Philosophy and Financial Decision Making

“A mummy again endued with animation could not be so hideous as that wretch. I had gazed on him while unfinished; he was ugly then, but when those muscles and joints were rendered capable of motion, it became a thing such as even Dante could not have conceived.”

That’s character Victor Frankenstein’s description of his monster creation — a hybrid of old body parts and strange chemicals in Mary Shelley’s classic novel, Frankenstein.

Behavioral finance was developed similarly — a mashup of traditional finance concepts and psychology. It burst onto the scene during the opulence of the 1980s, although its origins date further back.

You can’t talk about behavioral finance without mentioning Daniel Kahneman’s and Amos Tversky’s Prospect Theory: A Study of Decision Making Under Risk. Their paper explored the limitations of the human condition and how they impact investors, like the anchoring and loss-aversion biases.

Financial decisions seem straightforward in theory, but we have difficulty making the correct ones due to our many cognitive inclinations. While traditional finance analyzes how we should act, behavioral finance tackles how we behave in reality.

The finance/psychology combo unveiled humans’ challenges in making financial decisions. Understanding our biases is helpful, but awareness can’t always help us avoid them. In her book Thinking in Bets, Annie Duke uses Muller-Lyer’s illusion to demonstrate this point.

By Franz Müller-Lyer — MathWorld — Müller-Lyer IllusionMüller-Lyer, FC (1889). "Optische Urteilstäuschungen". Archiv für Physiologie Suppl.: 263–270., Public Domain, https://commons.wikimedia.org/w/index.php?curid=109553102

Even when you know the lines are of equal length, you can’t re-wire your brain to see them as such. Knowing which decisions are most logical doesn’t seem to save us, and awareness of our cognitive limitations is only helpful to a point. But there’s another layer to explore — philosophical finance.

Philosophy has unintentionally helped me better align my money with my values; it can help others too.

Many philosophical texts and ideas date back thousands of years. These thinkers lived in a very different world than we experience today. Yet, they confronted similar emotions, desires, grievances, fears, victories, and defeats. By looking back, perhaps we can gain some wisdom to get ahead.

What do you want out of life?

Not in life, but out of life. We all have goals (a family, a lovely home, a high-paying job) — but what is your grand goal in living? If you can’t answer that, how can you possibly live in alignment with it?

I bet you know people who make a lot of money. They have big houses, fancy cars, and lots of stuff…but they might not be happy. The famous study by Nobel Prize winner Daniel Kahneman demonstrated that money only increases happiness to a level when our basic needs are met. Additional income does little to improve our well-being. He summarized this, saying, “Money does not buy you happiness, but lack of money certainly buys you misery.”

Yet many people get stuck on the hedonic treadmill, endlessly chasing more — whatever that is. I believe some of this can be attributed to a lack of a philosophy of life. Without one, we can mislive and fail to pursue something genuinely valuable, squandering our chance at life.

A Philosophy of Life

Philosophy is often considered esoteric — best left to brainy academics. Admittedly, I used to think this too. I believed philosophy’s sole purpose was to explore big questions, like how did we get here and what does it all mean. But then I discovered Stoicism, a practical philosophy with tools and techniques to tackle everyday challenges.

Stoicism may not be for everybody, but philosophy is. Since finding Stoicism, I’ve taken meaningful actions to improve my life, and my finances have benefited as a result — a pleasant and unintended consequence.

Before pondering my philosophy of life, I had a good life — but at times, I was chasing a carrot. I was falling victim to connoisseurship. I desired better, more expensive bourbon and cigars and more extravagant travel. Yet, I wasn’t satisfied after attaining these things. What gives?

Desire

The famous Greco-Roman Stoics lived in a time of massive wealth disparity. Marcus Aurelius came from one of Rome’s great families and became emperor. Seneca the Younger also amassed a vast fortune while serving as Senator and advisor to the brutal Emperor Nero. Both men could have almost whatever they desired — yet both understood the dangers of unchecked wanting.

Seneca said, “Suppose that the property of many millionaires is heaped up in your possession. Assume that fortune carries you far beyond the limits of a private income, decks you with gold, clothes you in purple … you will only learn from such things to crave still greater.”

I’ve come to be much more satisfied with what I have. “Don’t dream about things you don’t have…think about the best things you now have and how much you would crave them if you didn’t have them.” This simple meditation recommended by Marcus Aurelius, the Philosopher-Emperor, works wonders.

Worry

There’s plenty to worry about: stock market volatility, inflation, geopolitics, health, family, etc. But as Seneca pointed out, “we suffer more often in imagination than in reality.”

Modern society is plagued with anxiety. Worrying about the future might start as a slow simmer but quickly erupts, destroying everything in its wake. The future is unknowable. Thus, it’s ridiculous to waste our time fretting over it. The media capitalizes on our worrisome nature, and misery loves company, so others will drag you into the anxiety-filled abyss if you allow them. But the Stoics have other ideas.

Epictetus recommends we “make the best use of what is in your power, and take the rest as it happens.” Focusing on what I can control has lowered my stress and increased my energy — allowing me to focus on higher-value activities.

Regret

Developing a philosophy of life has also helped me let go of past mistakes. Stoics compared regret to prison, but Seneca noted that “we are the ones that hold the key to our escape.” My future is less poisoned by my past, and I can live more fully in the moment — freely.

We all make mistakes, financially or otherwise, but we must accept the past for what it is and remove the shackles that bind us.

Ambition

I began to ask myself, “what is the point of money?” Marcus Aurelius said, “nothing is worth doing pointlessly.” Yet, some of us aimlessly wander, trying to accumulate more money and stuff. It’s worth asking, “what’s the point?”

I was at risk of falling deeper into captivity by seeking endless pleasures. Seneca touched on this, saying, “The more pleasures a man captures, the more masters he will have to serve.” Don’t get caught in the trappings of life.

It’s ok to be ambitious, provided your motives are virtuous, and your means are sound. “I do not forbid you to possess wealth; I only seek to make you fearless in possessing it. And the only way to achieve that is if you convince yourself that you will be happy even without it.”

William B. Irvine explored the relationship between Stoicism and wealth in his book The Guide to the Good Life, writing, “there is nothing wrong with enjoying the good things life has to offer, as long as we are careful in the manner in which we enjoy them. In particular, we must be ready to give up the good things without regret if our circumstances should change.”

When it comes to money, the lesson is to stop obsessing over it. Strangely, since I’ve done this, I’ve found greater success. I’ve also noticed I’m not particularly impressed by most of those who possess lots of it.

The absence of a philosophy of life can lead to one ruled by hedonic desires, leading us to deploy money in meaningless ways.

Don’t develop a philosophy of life to get more money; it won’t work. But you may find that you are better off financially as a result — a positive side-effect of understanding your grand goal in living.