As the festive season unfolds and Christmas approaches, the allure of excess can be hard to resist. It prompts one to ponder whether our penchant for overindulgence is truly within our control or if there are deeper forces at play….
In his latest publication, 'Scarcity Brain,' Michael Easter delves into the ancient roots of our scarcity mindset and its subtle influence on our subconscious decision-making in the modern world. This piece aims to shed light on the “Scarcity Loop,” its impact on our lives, and the imperative of liberating ourselves from its clutches.
Understanding the Scarcity Loop
Easter defines the scarcity loop as a powerful psychological mechanism that exploits our attraction to opportunities, unpredictable rewards, and quick repeatability. This compulsive cycle extends its reach into various aspects of our lives, whether it is the realm of the festive season or that of financial investments. Grasping the three components of this loop is essential to comprehend its profound effects.
Opportunity: The scarcity loop begins with the allure of seizing a valuable opportunity—a potential enhancement to our lives. In the context of Christmas think ‘Boxing Day Sale.’ For investing, this could manifest as the promise of significant returns on a specific stock or market trend. The pursuit of financial gain can create a sense of urgency, clouding rational judgment and leading to impulsive decision-making.
Unpredictable Rewards: The second element introduces the uncertainty of rewards, reminiscent of a slot machine's unpredictable outcomes. Shoppers are motivated by the potential for a bargain if they act quickly. Investors may find themselves uncertain about when their gains will materialise. This uncertainty often fuels impulsive decision-making as investors chase the thrill of potential windfalls.
Quick Repeatability: The scarcity loop concludes with the ability to repeat the behaviour rapidly. For example, credit cards remove the impediment to spending and therefore make purchasing easily repeatable. For investing, this is exemplified by the swift nature of certain investment strategies, such as active trading or market timing. The immediacy of potential gains becomes a driving force, encouraging individuals to perpetuate the cycle.
Breaking Free from the Scarcity Loop
So, in the realm of investing, the scarcity loop presents a formidable challenge, tempting individuals to pursue quick gains at the expense of their long-term financial well-being. Breaking free from this loop is not only crucial for successful investing but also for maintaining a healthy lifestyle and fostering a resilient approach to wealth creation.
As financial advisors, our role is to help our clients break free from the scarcity mindset by embracing and committing to a robust, evidence-based approach to investment. Here are three key strategies we employ:
Being Goals Focused & Planning Driven: We guide our clients to anchor their investment decisions in clearly defined goals and comprehensive planning. By staying focused on long-term objectives, we mitigate the impact of impulsive actions driven by the scarcity loop.
Taking an Evidence-Based, Long-Term Perspective to Investing: Our approach involves drawing insights from academic research and proven investment principles. By adopting an evidence-based, long-term perspective, we steer our clients away from the allure of short-term speculation, positioning them for sustained financial success.
Instilling Discipline and Patience: Discipline and patience form the bedrock of our client financial plans and portfolio management strategies. This disciplined approach ensures that investment decisions align with long-term goals, minimizing the influence of short-term market fluctuations.
Being aware of the ‘Scarcity Mindset’ might not stop the temptation for one more mince tart or purchase that must have Apple product, but hopefully this knowledge will help you contextualise current global events or the latest investment trend in terms of your long-term plans.
Sam Hunt - "I have a genuine desire to help our clients achieve what is most important to them, by giving them clarity around the important financial decisions they face."