Disequilibrium and why you suck at money

You suck at money. I know why and I know how to get your mind right so that you stop sucking at money. Get ready, because this is going to be a loooong post with fancy words for fancy people. We’ve already talked a bit about cognitive bias. Today, we learn about an entire theory of cognitive development that I will use to explain why you suck at money.

As some of you readers already know, my meat-space job involves science education. I’m kind of a big deal, too. I’m keynoting a big workshop on the subject in a few weeks and I’ll be schmoozing at the residence of an American ambassador to a European country because of this gig.

When it comes to everyday people learning complicated new stuff, I know a little bit about what I’m talking about. Or, I can at least con some pretty smart people into thinking I do.

This may mean nothing to you if you’re looking for a little money talk. However, stay with me. I’m about to drop the name of a dead psychologist that pioneered the field of human cognitive development, and I’m going to relate his breakthrough work to your money.

It will also be an excellent opportunity for me to look smart. Hold on a second while I slip into something a little more intellectual …

I'm smart and I know why you suck at money!
You can’t see the elbow patches on my sport coat, but I assure you that they are there.

That’s better.

Now … what do fancy-pants words like disequilibirum, schemata, and cognitive theory have to do with your money?

It turns out that you suck at money. You suck at money because you think about money in a strikingly different way than someone like Mr. Money Mustache. You will always suck at money so long as you still fundamentally think about money the way you do. And, the only way you will stop thinking all sucky about money is by taking a figurative two-by-four to the back of your skull.

Stay with me to learn what dead French psychologist Jean Piaget has to say about you not sucking at money.

Jean Piaget’s Theory of Cognitive Development

The French psychologist Jean Piaget developed the first theory of cognitive development by watching how children solved problems. Before Piaget, psychologists basically assumed children thought about topics in the same way as adults, only with less sophistication or complexity.

It turns out, children actually approach certain ideas in strikingly different ways from adults. Children at a certain level do not have the same logical frameworks that adults have developed.

Piaget sought to develop an explanation for how children go from child-like thinking to full adult reasoning. So, he observed the way children approached problems as they grew. From those observation he built an explanatory theory of how humans develop their mental faculties. A theory of cognitive development.

Now, everyone here is an adult. You don’t suck at money because you have a child brain. Hold on a second, because it will get interesting in a moment. It turns out, Piaget’s theory is also a pretty good model for how us adults learn stuff, too.

Piaget’s theory has three basic components: (1) schemas, (2) adaptation processes, and (3) developmental stages.

You suck at money because of poorly written index cards in your brain

Schemas are the building blocks of knowledge we use to make the world make sense to us. They’re the things in our head that allow us to form a mental representation of the world around us.

Imagine you are an infant and you have absolutely no mental model of the world around you. You could not make use of past experiences, because you have none. You could not integrate the new objects you see with your current understanding, because you have no current understanding. Everything would be scary and make no sense, because you have no framework for sense making.

The cognitive scientist Barry Wadsworth describes schemata as the “index cards” filed in the brain. They consist of things like past experiences, mental images of objects, results from past actions, and little files on more abstract knowledge, like chemical reactions or English literature.

We use these little index cards to tell us what to do or think when we encounter new stuff. They form the basis of our mental model of the world.

When we touch the red-hot burner on the stove, it fucking hurts! We remember that. It gets filed away in our mind. We now have a model of the world that says that rectangular box with the red glowy things at the top is bad to touch.

We can tell a child not to touch the stove all day long. But until they have a reason to equate stove + touch = bad, they will never really learn because it’s not yet part of their model of the world. We don’t learn ANYTHING by simply being told. That’s one reason the traditional model for education sucks balls.

Let me give you another example of cognitive model building that you as a big boy or girl can relate to right now. I’m currently in the Czech Republic. I don’t speak Czech. But, when I go to a restaurant, and the waiter comes up to the table and says something that makes no sense to me, I know that he is probably asking what we’d like to drink.

I don’t need to know the actual words he’s saying, because I have a model in my mind for how the restaurant experience plays out. “May I take your drink order?” Disappear while preparing drinks. Return with drinks. “Are you ready to order food?”

The waiter could speak Klingon, and so long as the basic customs are the same, I just have to point at stuff on the menu. I’ve built a cognitive model for a restaurant based on past experiences (schema) that is applicable all over the world!

You see why Piaget is a big deal in education? Maybe you can also see where I’m going with respect to your money.

You have a mental model for how money works. It sucks, but it has kinda worked for you for a while, so you haven’t had much necessity to change that model.

I don’t need to change my model for a restaurant, because it has worked fantastically well for every restaurant I’ve been to as I’ve traveled around the world. Eventually, the whole thing will go to shit when I find a culture that does things differently.

You think of money as something you get after working. Money is used to buy you stuff you want. That model was developed by past experience, and watching those grown-ups around you interact with money. Those experiences followed you into adulthood.

All around you is advertising reinforcing this model of money. Everywhere you look, you see examples of this model for money at play. Your co-workers talking about the new car they just bought. The expressions of happiness you see in their face.

