1.1.3: The two types of financial errors
Wise money decisions start with avoiding mistakes in problem formulation and problem solving
Good philosophies focus on flourishing and flow, rather than fixing on a target and forgetting about the life behind it. Philosophy is about the process, not the goal. Specifically, the process of thinking things through in an undistracted and undistorted way. Of learning to love self-insights enough to overcome the resistance to the effort required to uncover them. Of making better decisions by getting more comfortable filtering and processing inputs from internal (body, mind, memory, emotions) and external sources to produce the sort of suitably reasoned outputs that enhance a life in an honest, whole, long-term sense. The best filter is a smart human brain, and the best human brain is a smart filter.
If improving filtering (how effectively you choose what to bother thinking about at all) and processing speed (how efficiently you think about what’s left over) are the two ways to improve decision making, misunderstandings and fallacies are the two ways it goes awry.
Misunderstandings are about problem formulation: a mistake in coming up with the question – asking a bad one, or asking the right one in a bad way. For example, asking what is the best investment? (for there is no such thing, as we’ll see later[1]).
Fallacies are about solution reasoning: a mistake in getting to the answer – using flawed logic, or an inefficient method. For example, using the price of something to the world to determine its value to you.
To combat misunderstandings, we need to cultivate what Jonathan Baron calls ‘active open-mindedness’. This involves both an ability to quickly integrate new information into your beliefs, and a willingness to change your beliefs when that new information suggests you should. If you think changing your mind is a sign of weakness, or don’t instinctively look for reasons your beliefs may not be true, then you’re not being actively open-minded.
To combat fallacies, we need to cultivate wisdom. This does not mean we need to be wise. Fortunately for our purposes, if you approach money problems with an actively open mind, the wise choices will often look after themselves.
Beliefs passively absorbed rather than actively acquired are the root of how we end up with a poor relationship with money. Part Two of this book sets out to challenge those beliefs: to make you stop and think about if your current way is the only way, and if it’s the best way. If it is, that’s excellent news. You don’t need to change anything, and your old actions will have a new confidence. If it’s not, that’s also excellent news, for acknowledging this is the first step to finding a better way.
This needn’t be any harder than simply not stopping at the first shop that sells something that looks like it’s what you went out to buy. It’s swapping accumulating a landfill of facts for finding and solving a single problem at a time. However, relevance does not always reveal itself; now we're unburdened by the cold, hard, realities of life outside of the self-service savannah, choosing what to focus on can be blinding.
We want to cultivate a philosophical process, set within an economics framework. This is cultivation in the horticultural sense: gardeners do not buy plants and take no further care of them; they nourish them, encouraging adaptability to inevitably changing and uncontrollable circumstances. In our context, philosophy is economics for the soul. Economics is the study of how best to allocate scarce resources. Philosophy is concerned with how to live a Good Life. And how to live a Good Life is the ultimate resource-allocation problem.[2]

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[1] Part 3, Section 4.4.
[2] Furthermore, while as a subject economics is notoriously mostly nonsense, that misses the point that those trained to think like economists (like philosophers) think more clearly and creatively than most (see examples in David Epstein’s Range). While we want to avoid the numbers-based forecasting part of the economics world, we want to embrace an approach to our individual lives that understands both the big picture and the minor details, knows the place of both, and dances between them, to creative and insightful ends.
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