I spoke recently with a fellow who had climbed Mount Everest. The first question I asked: What was it like at the top?
What I expected him to say was that the view was dramatic. Instead, he said, his time at the summit turned out to be less than he’d expected. For starters, it was 4:45 in the morning, so there wasn’t a lot of visibility. In addition, it was minus-45 degrees. Because of that, he didn’t want to stay too long. Reaching the summit, it turned out, wasn’t the most memorable or the most enjoyable part of the trip.
This got me thinking about the topic of regret. When it comes to personal finance, there’s the standard type of regret that is well understood: If we don’t save enough, or spend too much or take an unnecessary risk. With mistakes like this, it’s natural to feel regret—because they’re mostly within our control, and the results are predictable. In those cases, we might genuinely wish we’d done something differently.
But this fellow’s Everest experience fits into a different category: Though it didn’t turn out as he’d expected, he certainly doesn’t regret it. In fact, he’d gladly do it again. This highlights a reality about decision making: Sometimes things don’t turn out as expected—but through no fault of our own. In other words, even with the benefit of hindsight, we don’t regret decisions of this sort because, despite the disappointing results, they still were reasonable choices and easily could have turned out differently.
What sorts of financial decisions fit in this category? Many have started new jobs, or even new careers, that turned out to be disappointments. In other cases, maybe a move to a new home or a new city fell short. In all of these cases, it wasn’t for lack of doing our homework. Things just didn’t work out as expected, for reasons beyond our control.
The world of personal finance is full of unknowns, which means that many—if not most—decisions are susceptible to this phenomenon. But that doesn’t mean things are completely out of our control. Even without the benefit of a crystal ball, certain decision-making strategies can help tip the results in our favor. Here are five I recommend:
Test the waters: When I was in school, I had a professor who grew up in New Zealand. Near his home, he said, there was a river that was a popular spot for swimming. The problem, though, was that sometimes a nasty type of biting fish might be in the area. Some of the more reckless kids would still just jump in, hoping for the best. Sometimes they got lucky—but sometimes not. The smarter approach was to take a half-step into the water, to assess.
In his field, marketing, this approach made a lot of sense. But for a long time, I wasn’t sure whether this philosophy would apply to personal finance, where many decisions tend to be irrevocable. Recently, though, I caught up with an old friend who told me this story: After his youngest child started college, he and his wife sold their house. They no longer needed such a large home. They then gave themselves two years to decide where to move.
One idea was Florida, but they weren’t sure. So they took six weeks over the winter to do some research. They started in Miami, then moved up the coast, town by town, spending a few days in each community. By the end of the trip, they’d collected a good amount of data and had largely made up their minds. The lesson: Even when it doesn’t seem like it might be possible, look for ways to test the waters on financial decisions. It might carry a cost, but might be well worth it.
Split the difference: In the world of personal finance, people often view financial decisions through a strict either-or lens. But often it’s possible to instead take a split-the-difference approach. A common example: Should you wait until 70 to claim Social Security? People battle each other over this question, but it need not be viewed as a right-or-wrong type of decision. Social Security can be claimed at any time between ages 62 and 70, and no one should feel they’re making the “wrong” decision if they decide on an age that—strictly according to the calculator—might be less than optimal.
Annuities are another flash point in personal finance. Some view them as overpriced and unnecessary, while others see them as practical and underappreciated. My opinion is that there’s some truth to both views. Considering an annuity? You could split the difference by annuitizing only a portion of your assets. And you could purchase multiple annuities over a period of years—and from different companies—to help further split the difference.
Conduct a pre-mortem: Annie Duke was a professional poker player and has written two books on the topic of decision making. One of her recommendations is to conduct a “pre-mortem” before making any big decision. Be the devil’s advocate. Think critically about what could go wrong. Then see if there are ways to mitigate those results, using, for example, one of the above strategies.
Cut losses. In his 20s, another old friend worked on Wall Street in a series of unpleasant investment banking positions. At a certain point, he decided he’d had enough. Despite the financial cost, he quit and enrolled in divinity school. Unfortunately, his life was cut short due to illness, but I’ve always felt it was a blessing that he didn’t spend his last years stuck in a cubicle doing dreary work for endless hours. The lesson: Recognize the difference between sunk costs and future costs. In the investment realm, this might apply to a life insurance policy or a mutual fund that didn’t turn out as expected. When that’s the case, there’s no need to throw good money after bad.
Buy options. A while back, a client asked about buying a pricey Tesla and wanted to know whether it would make more sense to buy or to lease it. My advice was to lease it. While that isn’t what I ordinarily recommend, my thinking was that electric vehicle technology (EV) was changing quickly, and because of that, it might be worth the added cost of a lease to gain more flexibility.
As it turned out, a recent move by Tesla did end up rewarding those with leases: It cut prices by 20% on its most popular model. This was devastating to those who had bought their cars—because it cut resale values—but didn’t hurt those who had opted for leases.
That wasn’t the sort of development I’d envisioned, but I wasn’t surprised that it happened in the quickly-evolving EV market. I doubt it would have happened in the older, more mature end of the car market. The bottom line: Optionality always carries a cost, but if a situation looks particularly unpredictable, it might be worth it.
These recommendations, I recognize, do carry a risk: In general, they favor being cautious and moving slowly. But there is such a thing as being too cautious. If we test the waters too carefully or think too rigorously about what might go wrong, there’s the risk that we might shy away from too many decisions.
In The Power of Regret, Daniel Pink makes an important observation: “People regret inactions more than actions—especially in the long term.” In fact, Pink’s survey work found that “inaction regrets outnumbered action regrets by nearly two to one.” That is an important counterpoint to keep in mind. Yes, it’s important to make decisions carefully, but ultimately we can’t control everything. Financial decisions will always require a balance. And as Annie Duke points out, the only decision anyone should ever regret is one that wasn’t well thought out. If we’ve done our homework, that’s all we can do. Better to get to the peak of Mount Everest in the dark and the cold than not at all.