beginning is what is your savings and investment rate in your 20s and 30s than you choosing that one investment that's going to just define your entire financial life. Focus on the stuff that really matters.

[Bo Hanson]

Then another thing you can do is make sure you recognize that progress beats perfection. It's about, am I improving? Am I moving along? Am I moving in the right direction? I don't have to do everything exactly right. I don't have to get every single decision perfect. But. But if the decisions I'm making today are better than the decisions I made yesterday and those are better than the ones I made last year, then I am progressing. I'm moving in the right direction, and that's okay. Continue to move forward and give yourself grace when you stumble along the way.

[Brian Preston]

And, guys, this is one of the reasons we have written and created the financial order of Operations. We have the book Millionaire mission. We have the financial order of operations. We've got so many things trying to help you make better financial decisions. We really call this the abundance cycle. One of the things I think is great is I think about the progression of the Money Guy show. Bo, you know, this originally started with the intent of Beau and I creating content to help people become educated and better. We've expanded this to where we then started doing live streams. Now we've started doing many shows on Wednesdays, and now we even have Making a Millionaire that plays out on Mondays. There are so many things we're trying to help you and reach you right where you are to become the better version of yourself and maximize every dollar that comes into your army of dollar bills.

[Bo Hanson]

Your brain is an amazing thing and it can do wonderful things for you when it comes to building towards financial independence and making the decisions in your life that really matter. But you have to make sure you recognize that sometimes it can work against you. And if you can recognize those things and alter course, there's a great chance you can set yourself up for a great big beautiful tomorrow.

[Brian Preston]

I often I say own your financial life or it will own you. Take control of your brain too, because that mindset is doing a lot more work than you probably realize. I'm your host, Brian Preston. Mr. Bo Hanson Money Guy Team out.

[Bo Hanson]

The Money Guy show is hosted by Bryan Preston and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment or legal advice. All investments involve a degree of risk, including the risk of loss.