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When to Make Fast Decisions

In a previous article, we discussed three surprising truths about decision-making:

• Even if you’re smart, you’re irrational and make stupid decisions all the time
• Perfect decisions don’t exist as certainty is an illusion
• Luck and chance play a role in almost every decision.

The second article in this series explored how to become a better decision-maker by knowing when NOT to make a decision that will probably turn out badly.

In this third instalment we will consider when to make fast decisions. Time is a finite resource; once it’s spent, we cannot get it back. Looking ahead, there is also a limited amount. Therefore, one of the best ways to become a better decision-maker is to learn how to identify when spending this precious resource is just not worth it.

You can make fast decisions when:

• The consequence or impact is low
• It’s a repeating scenario
• The decision is reversible
• You’re unsure about your values or preferences
• Two options are impossibly close.

By the way, there is a difference between being impulsive and going fast. Being impulsive involves acting without thinking through the consequences. It’s unstructured and haphazard. Going fast is about following a system but doing it quickly. In business and in life, being nimble and able to adapt to ever-changing conditions quickly creates tremendous advantage.

Reflection questions

1. Review the list of go-fast circumstances. What proportion of your decisions do these situations cover? Does this surprise you?
2. Based on this estimate, are there places in your life where you could become a better decision-maker simply by spending less time deciding than you currently do? Hint: what to wear, what to eat and what to watch on TV can consume a lot of time for little return.

Determining the consequence/impact

A cognitive trap many of us fall into is spending excessive time on the trivial. This phenomenon is so common it has a name: ‘bike-shedding’. Picture a fictitious meeting with three agenda items: a $10 million nuclear power plant, a $350 bike shed and a $21 coffee budget. When it comes to the important topic, the power plant, the experts can’t fully explain what they know, so it’s too complex for most of the attendees to participate in the decision-making process. What does everyone do instead? Discuss the bike shed (Farnam Street, n.d.).

If you find it hard to judge whether a choice is trivial or consequential, apply Suzy Welch’s 10-10-10 Rule (Welch, 2006). This strategy clarifies when an outcome really matters. Make your decision and then imagine how you would feel in 10 minutes, 10 months and 10 years. Repeat the process for any other options you’re considering. If it feels like the choice wouldn’t matter in 10 months or 10 years, then it’s not so consequential. Go fast because the impact is low.

Let’s see how this works in practice. Imagine you’re out for dinner with friends and deliberating between the chicken and the fish. Will it really matter which you opt for 10 months or 10 years from now? Unlikely. Sure, you could pick one and be disappointed in 10 minutes time if the dish isn’t as tasty as you hope. But this possible outcome is not worth sending the waiter away so you can continue agonizing.

Once you’ve done your sorting, that is, eliminated all other menu items besides the chicken and the fish, you’ve completed the decision-making heavy lifting. You’ve eliminated as much uncertainty as is possible in this scenario. Adding a further 15-minute deliberation won’t change this fact or improve the quality of the decision. So, accept that disappointment is possible, make a call, and get back to enjoying your evening.

Reflection questions

1. Identify past situations where you wasted time trying to make decisions you now recognize were trivial. If this feels difficult, blind spot alert! Ask someone who knows you well to help with this task. The point is to figure out if you often agonize over inconsequential decisions.
2. Are you currently facing a major decision? Apply the 10-10-10 rule to see if it really is a major decision. It’s up to you to choose the relevant timeline – perhaps this means it matters in 10 months. Or you might feel more comfortable with 10 years. If you chronically avoid making decisions, it’s okay to err on the side of safety and opt for the 10-month timeframe. Moving from indecision to any decision is to be celebrated, not judged. As you make more and more decisions, your comfort level will likely shift. Start wherever you are now.

Repeating scenario

The beauty of a repeating scenario is that it can lessen the sting of regret. Unhappy with your fish tonight? It’s probably not going to be your last meal out. When making decisions in a repeating scenario, focus on the fact you’ll likely get a do-over, so today’s outcome is less important than it feels.

Reversibility

Another time we struggle with decision-making is when we think making a decision means we’re locked in to the outcome. What we often fail to consider is whether we could back out if the situation turns out differently than our prediction. We have a bias against quitting as our society reveres grit and perseverance. What we aren’t taught is that there are times when changing our minds and quitting the decision is a smart move.

Amazon founder, Jeff Bezos, refers to reversible decisions as ‘two-way door’ decisions:

“Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before.

But most decisions aren’t like that – they are changeable, reversible –- they’re two-way doors. If you’ve made a suboptimal…decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through” (Jeff Bezos in Haden, 2021).

Reflection questions

Turn your attention to a current decision, big or small. Write down some of the options you’re considering.

