There’s a great story of a young girl who, at 6 years of age would make change, working the cash register at her parents’ store. She did this without any trouble. But at school, when her teacher asked her what 100 minus 25 was, she couldn’t answer… Her math brain was just not wired that way. If her teacher had asked her to make change for a dollar on a 25 cent item, she would have given the correct answer right away: Not 75, but “three quarters”.
Math can be tough. Even if we’re good at it, math can still get confusing, especially if your brain hasn’t seen the problem before, or if it is asked in a way it isn’t ready for. With money issues, this is particularly difficult. That’s why so many people take payday loans, accept terrible terms on their mortgages and buy insurance products that are useless. Our brains are not wired to understand these issues easily.
There is a great article in the New York Times about health insurance, and how difficult it is to make the best decisions in the face of complicated choices.
Here’s the essence: Insurance math is ridiculous! It is complicated, difficult to understand and not based on everyday reality. So people take shortcuts. In insurance, they focus in on the wrong things, like focusing on reducing the deductible, not realizing that increased premiums will wipe out any savings. Or they focus on titles like Gold vs. Silver, or on the top listed plan, which have little to do with whether the plan is the best for them. And people make the mistake of staying in plans as costs rise over time because they believe the logic of their original choice still applies.
In the end, research shows that a huge number of people make poor decision when choosing insurance plans and end up paying too much for plans because the math is foggy.
So what can you do? There are three simple things that can help prevent making bad insurance decisions. In fact, these strategies can be used to help with all sorts of tough financial issues, and they all have to do with using tools to unlock the math.
- Learn: Research shows that if people are taught simple strategies or taught how to properly dissect the problem, they make better decisions.
- Use calculators: When given a tool that helps to crunch numbers or a tool that compares outputs, people make much better decisions.
- Show the answer: if people use a tool that builds an appropriate solution, or are given an appropriate output that can be edited and refined, people are much more likely to make better decisions.
These solutions can be applied to all sorts of financial problems around us. And there are lots of great tools out there that help unlock the tough financial math. You can find terrific mortgage tools, mortgage comparison sites, stock filters, savings tools and rent vs. buy calculators to help you make sound math decisions for life’s bigger financial challenges. They are all excellent tools to help you make better decisions.
At GoldBean, we’re doing exactly that: giving people the tools to make great investment decisions. We have lots of learning content to help you build your own decision-making skills. And in the next month we’ll launch ready-built portfolios that you can edit, which will reflect you and your risk tolerance.
Math is tough, and it can make you feel dumb. But it can be overcome. You can get there too, if you’re given the right tools.
So go out there, use those tools and #GetYourShare.