The Dumb Money Effect
Carl Richards is a certified financial planner. He writes regularly for the New York Times blog, Bucks, doing an excellent job of making financial principles more understandable via his musings and fabulously illustrated sketches. Yesterday, as I read his latest post, “When Your Money is the Dumb Money,” I couldn’t help but wonder what the equivalent of the dumb money phenomenon is when it comes to how you and I manage our careers.
On Wall Street money tends to be categorized in two ways: “smart money” or “dumb money.” The latter is a common sentiment expressed by Wall Street professionals to describe the typical behavior of individual (aka retail) investors. More so than Wall Street professionals (traders, investment bankers, hedge fund managers, portfolio managers, etc.), retail investors typically react to past performance than to anticipated growth. The result: They tend to buy high and sell low; when it is best to buy low, sell high. Every investor is aware of the buy low, sell high investment principle and discipline; yet not every investor follows this practice when it is most warranted. Why? Because they are allowing their emotions to dictate their reaction to the market’s volatility.
I’m unaware of the term that represents the career equivalent of “dumb money,” but I have identified four (4) behaviors that reflect the phenomenon of putting your feelings before knowledge when making decisions. I’ll use a recent conversation with a friend to showcase these behaviors:
Behavior #1 – Haste
Three weeks into a new job, she wants to quit. Perhaps the job really isn’t a proper fit. But she left her previous job of just five months for the one she has now. I think she’s being too hasty and is possibly misreading her “feelings” about her situation, confusing the family pressure she is currently under with how she feels about the demands of her work.
Behavior #2 – Action without a strategy
She’s ready to resign yet she doesn’t have another job lined up or a broader strategy to address her “What’s Next?” factor. She’s being reactionary as opposed to being measured and thoughtful about her next move and why the potential move is the right move, right now.
Behavior #3 – Can’t easily distinguish between caution and courage
As often happens when we lead with feelings rather than knowledge and insight, we’re cautious when courage would better serve us and courageous when all signs indicate “proceed with caution.” I think my friend is having a difficult time discerning between the two.
Behavior #4 – Too much focus on the noise
I refer to distractions, which are around us all the time, as noise. And it seems we pay more attention to the noise when we are unsure of ourselves, our choices and/or our desired outcomes. When we focus just on our feelings, it is hard to silence out the noise in order to make an informed decision.
Ultimately, the dumb money effect is really about making a choice that isn’t in your best interest – in any area of life. I hope my friend takes her time to make a choice that is in her best interest, and I hope you do (are doing) the same.
