Every day we make choices in our lives based on what we perceive to be reality. We see things through the lens of our own experiences and make decisions based on those situational perceptions. But how much of what we perceive is reality? What if most of what we perceive is wrong? What would that say about the financial choices we make. Let’s explore Situational Perception.
Perception of Others Versus Reality
In the early days of Full Time Finance I wrote a post on understanding how the perception of others impacts success. During that post, I was really referring to how people perceive you and you perceive others. This is a very important topic I recently reencountered. We went into a car dealership while dressed a bit down for the weekend. They didn’t give us the time of day, which lost them a sale. Remember never let your perception of others define how you interact with someone, as perception may not be reality.
Perception of Situations Versus Reality
But to the perception of people, as per that post, I have to add an additional concept today. Perception of situations can also impact the choices we make.
The human brain works in a way that it actually only sees part of a situation. Then based on past experience, it perceives the rest of the picture to make a decision or observation. The brain never sees and may even ignore whole pieces of the situation. I have been recently watching a great series on this effect called “Brain Games”.
Situational Perception: The Ames Room Example
In one of the episodes, they place 2 women in what is called an Ames room. In essence, the lines of the surroundings of the room make objects on either end, like a human, appear of much larger or smaller scale than they are. The reason is that your eyes perceive the room to be of uniform height and shape due to these lines. Our brains are used to seeing those lines in the context of a given size disparity, so it interprets the size disparity here. But in reality, the room is tilted in such a way that the objects are of equal size in a room with lower or higher ceilings. Your brain is seeing the lines and the people and drawing an inference despite physically there being 2 people of the same size in the room. This is just one example, the show has many pretty cool examples of these illusions.
But anyway, I digress. The show got me thinking, where else might these same situational perceptions color our interpretations? How do each of us act in relation to these interpretations?
Situational Perception: Heuristics
Now I wrote a post about a year ago on biases. In some ways, these situational perceptions lead to heuristic based biases. I won’t rehash those particular biases but instead will refer you there. Instead in this case, I’m wondering more broadly, how our life experiences and situation might color our perceptions.
Generational Culture and Situational Perception
A great example that immediately comes to mind is generational culture. Note everything about the below are generalizations, there are always exceptions. However. without generalizations, it would be hard to make this point.
Baby Boomers were the generation immediately following the end of WW2. They were products of parents who had just completed living through rationing. During the war, no amount of money was able to buy certain things. As such, it is very common of this generation not to throw anything out. Hoarders tend to be from this generation.
Contrast that with myself as a gen-x member. I belong to the disposable era. Diapers, wipes, paper towels, etc. When something’s broken I toss it. If I don’t use it anymore I donate it. When I was a kid people didn’t think twice about buying something meant to be used one time only.
Adding one more layer of contrast is the millennial. Born into a world obsessed with conservation and the environment. Their perception in some cases is to never buy the item in the first place. In some ways, I guess you could tie this to the rise of minimalism and the tiny house trend.
Experience, Situational Perception, and Choices
Now the point of this post is not environmentalism, so let’s push that to the side of the moment. It is however to raise the question, how much of our decisions are because of making the right decision, versus how much is just because of life experiences. And does that perception lead us to make the wrong decision from time to time even if it may be for good reason?
Hoarding: Good or Bad?
So take our hoarding example. In a world of rationing hoarding is a good thing. There are plenty of other situations where it can be a good thing. Who can’t say from time to time they stumble on things in their basement they haven’t used in years for which they suddenly find a need. But also hoarding something for the simple sake that you might need it 20 years from now can have a detrimental impact on your current life. It could be a dust magnet increasing your cleaning time, affecting your health, or taking up space you might need for something else.
Disposal: Good or Bad?
Moving to our disposable era, similar situations come to mind. Let’s be honest, there are definitely situations in life where buying something cheap and disposable instead of built to last is the correct choice. Take for example an e-book or magazine (to duck the environmental question).
Would a paper copy potentially last longer? Well maybe since electronics fade but I have books in our library from 100 years ago. But is it worth it to spend extra for a paper copy of a book over an ebook these days? Most books you read probably once or twice and then sit on the shelf forever, making the physical copy a waste of space and money. The hoarder might disagree based on their experience. (Note I am ignoring those who enjoy the feel of a good paper book for an obvious non-controversial example.)
On the flip side, you can potentially save significantly with cloth diapers or using a towel instead of a paper towel to clean up a mess. So there are definitely areas where buying to last is the better move. Again the situation is more nuanced but decision may not be.
Tiny House a Symptom of Situational Perception?
Meanwhile our millennial would consider living in a tiny house as sufficient over a McMansion. But what if the bulk of millennials are searching for tiny homes such that their price is no longer competitive compared to larger options? What if it was the difference between building or utilizing an existing home (to again remove environmentalism)? Given the transactional costs of changing homes, there is definitely a point when the bigger home is a better choice.
Want another example? Absent the environmental emissions question is it a wiser financial move to sell a perfectly good car at a loss to buy a car that costs more but gets a few more gas mileage? I see people making these types of decisions all the time.
A Rhetorical Series of Questions Leads to the Point: What is Driving Your Decisions?
I raised this simple series of examples above as basic thought experiments. They are rhetorical in nature but eluding to a deeper question. Are we cognizant of what is driving our financial decisions? Are we sure they are the correct decision for the situation or simply our cultural or experiential preference?
It is Common To Miss the Situational Nuances
I actually see some of these same perceptions in the actions of others. Those that have been severely burned by debt tend to react that all debt is bad. Those that had a particularly tough time during the great recession might be overly cautious with their investments. Still, others might be overly optimistic about their long term investment potential due to recency bias. In every case, we are a product of our past experiences and make decisions based on them, oftentimes to the exclusion of understanding the situational nuances.
So what’s the point? The next time you snap to a financial judgment sit back and contemplate for a moment. Are you making the decision because it is the right call, or are you making it simply because of your perception of the situation? Try to step back and ensure you see the whole picture.