1. Are any of the options reversible and low consequence? If so, you can decide fast. Are any reversible and high consequence? If so, you can go fast-ish, meaning slower than for the low consequence choices, but faster than you think. You still need to gather information and weigh options, which takes time, but you don’t need to follow a full-blown, slow, methodical process. If you don’t like what happens next, follow Jeff Bezos’ advice and return to your present situation.
2. If the options aren’t reversible, could any be made reversible? For example, if you’re considering buying a house, but unsure because it’s in an unfamiliar neighborhood, you could rent in the area first. If you don’t like the neighborhood, you can back out of the decision by moving when the lease is up: reversible and much lower impact than footing buying and selling costs.
3. If this is a high impact decision and none of the options are reversible (and can’t be modified to make them so), you need to follow a go-slow decision-making process.

You’re unsure about your values or preferences

If you haven’t had the opportunity to make a lot of decisions, you may still be developing your values and preferences. You’ll know this applies to you if the answer to “What if?” questions always feel like a guess. You may also go along with the crowd because you aren’t yet clear what you like. What you need to become a better decision-maker is more data.

Annie Duke, ex-professional poker player and author of two books on decision-making, Thinking in Bets and How To Decide, recommends designing low-risk experiments to “poke at the world”. In other words, trying stuff to figure out your likes and dislikes. The faster you make decisions about what to try, the quicker you will work out your preferences.

The key here is not to mistake a negative outcome for a bad decision. This is a common thinking error called ‘resulting’. Just because it turned out you didn’t enjoy rock climbing after a few hours at the local indoor center doesn’t mean you chose poorly. The experience had value because you discovered something about yourself to inform future decisions.

Two options are impossibly close

This is a common decision predicament. You’ve narrowed things down to two finalists but just can’t make the final decision as the two are impossibly close. There is no obvious way to differentiate between them.

You may be in for a surprise with this next advice. Flip a coin because it doesn’t matter. You can’t know in advance which will turn out better. If the choices are that close, while each possible outcome will be different, they are likely to be equivalent.

We’ve come across this principle before; the hard part of decision-making is in the sorting. Once you’re down to the finalists, you can go fast. This cognitive tool is especially useful for people who have trouble finishing the decision-making process, the overthinkers gripped by analysis paralysis.

Reflection questions

Do you have a good handle on your likes and dislikes when it comes to work? If yes, skip this activity.

1. If not, here are some professional preferences to consider. These are presented as dichotomies, one or the other. There are, of course, jobs that provide opportunities for both. Do you prefer:
   1. Individual work or teamwork?
   2. Detail-oriented or ‘big picture’ tasks?
   3. Client-facing roles or behind-the-scenes duties?
   4. Management responsibilities or not?
   5. Office-based or work-from-home roles?
   6. Big bucks or big satisfaction?
   7. Note down other skill sets relevant to your industry or role, and whether you know your preferences.
2. For any of the items above, if your answer is “I don’t know”, brainstorm low-risk experiments to help you “poke at the world”. These will generally be low impact and reversible decisions. Let’s say you gravitate to roles that have no team interactions because your only experiences of group work at school or college were negative. You are actually missing data about how it feels to be part of a high functioning team. Are there any such teams at your workplace? Could you ask to join one of their projects for a trial period?

Key takeaways

• Not all decisions need to be made using a slow, methodical process.
• Decisions can be made quickly when the impact is low, the scenario repeats itself, the decision is reversible, you’re unsure about your preferences or two options are very similar.
• The 10-10-10 rule can be used to judge the impact of a choice.
• Repeating scenarios offer the opportunity for decision do-overs.
• Most decisions are changeable if the outcome is different than expected. It’s okay to quit a decision.
• If you’re unsure of your preferences, one of the goals of decision-making is simply to gather more data.
• As counterintuitive as it seems, the quality of decision-making should not be judged purely on the outcome. We don’t have total control over what might happen.
• When two options seem indistinguishable, they are, so flip a coin.

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Competencies of Emotional Intelligence

In a previous article, we explained that success in life depends on both IQ and EQ. Therefore, in the workplace, emotional intelligence (EQ or EI) matters for both leaders and employees. It’s now time to delve more deeply into what emotional intelligence actually is.

Definitions

Emotional intelligence was first described in the psychology literature by Salovey and Mayer (1990). However, psychologist Daniel Goleman is generally credited with introducing EI to the public via his book “Emotional Intelligence: Why it can matter more than IQ” (Goleman, 1995).

You may be surprised to discover that there is no universally agreed upon definition of emotional intelligence, and no consensus about the competencies that comprise it. However, this is typical of psychology research where it’s common practice for academics to propose a variety of definitions and models.

Let’s begin by considering some of these definitions. Emotional intelligence has variously been described as:

• “the ability to monitor one’s own and others’ feelings and emotions, to discriminate among them, and to use this information to guide one’s thinking and action” (Salovey & Mayer, 1990)
• “a person’s ability to manage his feelings so that those feelings are expressed appropriately and effectively” (Goleman, 1995)
• “an array of noncognitive capabilities, competencies, and skills that influence one’s ability to succeed in coping with environmental demands and pressures” (Bar-On, 1997), and
• “emotional intelligence is not the opposite of intelligence, it is not the triumph of heart over head – it is the unique intersection of both” (Caruso in Freedman, 2017).

