The Equal Pay Rabbit Hole: How to Be Functionally Rational

By Kim Stephenson

Despite our best efforts to align our financial decisions with our values (discussed in part two) and focus on what matters to us, it’s understandable that “Keeping up with the Jones’” occurs. The fight, flight, and freeze responses to threats are built into us by our evolutionary past. Others’ success, a financial loss, or a perceived financial mistake can all feel like a threat.  

It’s understandable, but rarely conducive to happiness. 

Since we’re modern humans, not hunter-gatherers, you’d think we could simply ignore those evolved routines and rationally: 

• Recognise what our meaningful and joyful life would be. 
• Analyse how our money toolkit can and cannot help us build that life. 
• Research how our money can best help, and how to use it appropriately. 
• Put that plan into action. 
• Monitor progress towards the life we want, using money’s flexibility to allow for unexpected obstacles. 

However, despite being the dominant life form on the planet (Home Sapiens – the smart hominoids), we often don’t perform rationally with money. Why not, and should we try and change that? 

Human Economic Behaviour 

Humans are not Vulcans (Google Mr Spock if that reference doesn’t make sense). We can use logic, but usually don’t. For example, most of us make decisions that are contrary to abstract logic in the “ultimatum game” (e.g. Sigmund et al., 2002), where one party has an option to maximise their own profit at others’ expense. Notions of fairness, influenced by cultural setting (Oosterbeek et al., 2004), mean there’s a variety of human behaviour in real situations that rarely, if ever, follows abstract logic, but makes sense contextually.  

Tversky and Kahneman identified some problems with these departures from logic (Tversky and Kahneman, 1974). Sadly, Tversky died, and Nobel prizes aren’t awarded posthumously. But the follow-up to their collaborative works won Kahneman the Nobel Economics prize (there isn’t one for psychology). This drove the establishment of behavioural science, and particularly behavioural economics, a more realistic view of human economic behaviour than assuming people are Vulcans.

Not Black and White: Shades of Grey 

Unfortunately, this advance also led to a persistent connection between heuristics (evolved mental short-cuts or rules of thumb) and bias. The word bias, like prejudice, carries many negative connotations. The real meaning of bias comes from, for example, a lawn bowls ball, which has a weight (a bias) on one side to make it take a curved path.  

The inference most people – including scientists and researchers – took was that heuristic equals bias equals bad, and that therefore heuristics were to be avoided and financial decisions “should” be logical.  

Reading lists of cognitive biases and “mistakes” people make (running to more than 175, Benson, 2016) can make us wonder how foolish we are. Which in turn makes us feel we “ought” to be better, that we “should” be able to make logical “good” decisions, particularly about money.  

But heuristics often work better than logic – as Kahneman explained (Kahneman, 2011).  

Gigerenzer (2008) describes many advantages of using such unconscious or intuitive thinking, as distinct from logical thinking. One of his concepts is “bounded rationality”. Simply put: 

There are finite resources (of time, energy, and willpower) to make decisions in the real world. Therefore, assuming resources are infinite and therefore logic (which often requires huge resources) is always beneficial, is an illogical assumption.  

Flexible Process, Not Rigid Decisions 

Despite many attempts to show that logic has its place, but that context, not logic, dictates the best decision process (e.g. Kahneman & Klein, 2009), most of us can’t resolve the dilemma that instinct evolved for survival, not happiness, and logic is not always practical.  

We fear making a “poor” decision, often without considering how we’re measuring what success means in context. The core problem isn’t the end behaviour (e.g. repeatedly forgetting to settle credit cards on time, using “retail therapy” to deal with pressure), it’s wanting predictability and control in an unpredictable and uncontrollable world. Consequently, we often rely on dogma, inherited attitudes, or prevailing opinion instead of a rational process (as above) that allows for plans to be flexible, however events unfold. 

Being able to be functionally rational (rather than rigidly logical) makes it easier to think clearly and to accept contextual aims and constraints. In other words, to recognise that life is unpredictable and that the “best” decision is always subjective and often impossible to establish, even in hindsight. And that it is possible to change attitudes, learn, and develop more effective processes. 

Where to Start

Many tools of both positive psychology and more conventional psychology (such as counselling) enable clearer thinking, acceptance of reality, and determining appropriate choices. Consider two examples: 

1. ACT (Hayes & Smith, 2005) 

A key concept of ACT, or Acceptance and Commitment Therapy, is psychological flexibility. In a way, it’s a practical method of “feel the fear and do it anyway”, allowing the emotions and anxious thoughts to exist, but to strive towards valued goals.  

