Is that a tiger? Cognitive bias in divorce finance

Spotting imaginary tigers may be dangerous to your divorce finances. Photo by Ranajot Singh via Unsplash.

Anyone working on their divorce finances needs to be aware of some brain tendencies that can affect reasoning abilities. Otherwise, you might unconsciously be leaning toward a decision that might not make sense after all.

We’ve discussed a number of different cognitive biases on this site last year. Another issue to watch out for is the human tendency to assume that effects come from an agent who knows what they’re doing.

“Very little is needed to make a happy life; it is all within yourself, in your way of thinking.” — Marcus Aurelius

What is this tendency?

Our brains are wired to believe that things are caused by a sentient agent. In other words, an effect is not the result of coincidence or happenstance. Something decided to make it happen.

Why do we have this bias?

In our early human-hood, we lived on the African savannah. Humans had predators who didn’t mind a people meal. They were often bigger and stronger than we were.

So we had to develop survival strategies that didn’t rely on brute force.

For example, the grass might be waving on a day with no wind. A person who believed that a tiger was making the grass move would leave the area in a hurry. One who thought it was no big deal would remain.

If there was a hungry tiger in the grass, the person who didn’t think about it got eaten. The one who ran away survived to pass their genes on.

And if there was no tiger, there was no harm done. The one who suspected a tiger probably experienced a spike in cortisol and adrenaline, but nothing more than that.

Why is this “wiring” a problem in divorce finance?

It’s easier to believe you have control over something when you think there’s a sentient cause.

If, for example, the market has some kind of agency behind it, then you might be able to learn how to manipulate it. You might take classes or read books from people who claim to have mastered how the market works. They’ll tell you they’re willing to pass their secrets on to you for a certain price.

By contrast, if the market is essentially random , it’s clear that what you do has no effect on it. You can leave the market out of the things that you worry about.

We’re also pattern-seeking creatures. Maybe you noticed, right before something happened, that there was a precondition to it. For example, the price of a certain stock spiked right before the effect you saw. Now, you’ll be watching for that stock to rise again, so you can cash in on the “pattern”.

Note that there are some meaningful trends that traders use. They’re pretty well-known though, so you won’t really have the opportunity to make money from them.

Unlike our tiger spotting ancestors on the savannah, however, in today’s world we can experience serious consequences from spotting paper tigers.

  1. Human beings have limited amounts of both time and money. Spending either on something that can’t actually be controlled prevents spending them on things that can be influenced.

If you’re busy watching for a stock to spike, you’re spending time watching the volatility of the stock ticker.

That’s time you are not spending on learning about finance and investing, or looking over your budget to see where you can potentially save some more money, or teaching your children the value of a dollar. All of those activities are worthy activities that actually have an effect on your life.

Similarly, if you’re throwing money at the pattern you think you’ve discovered, that’s money that you’re not investing for growth over time. Over periods of years the stock market returns about 6–8% over inflation. Money properly allocated to take advantage of different areas of the market will likely produce this growth in time.

2. There are health consequences to this too! It’s one thing to have the occasional cortisol spike. It’s quite another to have them on a regular basis. Constant stress keeps the cortisol levels in your body high, and this causes inflammation.

Many diseases are caused or made worse by inflammation: some types of cancer, diabetes, heart problems, etc. Constantly monitoring something you can’t control increases stress significantly. And divorce is naturally stressful as well!

Summary

People developed this tendency as a reasonable defense against predators on the African savannah. But now, although our brains still contain pretty much the same wiring, we’re in a totally different environment. Especially when it comes to the stock market.

One way to combat this bias in your divorce finances is to concentrate on the areas where you clearly have some agency yourself. How much you save, how you invest your money, and how you spend it. Take a breath and let the rest go. There are no hidden tigers in the financial markets.

COMING SOON: Financially Fab-ruary! This month-long program is designed to help you get a stronger grip on your finances. It’ll help you map out where you want to be in your life after divorce. Each week has a different theme, and resources to help you take charge of your financial future.

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