It’s a pretty useful model for money, because it explains money’s existence (a means of exchange for getting stuff) and it provides a basic understanding of the world around us.

When you ask for a soda pop, you don’t look confused when the shopkeeper asks for money. A car loan makes sense, because nearly everything around you says that’s what people do to buy cars.

Basically, you have a Sukka Consumer model of money.

That’s the cognitive model you have in your brain, and until you have reason to change it because you’ve got some new schemata to reconcile and a willingness to do it, it’s the model you’re stuck with.

Equilibrium makes you suck at money

Piaget’s theory of cognitive development views intellectual development as a process of adaptation. This process works as follows:

  1. We assimilate new experiences with the schema already in our head.
  2. We accomodate when existing schema don’t work for some new experience.
  3. We equilibriate when new information cannot be fit into our little schemata boxes at all.

Anyone with children will recognize the embarrassing (to us) things that children will say or do as they go through the process of assimilation and accommodation.

Carnegie Mellon Cognitive scientist Bob Siegler describes the following very relatable scenario:

A 2 year old child sees a man who is bald on top of his head and has long frizzy hair on the sides. To his father’s horror, the toddler shouts “Clown, clown!” The child is assimilating this new experience with his schema for clown.

The boy’s father explains to his son that the man was not a clown and that even though his hair was like a clown’s, he wasn’t wearing a funny costume and wasn’t doing silly things to make people laugh.

The boy is able to change (accomodate) his schema of “clown” and make this idea fit better to a standard concept of “clown”.

We can go through a similar process with money.

A loan is kinda weird. I don’t have money, so how can I buy a car? Well, I will loan you the money, of course!

Ahhhh. Ok. I can easily accommodate this into my model for money. The loan is a way for me to buy stuff without having enough money. I just work for the money and pay a little at a time. I work for money, and I use money to buy stuff. This is just a different way to do it! Enter the concept of “the monthly payment.”

You see how that still fits into our model for money? It’s easily accommodated, so there is no reason to fundamentally alter our cognitive model for money.

When our schemas can deal with new information through assimilation easily, we are in a state of equilibrium. Disequilibrium occurs when we encounter new information that does not fit into our existing schema.

Disequilibrium hurts and we don’t like it

Usually, we accommodate without having to fundamentally change our basic cognitive model. This is relatively painless, and we usually strive to accommodate in this way as much as we can get away with.

Our brains are fundamentally lazy. We resist changing fundamental models without significant reason to do so. This is my challenge as a science educator.

As an example, I guarantee that at some point in your life you were “taught” correctly why we have seasons on Earth. However, when researchers asked Harvard University graduates (you know, smarty-pants) about the cause of the seasons, they get it wrong 90% of the time.

We have a pretty simple model for hot stuff. As you get closer to big balls of fire you feel more heat. Remember that rectangular box with the red glowy things?

You remember that little picture of the Earth’s elliptical orbit, where the Earth is closer to the sun during certain parts of the year? Naturally, you assume the hot summer comes when the Earth is closer to the big ball of fire we call the sun.

It fits our fundamental model of hot stuff. Since we have no real reason to need a good model for the seasons, we just keep right on thinking this is why they exist.

Then, one day during the summer in Maryland, you pack your t-shirts for your trip to Buenos Aires, Argentina. You’re a little shocked when you arrive and learn its fucking winter! What the hell.

We have seasons because of the tilt of the Earth. This is why the seasons are different in different hemispheres of the Earth. It has nothing to do with how close we are to the sun. You were taught this, I guarantee. In fact, we know that we can teach you this, ask you on an exam, you will give us the right answer, but you will still not fundamentally believe it. We’ve done those studies.

You don’t want to have to change your fundamental model for seasons, because doing so will cause you to go into a state of disequilibrium until you sort it out. Disequilibrium is a cognitively painful experience. We’ll avoid it at all costs.

Therefore, you just accept what “the man” has to say to get a good grade, but you don’t have to believe, damn it! Otherwise, you have to keep those gears turning until that whole tilt thing makes sense, and it’s kinda complicated. It’s easier to just drink beer.

Disequilibrium and why you suck at money

Something similar happens when it comes to your model for money.

All of your experiences fit your model. You’re in debt and you’ve got nothing saved for retirement. You go to work to earn some money, and you dutifully go out and buy a new shiny toy.

Nearly everyone around you seems to be doing the same. Rich people got rich by getting lucky with some fancy new product, or they basically just legally stole that money through the political system. Or, they were smarty-pants that went to become doctors and lawyers and stuff and just earn more for the work they do.

Then, you read an article in the New Yorker about some weirdo who doesn’t work for money at all. He just rides around on his bike all day and lectures people on not buying so much stuff. What the fuck is this guy talking about?!

Go find the article on the same dude at the Washington Post. Read the comments. I dare you. There are over 1230 comments to an article about Mr. Money Mustache with approximately 80% of them completely in disbelief that a man retired at age 30 without some weird fluke. Or they strongly believe that he’ll definitely be broke within 5 years.

This dude and his views do not fit our model for money.

