About 10 years ago, I had a lightbulb moment.
I was putting some clothes into the washing machine and wondered how much liquid washing powder I should put in. So I looked at the instructions on the bottle which told me to put in 2 capfuls per load.
I was running on auto-pilot. In those days I was often harassed by looming work deadlines, weekend emails and screaming children. So thinking about washing liquid wasn’t top of my priorities.
I suddenly realised that I was violating one of Warren Buffet’s best pieces of advice:
“Never ask a barber if you need a haircut”
As my lightbulb went on, I saw that I’d been asking Proctor & Gamble for their advice on how much of their washing liquid I should be using.
Now, Proctor & Gamble know a thing or two about washing liquid. We can safely say that they are experts. So I should just follow their advice right?
Wrong, that would be a violation of The Principles of Lifehacking. In particular, Principle #8: Alignment of Interests. It’s not enough that Proctor & Gamble know more than me about washing liquid. If I am going to follow their “advice”, I’d better be sure our interests are aligned and don’t conflict.
The Escape Artist believes in the benefits of free trade and does not mind the nice people at P&G getting rich if, at the same time, they help other people to have clean clothes. Particularly if I’m in the same room as those other people. This has the potential to be a win-win solution.
But first let’s identify the incentives here. Let’s assume for now that the directors of Proctor & Gamble are lovely people whose mission in life is to make clothes cleaner (and that they’re not just focussed on their share options). To fulfil their mission, P&G want to sell as much washing liquid as possible.
Our primary mission on this site is financial independence as a path to happiness. As a secondary objective, I want my clothes to be clean but perfection is not required (see principle #4 of The Principles of Lifehacking).
There is a deal to be done here. I can benefit from P&G’s factories and expertise in making washing liquid in return for a small amount of money which will then be lost to the Freedom Fund and will no longer grow in my compounding machine.
Whilst our interests may partially overlap, they are not aligned. P&G are on the other side of the table from us on the washing liquid issue. They want us to buy more at higher prices, we want the opposite.
You don’t always have to do what you are told. It’s interesting to note the manufacturer’s choice of words on the label: “DIRECTIONS FOR USE”. Not guidance, not suggestions but directions to the horde of zombie consumers. But you are allowed to make your own choice on how much washing liquid to use.
An environmentalist, frugalista and tree hugger like The Escape Artist might suggest that one cap was enough. And a washing liquid manufacturer might say it’s better to err on the safe side and lob in 2 caps.
It’s almost impossible for us humans to separate out our own interests from our opinions of what is right and wrong. A better approach is to admit that we are all somewhat self-interested and to avoid (or declare) any conflicts of interest.
This is why judges don’t preside over trials of family members, teachers don’t mark the exam results of their own students and why juries are made up of independent members of the public.
So The Escape Artist does not take the “advice” or “directions” of Proctor & Gamble on the issue of how much washing liquid to use. Instead, he uses #3 of The Principles of Lifehacking and experiments with a reduced amount to see if it’s still effective. Turns out it works just fine.
So far, so obvious you may say. But every day I see people violating the principle of alignment of interests.
As an example, I can’t listen to commercial radio as there is an advert running for a mattress company where the listener is told that “we advise you to buy a new mattress every 7 years”. Note the use of the word “advise” here. This is like the “advice” not to run away that a wolf might give to a lamb.
The presenter of the advert adopts the “caring & concerned” voice tone that politicians, news presenters and other PR spinners get taught in media training. The listener is invited to suspend disbelief and adopt the comforting yet implausible assumption that the mattress company is on their side.
Sorry for the rant but this advert makes The Escape Artist’s head explode. The Escape Artist is not a communist and does not wish to ban advertising or see all mattress manufacturers nationalised to seize the commanding heights of the economy. But I would like to see the CEO of that mattress company dipped in a sewage tank whilst the Escape Artist “advised” them to keep quiet with the help, should it be required, of an electric cattleprod.
Now, making and selling mattresses is a noble occupation that has value to society. Especially if you have a good product, target people that need mattresses and are honest. But the mattress company can’t give impartial advice on whether someone needs a new mattress.
This passing off of marketing as “advice” is so insidious, so universal and so pervasive that we have become pretty much blind to it.
Most advertising seeks to portray the warm and cuddly human face of corporations. They are trying to persuade us that those companies are our friends. Well guess what…they’re not. The uber smart readers of this blog may not be taken in by advertising. But I’m pretty sure that shit is working on the rest of the population. Companies wouldn’t keep wasting their money on advertising if it didn’t work. Adverts may be funny but they are created by super-smart business people, not by amusing clowns. We must respect our enemy.
Some may not join the dots between an extra cup of washing liquid and stashing enough money to never have to work again…but they are linked by the aggregation of marginal gains. Yes, it takes time but if you can change your operating system so your default setting is frugality + decent earnings + investing wisely, then you will almost certainly get rich.
Life contains a series of decisions that we can make under the influence of advertising and marketing or we can wake up and start to see The Matrix. If every decision you make rejects consumerism and minimises waste, that will add up over the years to many hundreds of thousands of pounds.
Humans are habit machines. So you are either in the habit of wasting money or you are in the habit of keeping and growing your money. In this sense, how you do one small thing is how you do everything.
It turns out that Buffet’s advice to never ask a barber was not actually about haircuts at all. It was about the
sales hype “advice” of fund managers, stockbrokers and financial advisers. Increasing complexity makes it harder for the customer to assess whether the product offers good value for money. This complexity helps justify and draw attention away from the ridiculous expense of the products sold by the financial services industry.
Financial advisers that invisibly deduct % fees may be independent of individual product providers but they can’t be independent of their own interests. They may be lovely people but they’re in business to make money. The result is that you the client gets screwed.
Incentives are not trivial details, they are fundamental to human behaviour. As an example, in the UK we seem to have stumbled on a reasonably cost effective healthcare system. Not perfect, but reasonably cost effective. When the Labour Government created the NHS, they anticipated howls of protest from doctors and decided to silence them by “stuffing their mouths with gold”.
As a result, doctors in the UK are paid pretty well without needing to sell product. So you can usually rely on your doctor being independent. As a result, NHS doctors have no incentive to perform unnecessary or complex procedures to maximise their earnings.
This may help explain why the UK spends about half the amount on health (as a % of GDP) as the USA and yet gets comparable health outcomes.
One of the keys to getting rich is to accept the realities of life and then work with the grain of human nature. When you think about other people’s incentives, their behaviour becomes much easier to understand. This works better than naively ignoring the conflicts of interest that life throws up. So don’t confuse your IFA with your doctor, because their incentives are very, very different.
The alignment of interests is not just about reducing spending. It also applies to increasing your earnings and achieving better investment returns.
For example, reading a handful of books about personal development will repay your investment many times over in higher future earnings. And I know that Stephen Covey, author of The Seven Habits of Highly Effective People, is not trying to get rich selling me shit I don’t need (he’s dead).
I disregard all investing advice where the person giving the advice stands to benefit and I don’t know what they are invested in. But if I see that a great investor owns a stock, I will check it out.
People often ask me about the risks of investing in equities. Having spent years thinking about this, I have come to a couple of conclusions. The first is that price volatility is not the same thing as risk. The second is that equities are not as risky as they first appear because of who your interests are aligned with.
Owning shares is a path to social mobility, to wealth and to freedom. When you are on that path, your interests are aligned with the richest and most powerful people in the world. As an employee, you don’t want to mess with The Man. But when you own equities, The Man works for you.