Thinking About Financial Planning

We plan because we think if we can identify enough of the information we can make our world predictable, even certain. Our world is too complex for that. The best we can hope for is to build structures that have a bias towards success.

Like Quantum physics when compared to Newtonian physics.

Transitions from one form of thinking to another take decades, even centuries. The Greeks had clear ideas about science and math. Isaac Newton and others advanced that understanding and for many of us that is where we have stopped.

We will not be intuitive about new ways even after we recognize their validity. Newton’s science is intuitive. It presupposes things we are familiar with. A limited space, where acceleration and velocity are at moderate rates, where time and distance measures are constant, and where if you knew enough about current position, motion, external forces, and acceleration you could predict position forever.

Newton’s universe is about law and order. It presupposes some sort of hierarchy of control, up to and including a supreme being.

With the dawn of the 20th century most of the ideas around predictability became less concrete. Quantum physics relies on probability, tendencies and an awareness of uncertainty. Cosmology came to exist in near unlimited space and enormous time periods. Huge velocities, and immense forces.

In the vast universe and tiny sub atomic worlds, you cannot predict with certainty. There is always something you don’t know. Worse still, there is always something you cannot know.

Financial planning should be more like quantum physics. Probability density functions, while not guaranteeing certainty, provide a good enough answer. You don’t need to know where a particular photon will be to manufacture a laser. You do need to know a little about how to produce a photon and have enough of them to get what you want even if a few stray in random ways.

Like investing. Diversity helps make the outcome fit into a range.

Planning helps but plans do not. It is the understanding learned in planning that achieves the answer. The understanding applies in the record, review and revise process. The R’s of financial achievement. Know what to expect, find out if you got it, assess the meaning of the new information including whether your expectation was reasonable in the given time, and amend the procedure if it falls outside.

Newton would have had little need for that review procedure because outcomes were far more certain. His world was simpler than yours is. Finance is more complex than calculating trajectories.

The outcome of thinking tends to be more dependent on how you think than it is on what you think about. Learn to think a little differently. Build your plan to take advantage of tendencies.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Contact: don@moneyfyi.com  

This entry was posted in Decision Making, Personal Finance, Planning and tagged , , , . Bookmark the permalink.

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