Inequality, platykurtosis and the right tail

In my previous post I dove a bit deeper into the left hand side of our quantitative model of financial wellness. In this post I’d like to focus on the right side - the area highlighted by the red box.

As per the previous posts in this series: The light blue line highlights the linear relationship belief we disproved previously, whilst the dark red light highlights what our model tells us actually happens in reality.

The left hand side of the graph is pretty straightforward to comprehend. It’s where the majority of the consumer finance industry exists. Things like overdrafts, credit cards, loans, savings accounts etc. are all there to service the needs of our natural short volatility position - essentially the inherent structural bet against volatility we all tend to make when dealing with finance stuff.

The right side though is a different beast altogether. It’s harder to conceptualize and largely ignored by the finance industry, but in our opinion is by far the most important side to look at if you really want to make meaningful change in the lives of most people.

Why? Because, the right side is about empowering ourselves with the capability to take full advantage of the positive financial events that will occur in our lives.

Currently, as our model’s concave shape shows, small positive financial events can increase our wellness up to a point, but that impact quickly attenuates to where the effect evaporates as the size of the positive financial event increases.

So although we can gain some initial benefit from small positive changes to our financial situation, larger financial events pass through us with no lasting impact on our overall financial wellness.

The implications of this are profound. One off stimulus checks, or winning the lottery, have a lot less impact on our financial wellness than we think. Yes, we get an immediate boost, but this quickly dissipates. Unhealthy or unsustainable behaviors are not washed away by larger financial events. If anything, these large positive events work against us by papering over our underlying issues only for them to resurface with a vengeance when we least want them to.?

Considering this more broadly, in our increasingly financialized economy, by not being equipped to take advantage of these opportunities our society is literally losing trillions of dollars in wealth creation and advancement. We can increase the opportunities as much as we want, but if more of us aren’t empowered to take advantage of them it will have a negligible impact on our financial wellness.

The parts of the consumer finance?industry that have stumbled across this issue have typically passed it off as a lack of financial literacy. We remain highly skeptical of this conclusion. In all our conversations we’ve had with consumers there’s no shortage of financial literacy knowledge. They all knew what to do. What they struggled with was a belief that they could do it, and the guidance to achieve it.

Why does this occur? More research is required of course, but we’d like to profess the following two hypotheses.

Firstly, a lack of direct experience in our existing social groups - i.e. “people just like me” - who have maximized financial opportunities has a big impact on us believing we’re capable of it. If you grew up amongst family and friends who always fritted away their financial opportunities, why would you believe it could ever be any different? Similarly, if you’re surrounded by people who have protected and grown wealth you’d associate that behavior as the normal reaction to a financial opportunity. There’s our availability heuristic at play again.

Secondly, our primordial limbic system always tells us that having more of something that we want is always better, and so that becomes our goal. We tell ourselves that everything will be better “once I get that raise” or “when I get my tax refund”. But this scavenger mentality acts as blocker to the?next crucial step in thought process: What are we going to do once we get that raise or refund?? Most people who dream of having a million dollars are actually dreaming about how they would spend a million dollars, which for most people would actually be the worst thing they could do with a million dollars.

It’s important to recognize that almost all of us will have significant positive financial events come to us during our lives. The platykurtic distribution of these events mean they occur much more frequently than the availability heuristic leads us to believe. But without the right money belief system & financial mindset we won’t be able to take full advantage of them. Instead the money would slip through our fingers, just like it always has.

This is a blind spot we all have. Some of us are privileged enough to learn this earlier in our lives, and have been able to maximize our opportunities. Others of us never learn this critical lesson, forever chasing more money. This is why financial wellness matters so much. Individually,? we sabotage our future selves. Collectively, millions of people are held back from achieving their full potential. In our view this is not only a gross act of negligence against our future selves, but is holding millions of people back in our society from reaching their full potential. We’re working hard at Stackin’ right now to fix this.