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Fools and their Money Metaphors
Posted By Venkat On March 2, 2009 @ 8:36 pm In Business,Culture,Economics,Thinking | Comments Disabled
This has always puzzled me: why do people with similar backgrounds and intellects vary so widely in their effectiveness in dealing with money? One guy goes to work straight out of college, saves strategically, quits and starts his own SAP consultancy in 5 years, and is worth a few million by age 30. Another gets an MBA, gets sucked into a high-class lifestyle of expensive suits and dinners, and ends up with a BMW and barely $50,000 saved by age 30. And yet another, for reasons obscure even to himself (ahem!) goes off into a PhD program, and emerges, blinking at the harsh sunlight, at age 30, with exactly $0. Last weekend, I finally began to understand. Here is the secret: depending on your direct experience of the money you manage, you think about it with different metaphors. Your metaphors, not your financial or mathematical acumen, determine the outcome of your dealings with money.
Let’s get two misconceptions out of the way. Money as a conceptual or theoretical construct  (academic debates about fiat vs. gold-backed) or as a technical definition  (the M0, M1… stuff) is mostly irrelevant to managing money at any level from big bailouts to a kid with a weekly allowance. So is advanced mathematics (in fact an interest in mathematics makes it harder to be interested in money, because money-math is among the dullest kind). You don’t need more than basic arithmetic and some trivial algebra to “get” money mathematically. Even all the statistics and optimization doesn’t get you to truly interesting math.
What trips us up is money metaphors. I began to realize this when I noticed that I was relating very differently to the completely trivial amounts of money this blog makes, compared to my paycheck. The first clue that put me on the track of this idea was this bit from The Organization Man (I haven’t yet blogged about this part in my ongoing series  about the book):
[Organization men] have little sense of capital. The benevolent economy has insulated them from having to manage large personal sums…
Whyte’s point was that those of us who have gotten our finances onto the ammortization autopilot thanks to paycheck deductions even for big sums like annual income taxes and house purchases, have simply never learned how to think about large quantities of money at a personal level. Thanks to the Nanny State and the Nanny Corporation, our financial horizon is the month, and through autopilot math, 80% of the cash flow that we are aware of in our lives passes by like clockwork: we watch it, but don’t actively manage it. The remaining 20%, we do manage consciously. This gives us the basic financial calibration point:
Middle class people in the US have a high-water mark of around $5000, whatever their actual income levels. This leads to two metaphors we are comfortable with: money as a clock (the limits between which we watch our bank accounts rise and fall predictably, like a pendulum) and money as renewable energy (like a cellphone battery). Here is the mental model of money this leads to, for an average middle class person in the United States (applicable, mutatis mutandis to the rest of the world):
Note that everything we commonly associate with different amounts of money falls into the “renewable fuel” or “clockwork” bucket. Even if we are nominally dealing with much larger sums (say $350,000 as the value of a house), the “high water mark” of $5000 or so limits our imagination. At this level, for instance, we don’t take interest seriously (8% is $400 a year) since it maps to an apparently trivial sort of expense (a couple of nights at a nice hotel).
But if you take somebody operating with an entrepreneurial mindset in the same rough range, that person actively thinks about and works with money very differently. He or she thinks on a scale at which the clockwork and fuel metaphors break down, and other metaphors work better. The “paycheck” person above might be a 100K a year employee. For this person, $1 million is not an obscene amount. If he had the true capitalist mindset, and lived with Protestant Ethic frugality on just $40,000 a year, and invested the rest at 8%, then $1 million is what he’d have built up as start-up capital to strike out on his own in 10 years, age 32 (yeah, yeah, I know, nobody is talking 8% returns at the moment). So why is this path so rare? I’ve met many people with the right level of frugality (mostly immigrants), but they are still stuck in clock/battery metaphors.
For the entrepreneurial mindset, the same money is viewed with metaphors of building material and “time to deadline.” Thinking of money as time to a deadline, or non-renewable fuel (for example, time to build up a certain capital position, or time to burn it down at a particular burn rate) or as building material (“this is what it would take to buy a McDonald’s franchise”), leads to a very different view of the same levels of money:
Since I worked at a startup as the first employee for a year, I’ve had a ring-side seat to this mindset. But even that doesn’t get to the visceral reality of living this metaphor by managing money with this mindset. But curiously, even something as simple as a blog can put your mind in this gear. I feel a child-like sense of emotion and excitement when somebody uses the “buy me a cappuccino” link on posts to send me $3.00, yet I feel no excitement actually buying my daily coffee at Starbucks. The difference comes from earning as a capitalist, but spending as a paycheck-guy.
These are just two different “money mindsets” based on two different sets of metaphors. So what are the others out there, and what happens when you use them in the wrong contexts?
Thirteen Money Metaphors and their Uses and Misuses
There are probably many other metaphors. I haven’t even looked at the entire “leisure” side of metaphors — the mindsets behind yachts, Louis Vuitton purses and the emerald jewelry worn by Angelina Jolie at the Oscars (reportedly worth millions).Many people with excellent metaphors on the management side have awful ones on the leisure side. That’s how you get the tasteless McMansions, crude new-wealth social behaviors and so on.
The metaphors you use determine your money personality, and how much you will be able to do with it. To get to the next level of money, you probably need to think with the metaphors appropriate to that level. Think too far above your league, and you’ll be reduced to daydreaming. Stick to your own level of metaphors, and you’ll never move anywhere. Change your leisure metaphor without changing your management metaphor, and you are in for frustration.
So much for the armchair lecture. When it comes to practicing what I preach, I admit I still haven’t got my mind out of the “paycheck” level of metaphors.
Article printed from ribbonfarm: http://www.ribbonfarm.com
URL to article: http://www.ribbonfarm.com/2009/03/02/fools-and-their-money-metaphors/
URLs in this post:
 theoretical construct: http://en.wikipedia.org/wiki/Money
 technical definition: http://en.wikipedia.org/wiki/Money_supply
 ongoing series: http://www.ribbonfarm.com/2009/02/17/the-training-of-the-organization-man/
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