Financial Intelligence - Counterintuitive Pattern 4: The Oddity of Future

Counterintuitive Pattern 4: The Oddity of Future




In addition to humans, many animals have been observed using language to communicate. Blue whales, for example, are believed to have a language system with a vocabulary as large as one thousand. However, if there is one word that definitely exists only in human language, it has to be the word “future”. The concept of the future is uniquely expressed in human language, as humans are the only species capable of thinking beyond what is happening right now. It seems quite common for us to make a work plan for tomorrow, book a dinner reservation for the weekend, and sell stocks to prepare for retirement. However, these actions are entirely unusual for any other species, not because the activities are exclusive to humans, but because we are taking action now to shape our upcoming world. Dogs, whose behaviour and psychology have been extensively studied, have no concept of the future. Dogs live entirely in the present, forever. They don’t worry about their next meal, whether it will rain tomorrow, or if they will suffer from type II diabetes in five years’ time. That is exactly why, when dogs see their owner coming back from work, they are incredibly happy, wagging their tails vigorously and jumping up and down. They enjoy the moment of reuniting with their owner, completely free of worries about anything else.

Animals display behaviours to get ready for the future, but the underlying mechanisms are different from those of humans. For example, bears start eating lots of calorie-rich food as autumn nears to build up their body fat for hibernation. However, these eating habits are driven entirely by physiological responses to natural signals, not conscious thought. These signals include a drop in temperature, less sunlight because of shorter days, and an increase in Omega-6 in their food, as there are more ripe fruits, nuts, and fatty prey (which are also probably storing fat for winter). When a bear’s neurotransmitters change in response to these shifts in light, temperature, and food, it begins eating more to prepare for hibernation. A bear doesn’t think, “Oh man, it’s getting cold, I’d better eat a few more fish every day to get ready for three months of sleep. Robert the other bear might mock my belly fat, but who cares, I need to survive this winter.”

The human mind’s ability to think about the future developed quite late compared to the more primitive functions of our brain. For example, our primitive capacity to understand emotions, recall fears from memory to prepare for fight or flight, and encode specific positive or negative feelings into memory for future use, all developed hundreds of millions of years ago. The machinery of our brain that handles these primitive functions is efficient and powerful, and almost always active. The amygdala is constantly scanning for perceptions of danger or opportunities for reproduction. The limbic system pays attention to the emotional turbulence of others, especially from those who have authority over us. We barely exhaust the capacity of these primitive brain systems since they have been with us for millions of years.

Conversely, our capacity to think about the future is slow to start, has limited ability, and needs conscious effort to stay active. For example, planning a party usually takes dedicated time and effort. We must think about various future factors, such as time, venue, cost, guest preferences, and safety. To engage the unique human part of our brain, the prefrontal cortex, we need to visualise and forecast potential outcomes. This task is difficult enough that we often rely on pen and paper (or a computer today) to share ideas from our minds, as our heads cannot hold so many future details. We also quickly run out of our planned capacity for future thinking, which is why sometimes we focus on only a few parts of an event at once, like venue and cost first, then after a coffee break, consider food and the guest list. These extra challenges in future thinking directly reflect our brain’s physiology, as the prefrontal cortex developed much later in evolution, making it less efficient and effective from a biological view.

To further demonstrate the efficiency gap between the brain’s primitive reaction mechanism and its advanced ability to plan for the future, let’s imagine a magic wand that grants the prefrontal cortex the same efficiency as primitive systems like the amygdala. Picture a scenario where we’re organising a party: “Bob asked me to organise a party for 42 people, with 3 more possibly attending, and there are 9 different dietary needs. The venue must be outdoors with a shaded area for children to play, avoiding nearby flowers due to some guests’ allergies. The event should be relaxed yet lively. For decorations, everyone loves floating balloons, but the city council has banned helium. The timing must be spot on, as many families juggle both weekdays and weekends, and traffic to nearby venues can be chaotic. Now, let’s wave our magic wand to boost our future planning capabilities with the efficiency of primitive brain systems. Beep. Brain upgraded successfully. Now, plan the party, 3, 2, 1, done! Everything is perfectly arranged! The venue is chosen, the most economical options are found, food choices are finalised, and decorations are sorted—all in seconds!




Humanity’s unique ability to plan for the future directly led to the birth of civilisation. However, when it comes to finance, our newly developed ability to think ahead has revealed its flaws. Firstly, we tend to overestimate future risks. Secondly, we project our current preferences onto our future selves. Let’s discuss these two points in detail.




Due to evolution, we tend to overestimate future risks. As humans gradually developed the ability to think about the future, we began to weigh immediate pleasures against potential future dangers. This evolutionary trait makes sense because, for most of human history, we lived in an unpredictable world where unexpected risks could occur at any moment. It wasn’t until the last few thousand years, with the advent of technology and knowledge, that humans could reasonably expect to survive the next few days, months, and years. In other words, our brains haven’t evolved enough to instinctively believe we can handle future risks so that everything will be okay. Therefore, when faced with a small immediate reward and a potentially larger future reward, we often choose the immediate reward because we can’t predict what will happen later.














To illustrate this difference between the now and the future, let’s run a mental experiment. Picture two groups of Stone Age tribes with different beliefs: Group A prefers immediate small rewards, while Group B prefers bigger rewards in the future. Both groups find a big apple tree with plenty of tasty apples hanging, just enough to feed everyone. Group A, favouring immediate rewards, chooses to eat all the apples at once, leaving everyone in the group feeling full and lively. Group B, favouring future rewards, eats just enough apples to satisfy everyone’s hunger, planning to come back for the rest over the next few days and avoid starvation for longer.

