Money Games - When gaming the system doesn’t pay
I was recently reading Atomic Habits by James Clear and came across a line that I thought was fantastic: “We optimize for what gets measured. When we measure the wrong things, we get the wrong behaviours.” It’s based on Goodhart’s law that essentially says that we (humans) are intelligent enough to game the system and optimize our actions to get the desired results even if focusing on those results didn’t improve our overall situation. For example, if a person believes that being “busy” is a byproduct of being successful, that person will likely optimize their day to make it feel like they have very little time on their hands. But if this person spends several hours a day browsing social media, does their lack of free time make them any more successful? Another great example is focusing on our weight. If the only thing that matters to someone looking to get healthy is the number on a scale, they might optimize for that result and take unhealthy shortcuts in order to reach their result. In both of these cases, the results being measured & and focused on did not translate to the desired outcome. When it comes to financial planning, there are other great examples of this law taking hold. Consider the person focused on earning more money. While this seems like a great goal to have, it only focuses on one part of cash flow management. If this person does whatever is necessary to increase her income by 25% in a given year, she could consider having won the battle. But if she neglected to recognize that she also increased her expenses by 35%, she’s losing the war. Similar logic can be applied to investing. If an investor measures his success solely on his relative performance against the prevailing benchmark index (say the TSX Composite here in Canada), then matching or beating the benchmark’s return could be considered a win. But in order to win, this investor might take on extra risk or diverge from his investment plan. Focusing only on beating the benchmark totally ignores other important investment considerations like tolerace towards risk and other investment assets that may be perfect complements to a well-balanced portfolio. The idea here is to reflect on what you’re measuring and seeing if there is potential for dislocation with your desired outcomes. If your goal is to be healthier, there are things you can measure and track like body composition, performance, stress and other markers that will give you a more holistic viewpoint to your overall health. If you’re looking to improve your financial success, take a step back and calculate your personal net worth on an annual basis or have a financial plan drawn up to take stock of where you are, where you need to be and see what kind of results you should be aiming for. If the results you’re focused on hitting are too narrow or specific, you may be cheating yourself out of your anticipated outcomes. This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments. Originally Published August 30, 2020
Marcel LeBlanc, CFP®, CIM® is a Financial Planner with Louisbourg Investments. You can follow him on Facebook & LinkedIn. Comments or questions may be submitted to Marcel at firstname.lastname@example.org, or he may be reached at (506) 383-5204.