This provides a means to tackle another concept, experiential avoidance. An example of this would be our feeling that we ought to handle our money better and resolve to do a budget and stick to it. But the emotions and concerns about failure, looking foolish, or being inadequate prevent us from tackling the budget. Our failure makes us feel inadequate, so we avoid it, which makes us feel bad, and we become locked in a fruitless and frustrating loop.  

Applying six principles of ACT’s psychological flexibility can make it possible to break the cycle: 

1. Acceptance: Being willing to experience negative thoughts, feelings, sensations. 
2. Cognitive defusion: Learning to view thoughts as just thoughts, not truths. 
3. Being present: Experiencing the present instead of being absorbed in the past or future. 
4. Self as context: Developing a sense of self separate from thoughts, feelings, and history. 
5. Values: Choosing qualities of action that give life purpose. 
6. Committed action: Taking consistent action, despite difficulties or setbacks. 

2. Mindful Self-Compassion (Neff & Germer, 2018) 

Essentially, mindful self-compassion involves: 

• Acceptance: Negative emotions about our capability and finances hurt.  
• Normalisation: Everybody has hang-ups about money, even – maybe especially – the wealthy. 
• Self-compassion: It is better to cut yourself some slack than beat yourself up. 

While self-criticism often appears necessary to maintain performance, it’s harmful both to wellbeing and performance. A mindful, self-compassionate approach works better both to maintain wellbeing and to persist effectively.  

Purpose and Awareness 

It’s hard to change long-held attitudes. But motivation from having clear purpose – in ACT terms, a valued objective – can help. As can: 

• Treating ourselves with kindness 
• Being aware of our emotions and thoughts: The mindfulness element of self-compassion, and ACT’s being present.  
• Realising that negative emotions are not external reality: Emotions are internal states over which we have some control. 

This combination allows clearer thinking, enabling us to focus on our valued goals and plan flexibly. It’s possible to determine objectives, learn the relevant financial principles, then set flexible plans to achieve those goals, with both the financial and mental flexibility to deal with unforeseen problems.

If our values and thinking (our internal points of heart and head) are under control, it makes following up with actions much easier. The link between our internal state and taking action is the subject of the next and final article in this series.

About the Author 

Kim Stephenson spent 12 years as an Independent Financial Advisor, working with professional and high-net-worth clients. In 2000, he qualified as an Occupational Psychologist, serving as Secretary of the Division and a Chartership Supervisor. Repeatedly asked for advice on finance, he perceived a common delusion that money is both a worthy life goal and inherently complex. Subsequently, he has contributed to three books and provided talks, articles, and consultancy about the synergy between positive and traditional psychology with finance and behavioural science. A frequent radio guest and occasional television contributor, he specialises in financial psychology and developing more helpful attitudes and behaviours around money.  

References 

Gigerenzer, G (2008) Gut Feelings: The Intelligence of the Unconscious, Allen Lane  

Gilovich T, Griffin D, Kahneman D, eds. Heuristics and Biases: The Psychology of Intuitive Judgment. Cambridge University Press; 2002. 

Hayes, S and Smith, S. (2005) Get out of your mind and into your life: The new acceptance and commitment therapy. New Harbinger Publications Inc 

Hayes, S (2019) A Liberated Mind: How to Pivot Toward What Matters, Avery 

Kahneman, D & Klein, G. (2009). Conditions for Intuitive Expertise. American Psychologist. 64. 515-526. 10.1037/a0016755. 

Kahneman, D. (2011). Thinking, fast and slow. Farrar, Straus and Giroux. 

Neff, K, and Germer, C (2018) The Mindful Self-compassion workbook: a proven way to accept yourself, build inner strength and thrive. The Guildford Press 

Oosterbeek, H, Sloof, R & Kuilen, G. (2004). Cultural Differences In Ultimatum Game Experiments: Evidence From A Meta-Analysis. Experimental Economics. 7. 171-188. 10.2139/ssrn.286428. 

Seligman, M. E. (2011).Flourish: A new understanding of happiness and well-being- and how to achieve them. Nicholas Brealey Publishing. 

Sigmund, K., Fehr, E., & Nowak, M.A.(2002). The economics of fair play. Scientific American 286 (1) 82-87. 

Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131. https://doi.org/10.1126/science.185.4157.1124