Probability ≠ (does not equal) Inevitability: The False Premise of Many “Planning” Paradigms
The idea that financial success is often achieved by preparing for opportunities that cannot be seen in advance can create psychological tension. Most of us like certainty and the sense of control that comes with it. The idea of planning for things that may or may not occur can register as counterintuitive – how do you plan for something you can’t plan for?
Given this tension, it’s natural to wonder if there isn’t a better way, a process by which to guarantee results and eliminate uncertainty. Quite often, this desire for better “success methods” in the financial realm leads to historical analyses and statistical probability models.
Looking for the best career path? Read a report on which fields anticipate high demand in the coming years.
Want to live in the best neighborhoods for raising kids? Yep, there are statistical surveys for that.
Need to know your “number” for retirement? A computer program can calculate it.
Looking for the best investments? Hoo boy! Do we have numbers! And pie charts! And allocation models!
Embedded in all of these analyses is an underlying idea that if you arrange enough probabilities in your favor, success is inevitable. But there are two problems with probability models: First, for statistics to be useful, they require interpretation. Where one expert sees a casual relationship between two events, another may only see a coincidence; the same set of facts can support vastly different conclusions. It’s like saying success is luck or preparation: who has the right model to interpret the facts?
Second, and perhaps most important, all of these probability studies are based on the past. While history may occasionally repeat itself, history also shows that new and unforeseen events often play a much larger role in determining your outcomes than what was expected to occur. Looking to the past to predict the future is like trying to drive a car by looking in the rearview mirror. Even if the view is perfect, it’s still looking in the wrong direction.
Flexible Plans = Opportunities for “Happy Accidents”
The inherent weakness of plans based on historical probabilities does not mean all planning is futile. Rather, it suggests different perspectives might yield better results. For example, instead of expending time and energy trying to anticipate future events, it might be more productive to develop action plans that allow you to respond to opportunities as they occur.
From this perspective, the Woody Allen comment “Ninety percent of success is showing up” rings true in the realm of personal finance. A lot of people miss opportunities for financial progress because they simply can’t “show up.” For example, they don’t have the cash flow or cash reserves to take advantage of a great deal. Or they don’t have the time to acquire a new skill, or start a business. In fact, opportunities often find them completely unprepared.
“But how could I have known?” they say. “Ten years ago, who could have anticipated the world would be like this?” And that’s precisely the point. Since you can’t know what the future will look like, why make financial decisions that eliminate choices or lock you into plans that restrict your ability to make changes in the future? You may not be able to quantify it with a number, but having the flexibility to respond to a variety of financial opportunities – including those you can’t even imagine today – is an extremely valuable asset. In fact, it may be a key asset in turning unforeseen events into “happy accidents.”
Believing that meticulous analysis of past performance can ensure the future is an illusion. In contrast, basic principles of financial preparedness – which don’t try to predict the future – are better suited to long-term success. Because you never know what might come your way.
Are your financial affairs prepared for “happy accidents”?
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected] See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
Elozor Preil