At this point, we have two options. (1) We can stay within this cognitively painful state of disequilibrium until we’ve rebuilt our model for money to accommodate this new data, or (2) we can quickly accommodate this piece of new data into our current model by assuming he’ll be broke soon, or he’s not being honest, or he secretly inherited a bunch of money.

It is cognitively easier to do the former. It’s actually A LOT easier.

You suck at money because society has taught you poorly about money, and learning a new way of thinking is cognitively hard.

Don’t hate the player, hate the game

At this point in my career, I don’t blame people for dogmatically sticking to certain scientific misconceptions, because those “misconceptions” were built over decades of life experience, and they have served a useful purpose over that time. There reaction to new ideas is understandable, relatable, and predictable. And, it’s not really their fault. This is how our brains seem to be wired.

I also don’t blame people for failing to alter their fundamental concept of money, and lashing out when confronted with a different way of thinking about money.

If you are here for some choir preaching, because you’ve always saved significant percentages of your money and didn’t waste it one unnecessary crap, then recognize that you are not normal. You were probably raised in a different money environment, or you had some interesting experience with money in your formative years that has made you a rockstar today.

If you are here after having a money epiphany, then my advice to you is to not get self righteous. You used to suck at money, too, and you probably spent a long time being a Sukka Consumer before something in your life forced you to go through the painful process of cognitive disequilibrium.

And if you still think of money as something you earn for work that you use to buy stuff you want, then stick around, because we’ll teach you a fundamentally new way to view money that will make you rich and awesome. But, only if you’re ready to face some serious mental discomfort.

New schema for not sucking at money

This post has gotten long (about 3,000 words!), but it was necessary so that you know why you either do suck at money, you did suck at money, or why other people suck at money.

Moving forward, I’ll be writing a few smaller posts about how you can move into a state of disequilibrium to change you model for money. I’m going to write about new schema that you can use to form a brand new mental model.

We’re going to use a process called Cognitive Apprenticeship to guide us through this process of learning new money habits and building new money models.

Yup. I’ll be taking stuff from my well established career as an internationally recognized expert in science education and applying that stuff to your money.

Or, I’ll just make up a bunch of shit.

Practical things you can do to not suck at money

If you want to get started right away with some new money habits, then read my post on Cognitive Bias and automatic savings.

Here are some other helpful things to get you rich and awesome:

Start a blog to stay motivated.

Grow your stash automagically using Acorns’ little money robot that rounds up the pennies from all of your transactions and invests them for you. I’ve been investing about $40 per month of my pocket change without thinking. Get a bonus $5 for being a Beards & Money reader.

Get out of debt faster by lowering the rate on your student loan with SoFi. They ignore your FICO and concentrate on your financial well-being, instead. Student loan rates are as low as 2.14%, saving members an average of $18,936. Get a $100 bonus to help pay down that debt using my link.

Get a personal loan from SoFi to refinance high interest debt like credit cards with a rate as low as 4.75%. You’ll also get a bonus $100 using my link.

Earn interest on you liquid emergency fund and easily transfer money from bank to bank with an online account at Capital One 360. Earn 0.75% on savings and 0.2% on checking. Get a $25 bonus when you establish your account just for being a Beards & Money reader.

Related

I’ve recently posted about research on how “experts” solve problems in both science and money. In that post, I go even deeper down the rabbit hole to look at a person’s fundamental epistemology, and how their ability to shift epistemic framings effortlessly makes them experts at money.

Disequilibrium and why you suck at money

6 thoughts on “Disequilibrium and why you suck at money

  1. Like most people that have/will read this post, I read a lot of personal finance blogs. Once in a while you stumble across someone that is preaching something new, or offering a different way to look at money. People like Mr. Money Mustache, JL Collins, Mad Fientist come to mind and now there’s Dr. Beard!

    This was REALLY helpful. Thanks for taking the time to write this and for sharing you knowledge. Can’t wait for the follow-up posts!

    1. Dr. Beard says:

      Watch out, Ty. You keep flattering me like that and you’ll convince me to write more! As an actual expert in the field of science education, I know that in general we kinda suck at teaching science internationally. Having looked at the personal finance blog world AND the actual financial education field, I believe I have found a technical field that sucks even worse at education. Definitely don’t take that to mean my fellow PF bloggers suck! They’re ALL awesome. We just sometimes get stuck preaching to the choir of those already converted. In a mass-education society, how do you reach everyone else (and by that, I mean the 99% of other people around us.) Step one: understand how they already think about money and why. You have to start there and educate from that foundation. No one ever really convinces someone else of something. We can only provide them the means to convince themselves.

      1. Preaching to the choir with your preaching to the choir comment.

        My hunch is that most of the readers of these blogs are thoroughly entrenched in their own journey for personal finance and end up reading the same thing over and over. But not on Beards and Money! No regurgitation here – that’s why your blog is destined for big things!

        Before you know it, the PF bloggers will be sharing what they learn from you and hopefully that knowledge will make its way into the general population.

    1. Dr. Beard says:

      I would love to claim the clown example, but it isn’t mine. Stolen (with attribution) from Bob Siegler at CMU, who doesn’t blog because he is too busy being an actual cognitive scientist instead of just playing one on the internet.

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