Error is a term used by psychologists to refer to the tendency
to assess risks by whatever comes first to ones mind.
Last week, we spoke about beating the odds. That doesnt
happen on its ownits the result of a calculated
Regardless of how simple we are, or how sophisticated, every
risk we take or every risk we subject ourselves to, is the
result of a decision. There is a technical term for the
practice of large numbers of people to make decisions while
completely ignoring the uncertaintiesit is called
At other times we simply make educated guesses. This involves
some reading, and some elementary estimates. But true risk
analysis involves the concept of taking calculated risks.
Calculated risk-taking incorporates the use of tests that
try sample data, against certain probabilities and certain
outcomes. It tries to determine how behaviour will influence
result. We all do this, while driving for example, making
estimates of speed and estimates of engine capacity, to
overtake on the roads, to stop at signal lights, etc.
And just as such measurements or judgments become more accurate
with experience, so too will your ability to make calculated
risks in financial planning. Our greatest failing, however,
is the availability error.
The Availability Error trap, forgets that we must know what
assumptions we make. Many people assume they dont
earn a lot of money and, therefore, can never save. They
make this assumption perhaps because they spend all the
money they earn. But there is another way to look at it.
You started working at age 19, and earned $2,500 per month,
for six years. In the seventh year you got a salary increase
to $4,000, and continued working for four years. You then
changed jobs for a higher paying one, and earned $7,500
per month for ten years.
You are not yet 40 years old and your have earned roughly
$1.2 million. If you take away 30 per cent in taxes and
compulsory charges for social security, you have earned
a huge amount of money over 20 years. You still have another
20 years (an assumption) to earn, with an average salary
higher than in the first 20 years. Did you think that money
was never available during those 20 years to allow savings?
Do you think that because of the increases in cost of living,
and your own increase in standard of living, the higher
current salary, still prohibits saving?
The rhetorical question is: why do we need to save? When
you retire at age 60, your salary will stop. You will still
have to live, eat, repair house and car, and now have to
pay large medical bills.
Some weeks ago I asked a young couple if they had ever thought
about the effect of a divorce on their decent financial
position. It would have been near catastrophe. So get out
of the Availability Error mindset, and take steps to reduce
your exposure to risk.