If there were certainty that the apples wouldn’t be discovered by other groups, that Group B wouldn’t face threats like tigers, deadly diseases, or lethal insects before returning, or that no natural disasters like floods or avalanches would destroy the apple tree, Group B would have a better chance of repopulating than Group A. However, such guarantees were nonexistent in the Stone Age, as any of the above adverse scenarios could occur, and Stone Age people had no means to prevent them (they lacked weapons, antibiotics, and tools to build shelters like we do). Consequently, the survival rate of Group A was better than that of Group B, leading to the widespread dissemination of Group A’s “eat it all right now” mindset through their genes. Technically, we are all descendants of Group A.

Embracing the “enjoy it now” mindset from Group A in modern finance, we often overestimate future risks and favour immediate rewards. The mathematical certainties in finance are too new for our Stone Age brains to fully grasp. Psychologists have been studying this tendency to overestimate future risks for a long time. In 1961, Richard Herrnstein from Harvard University published “Relative and Absolute Strength of Response as a Function of Frequency of Reinforcement,” where he discussed humans’ tendency to discount future rewards. Herrnstein conducted an experiment showing that participants generally preferred a $5 prize over $10 a week later. Another experiment by Kris N. Kirby and Nino N. Marakovic, psychologists from Williams College (USA), involved a 27-item questionnaire asking participants to choose between “$54 today or $55 in 117 days” and “$34 today or $35 in 186 days.” After analysing the questionnaire results, Kirby and Marakovic concluded that, although it varies greatly among individuals, the median one-year perceived risk rate for all participants is 150%. This means a typical rational adult would prefer an immediate $100 over $150 in one year. The study also suggested a close relationship between a high perceived risk rate and a high likelihood of impulsive behaviours, such as smoking, gambling, and poor financial decisions.

So, how can we reduce our mind’s tendency to dismiss future rewards or overestimate future risks? First, we can rely more on concrete calculations rather than feelings when planning our finances. If we save $200 a month from now on, what is the exact amount we can withdraw for retirement? If we cancel Netflix, which we haven’t used in a while, how much will we save over the next six months? If we limit eating out to once a week, saving $100, how much can we save over six months? Additionally, we can force ourselves to think rationally instead of emotionally or instinctively about the risks of pursuing future rewards. What is the likelihood of us living until retirement? (I personally think it’s high since the retirement age is well below average national longevity.) What is the risk of not watching Netflix for six months and actually realising the savings from canceling it? What are the risks, or rather, the potential negative consequences, of not eating out much for six months? Perhaps instead of risks, we can focus on the benefits of not indulging in restaurant food, which is typically high in sodium, sugar, and vegetable oils. We will discuss the benefits of cooking at home in full detail in Chapter 5.




Apart from overestimating future risks, preference projection is another reason why the future feels strange. This term appears in both psychology and finance. In psychology, it describes the process where people imagine themselves in the future, especially when making decisions. In finance, future projection involves predicting outcomes such as revenue, costs, growth, or cash flow. The strangeness of the future comes from our tendency to project too much of our present selves onto it when planning finances. In other words, we underestimate how much our environments and preferences will change when making financial choices about our future financial situation. Put simply, we rely on our current likes and dislikes to estimate our future selves, which are usually quite different.

Let’s examine a concrete example of how future projection can undermine effective financial planning. When purchasing owner-occupied property, studies indicate that apart from price and location, the interior look and feel are among the most important factors influencing buying decisions. People assess the new property heavily based on its potential to accommodate their current hobbies, furniture preferences, and style tastes. However, consider two sets of data: In Australia, people on average move to a new property every nine years, according to Domain (a real estate website)’s Tenure and Profit Report. Regarding people’s hobby “shelf-life,” research involving over 2,000 UK adults showed it is 16 months. This means, on average, an adult would develop a new hobby every 16 months. Combining these two data points, we can infer that an average adult in the western world might change hobbies about 6.75 times during their tenure in the same property.

Considering this 6.75 times factor, let’s think about how often we buy properties for a particular hobby. It’s common to hear remarks like, “I really need a second living area to fit my pool table; I cannot do without it.” “A nice pergola-covered outdoor space is essential since I barbecue three times a week.” Or, “the backyard needs to be big enough so I can build a workshop for my crafting and store all my gardening tools.” Will these billiards, barbecue, and crafting hobbies last for a few years? Possibly. Will they last nine years before moving on to another property? Unlikely. Hence, the investment in a second living room, a large barbecue area, or a dedicated crafting space might be a waste for the majority of the time spent in the property, which is mathematically (1 - 1/6.75) = 85% of the time.

Obviously, the above model is oversimplified. Many people don’t prioritise hobbies when purchasing property. When shifting hobbies, people can repurpose the space so it is not a complete waste (for example, converting a barbecue area to a workshop). The point is, we tend to over-index on our current needs to make financial decisions that will last much longer. We project our current selves onto our future selves, distant strangers, according to temporal structural theory.

How can we effectively plan for the future to improve our future projections? Instead of concentrating on specific details, use your conscious mind to think abstractly when planning your financial future. For example, instead of thinking, “I need to make sure I have a treadmill,” think, “I need to prioritise my fitness.” Rather than considering, “I need to save money for an overseas trip each year for the next 10 years,” think, “I need to ensure I can explore new things with my family, spend quality time together, and temporarily disconnect from work stress.” Focus on strengthening your relationship with your significant other rather than organising a big surprise party and purchasing an expensive anniversary gift. We will cover these topics in Chapter 2, Chapter 5, and Chapter 6, respectively. By thinking more abstractly, we can avoid projecting specific preferences, which change over time. Instead, we project our beliefs, ideologies, and values into the future, which tend to be more stable.