Are there parallels in how we assess risks in life situations and manage our money?

Here are four real life stories on how these people managed personal situations and money decisions.

Are real life situations and financial decisions assessed for risks in a very similar way by investors? It's not always, but there are parallels. Here are some anecdotes with pertinent personal finance lessons.

The choices people make

Gomati firmly believes that doctors play con games. She believes in reading up and self-prescribing any medical requirements, and has the confidence that she has the ability to take care of her health needs. When I came to know about this, I asked her why she doesn’t want to go to a doctor. Her response was an assertive “I don’t trust doctors; after all, they don’t have any skin in the game. I would rather self-medicate and take the risks attached, rather than go to a doctor who charges a fee for prescribing a medicine, which he probably doesn’t take himself.”

I chanced upon a discussion with Krishna recently. I knew he had been looking for a groom for his daughter who is well-educated and has just started a decent paying job.

When I asked him how things were going on that front, he was very happy when he told me, I have finalized the groom. I congratulated him and asked him for the details and how he found the match.

He replied, “I came upon this smart boy one day when I was surfing Facebook. He and his family are all in the US. I spoke to him and his family on a video call; they seemed very nice and I think he suits my daughter very well. His LinkedIn profile seemed quite impressive. I decided to go ahead and give my daughter’s hand to him in marriage; the engagement is next week, online.”

Ronita is a fairly high-level corporate executive. She called me one day to take some advice regarding her insurance policy . We got talking and I ended up asking her how the lockdown was treating her. Her interesting take was, “Work is fairly good; I have joined a new company recently, but I think I am fine. I seem to have a lot of spare time, so I have decided to try my hand on playing poker online.

I know what you are thinking, but don’t worry. I intend to read up enough to learn the tricks and I am also taking enough care to not allocate more than a certain percentage of my liquid money to this. I find it exciting and will hit the jackpot sooner than later.”

Amrut is a widower and an ex-colleague of mine who moved to live on the outskirts of Mumbai. He now has a small business of flowers and vegetables that he grows in his small garden. He is financially not very secure and depends on this business income for his lifestyle.

After the lockdown was eased, I desperately wanted a break, so I went to his place for a couple of nights with my family. When there, I saw that he was not comfortable with anyone else tending to his garden (though his knowledge about this was limited, and he needed help). Strangely, his garden needed upkeep, as there were lots of weeds as well as some plants that were clearly not flowering and nearly dead.

On enquiring, his response was “I don’t trust this gardener with my garden. I am very worried that his actions will ruin my garden completely. As for these non-flowering plants, I am tending to them. I am sure that someday they will flower.”

All of you must be quite surprised with these behaviors, maybe even shocked? After all, who would take such personal risks without properly thinking, and cause emotional/financial harm to themselves and their families? They need help, right?

Now, what if I tell you that these stories are real, but are slightly modified? And that these strange behaviors are to do with how they handle their money? The real stories are given below.

Real Story 1

Gomati prefers investing directly rather than through intermediaries since the fund manager has no skin in the game. She would rather lose money herself rather than let someone else to lose her money. She does her own research and has been managing her entire (fairly-large) corpus herself the last few years.

Real Story 2

Krishna needs money for his son’s education two years from now. He follows this star PMS fund manager on Twitter and the firm is suggesting global diversification for him, which he thinks is a good idea. He has decided to invest in the PMS this month and is confident that the money will be available and intact in 2022.

Real Story 3

Ronita has just joined a new job. She seems to have time on her hands and has decided to try her hand at equity trading. She doesn’t have any prior experience but she is reading up on the subject and is confident of succeeding. She plans to set aside a fixed sum for her income for this month.

Real Story 4

Amrut finds it difficult to trust his advisor and hence researches every time he gets some advice and ends up modifying the advice with his own views. He is also very risk averse and feels that his capital might be at risk if he were to completely trust his advisor. He holds on to losers in the hope that they will recover one day.

Now, these stories make more sense, don’t they? In fact, you might now be thinking, “I know this person!” And that is so true. The above stories may be about specific people, but these behaviors are ubiquitous.

So, what is it about us that causes us to behave so differently with our money? If a similar risk were to be taken with our life situations, we would find it crazy behavior, but when it comes to managing our money, we coolly take such risks and get on with it.

A popular proverb goes “It takes a wise man to learn from his mistakes, but an even wiser man to learn from others.” I would proffer that wisdom also comes from our own successes. Learn also from the mistakes that you don’t make with yourselves, and apply it when it comes to managing your money.