Functional Familiar Trumps Optimal Unknown

In doing research in personal finance and money management, I’ve learned that people are highly idiosyncratic in the way they manage their personal spending and saving.   Some engage in what seems to he entirely irrational, but when asked follow-up questions, there is usually some twisted logic that they use to justify the bizarre things that they do – and when a different course is suggested, their reaction is to cling to their current habits, typically supported some variation on the phrase, “It works for me.”

This is true whether the subject has millions of dollars in savings and investments and is merely being inefficient in managing his surplus, or the subject is living paycheck-to-paycheck and barely scraping by.   Because their behavior has not led to a disaster, they feel that they are doing as well as can be done – or as well as they need to do – and see no reason to make a change for the better. 

It’s only those in crisis who admit, somewhat reluctantly, that they might be doing something wrong – but most often, there is something to blame for their situation and that they can continue with their usual habits as soon as they recover from this temporary setback that was inevitable and beyond their control.  Because what worked in the past will work in the future.

The irony is that it is the very same attitude that decision-makers tend to take in their business affairs.   What they have doing has made their firm successful, or perhaps just barely sustainable, in the past and their intention is to keep doing what they have been doing – and any inefficiency or failure is seen as the consequence of circumstances beyond their control.  

“It’s the way we’ve been doing business for decades, and it works for us.”   And this is regardless of how the firm is doing at the moment, regardless of the glaring inefficiencies, regardless of opportunities to make a change for the better.   And when a committee gets involved, the mantra of “works for me” becomes all the more pronounced.   It is not until the firm is ion obvious crisis that they see a need to do better – and more often, it’s seen as a temporary measure before the firm can return to its old habits, which made it successful in the past.

And I don’t know the cure for it – either in my function of helping to change the behavior of consumers, nor in my function of helping to change the behavior of my organization.   What works now, and what has worked in the past, is invariably preferred to a better course of action.   And while you can describe the crisis that is inevitable unless a change is made, the change will not be made until the crisis is manifest – often, when it is too late.

If ever I find the solution to this problem, I’ll post it – or maybe not, because solving that problem is the source of tremendous competitive advantage.