A few years ago, I was on the hunt for some new financial investments, and doing a lot of research. After giving it some thought, I decided to buy some individual stocks. Which specific stocks doesn’t really matter because buying them now would not be a wise bet, but for transparency’s sake, they were:
- Cato Corp (CATO)
- El Paso Pipeline (EPB)
- Greif Inc. (GEF)
- Mattel (MAT)
In situations like this, I always make a plan: buy at [x], and sell at [y] for a profit if I got it right or [z] for a loss if I got it wrong.
Side note: This is a good decision-making formula for any investment in any part of your life. Know when to get out!
Then, I got lazy. I quit paying attention. Luckily, when I looked again three of the stocks had done very well—I’d nearly doubled the gain I expected.
What I should have done at this point is remembered my plan: sell at [y]! But you know what I did instead? Nothing.
Instead of falling back on all the hard work I did to place a smart value on my investment, I thought, “Hey, I’m even smarter than I thought. Let’s see how far I can take this!” Famous last words, right?
Several days later, the market took a turn for the worse. I got out while I was still far ahead, but I’d lost a fair sum of money trying to play the market for a few extra days.
Why didn’t I do the smart thing* and sell the second I saw how far ahead I was from where I expected to be? Why did I get greedy rather than lock in my unexpected earnings?
The answer lies in a small but important study done years ago at Harvard about how we make decisions based on short and long-term stimuli.
If you want to make great decisions in your life, you should fully understand this concept.
More Stress = Less Money
In 1999, a psychology professor at Harvard University named Jeremy Gray wanted to test the way people make decisions under different circumstances. He rounded up a group of students and set up two experiments where they’d play a game that resulted in earning a small sum of money that varied based on their decisions. If you thought through your choices from the beginning, you could plan to earn the largest sum. If you didn’t, you’d earn less.
But here’s the twist.
In the first experiment, he assigned a random group of students to look at a series of threatening and aversive images. In the second, he asked his students to report their level of stress about upcoming exams.
You can probably guess the results.
Students who saw the aversive images and the ones who reported high levels of stress about their exams earned predictably less money than their peers in the game. Basically, they were worse at making good long-term choices because their minds were pre-occupied with short-term concerns.
Short-Term Thinking: When Right Is Actually Wrong
The quality of a decision looks completely different from different perspectives. We all want to make good choices that will make us happy over the long run, but it’s hard to see what those decisions should be if you spend your time worrying about short-term hurdles.
You can probably relate to these stressed out students. Maybe you remember making poor long-term choices yourself when you were a student—it’s hardly uncommon. You might recall a time at work when you made a trade-off to get something now you wish you hadn’t—extra hours that made you miss your kid’s soccer game or other important event that can’t be made up.
In the case of my high-flying investment, it was greed rather than pessimism that fueled my short-term thinking, but the effect was the same. I’d made a plan with a good long-term outcome but got caught up in the short-term stress of speculation, and it cost me.
I came out ahead because the plan was based on a solid foundation and I corrected my mistake before it was too late, but I got lucky. I just as easily could have lost a lot more by ignoring the long-term plan.
Short-term thinking isn’t always bad. Sometimes, you have to think short-term.
If a swarm a bees chases you, you’d better jump in the closest lake as soon as you can. Nevermind the danger of drowning. Or, if you’re about to get fired from your job, you might have to do some short-term damage control even if it means you’ll be cleaning up another mess later.
But usually, the damaging effects of short-term thinking can be avoided with a few proactive steps.
Making The Best Long-Term Choices Right Now
Making good decisions that provide a lifetime of happiness is pretty simple. We all know how to do it: make a plan from the beginning and stick to it.
But once you get going, it can be hard avoiding distractions that come and go, begging for short-term solutions that feel good now, but leave you regretting later.
Here’s what you need to do next time you feel a sudden urge to steer yourself off course:
- Recognize when you’re about to compromise your plan. Most of the time, we don’t make poor decisions that compromise our goals by accident. We see them coming, evaluate them, and make them anyway because they provide immediate relief.
- Force yourself to pause. If you know you’re about to make a short-term decision (and you probably do), impose a timeout on yourself. Sometimes, all you need to do is let your stress levels naturally fall, and the desire to make a bad choice will pass. Doing nothing is sometimes the best choice.
- Zoom out to 10,000 feet. Before you make a short-term decision, step back and look at the bigger picture. Has anything fundamentally changed since making your long-term choice—something that would have changed the long-term plan from the beginning? If not, you’re just reacting to stress. Go pet a cat or do some cartwheels to blow off steam.
- Remove immediate, unrelated stressors. When it’s time to make an important decision, use only relevant information to make it. What a novel concept, right? But we’re surrounded by all kinds of external stressors—the news, other people’s opinions, etc.—that quietly influence us to worry about nothing and make poor choices.
This is an unbelievably simple process: four steps you can probably complete in a matter of minutes for most decisions each day.
Think of them as your plan—you’re long-term plan—to help you stick to your other long-term plans. Very meta, I know.
But if you make it to just the first step, the other three happen automatically. That’s all thanks to the power of your brain to remember helpful sequences.
Try it the next time you’re feeling stressed, and let me know if it helped you stick to your long-term goal.
*The smartest thing, actually, would have been to place a limit order on the stocks so they would be automatically sold when they reached a certain price. This way, I would have stuck to my plan automatically, and I wouldn’t have gotten in my own way.