Models

Currently, three academic models which conceptualize emotional intelligence differently dominate the EQ landscape. These models have been developed by:

• Peter Salovey and Jack Mayer, and further refined in collaboration with David Caruso
• Reuven Bar-On, and
• Daniel Goleman.

Salovey and Mayer (1990) argue that emotional intelligence is a form of innate intelligence related to cognitive (thinking or mental) ability. They view EI as a set of abilities involved in reasoning about emotions and using emotions to enhance reasoning. Their model is thus referred to as an ability model.

By contrast, Goleman (1995, 1998) and Bar-On (1997, 2006) regard EI as a set of skills that depend on both ability and personality traits. These models are referred to in the scientific literature as mixed models.

This article focuses on the evolution of the framework developed by Daniel Goleman. In his 1998 book “Working with emotional intelligence,” Goleman proposed a model of EI that included five components (Figure 1).

Figure 1. The five components of emotional intelligence (Goleman, 1998).

Over time he refined his model to four domains (Goleman & Boyatzis, 2017):

• Self-awareness: knowledge of self
• Self-management: actions towards self
• Social awareness: knowledge of others
• Relationship management: actions towards others

Competencies

In the current version of Goleman’s model, twelve competencies are nested under these four domains (Figure 2). These building blocks of emotional intelligence are the “learned and learnable capabilities that allow outstanding performance at work or as a leader” (Goleman & Boyatzis, 2017).

Figure 2. Emotional intelligence domains and competencies (Goleman & Boyatzis, 2017).

Emotional self-awareness is the first competency of emotional intelligence. Self-awareness is the capacity to understand how our feelings affect us, other people and our job performance. A sign of self-awareness is the ability to speak openly and accurately (Goleman, Davidson, et al., 2017b; Harvard Business Review et al., 2018).

Emotional self-control is the ability to maintain effectiveness by keeping impulses and disruptive emotions such as anxiety, fear and anger in check under stressful or even hostile conditions (Goleman, Boyatzis, Davidson, Druskat, et al., 2017b). Emotional self-control is not about suppressing emotions but about understanding their function as a natural guidance system (Harvard Business Review, 2017).

Adaptability refers to being able to adjust when situations change or are uncertain and being able to juggle multiple competing priorities (Goleman, Davidson, et al., 2017a; Harvard Business Review, 2017).

Achievement orientation means striving to meet or exceed a standard of excellence and seeking ways to do things better (Goleman, Boyatzis, Davidson, & Druskat, 2017a).

Positive outlook relates to seeing the positive in people, situations and events and persisting toward goals in the face of setbacks and obstacles (Goleman, Boyatzis, Davidson, & Druskat, 2017b).

Empathy underpins social awareness and relationship management. Empathy is the ability to feel other people’s feelings, understand their perspective, and sense what they need (Goleman, Boyatzis, Davidson, Druskat, et al., 2017a; Harvard Business Review, 2017).

Organizational awareness is the ability to read a group’s emotional currents and power relationships, and identify influencers, networks, and the dynamics that matter in decision making (Goleman, Boyatzis, Druskat, Nevarez, et al., 2017).

Influence is the capacity to have a positive impact on others and to gain support and buy-in from key people (Goleman, Boyatzis, Senge, et al., 2017).

The Coach and Mentor competency refers to the ability to foster long-term learning or development of others by understanding their goals and providing constructive feedback and support (Goleman, Boyatzis, Kohlrieser, et al., 2017).

Conflict management represents the ability to help others through emotional or tense situations, tactfully bring disagreements into the open, acknowledge and understand differing perspectives, find common ground, and reach resolutions that everyone can endorse (Goleman, Boyatzis, Gallo, et al., 2017).

Teamwork is the ability to work with others toward a shared goal. Teamwork involves contributing to the capability of the team and sharing responsibility and rewards. Individuals with high teamwork competence create positive relationships and an atmosphere of respect and cooperation (Goleman, Boyatzis, Druskat, Lippincott, et al., 2017).

The Inspirational Leadership competency represents the ability to give others a sense of purpose beyond their day-to-day tasks. Inspirational leaders inspire and motivate their people towards a shared mission, guide them to get the job done and bring out their best qualities along the way. They are agents of positive change who take risks and sometimes defy conventional norms (Goleman, Boyatzis, McKee, et al., 2017).

In the next article, we will consider how emotional intelligence is measured.

Key takeaways

• Emotional intelligence is necessary for outstanding performance at work, whether you are a leader or employee.
• At a macro level, being emotionally intelligent means being self- and socially aware and having the ability to manage yourself and relationships with others.
• At a micro level, psychologist Daniel Goleman proposes that emotional intelligence is comprised of twelve competencies. These are emotional self-awareness, emotional self-control, adaptability, achievement orientation, positive outlook, empathy, organizational awareness, influence, coach and mentor, conflict management, teamwork and inspirational leadership.
• Emotional intelligence competencies can be learned.

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How Job Design Affects Mental Health

In a previous article in our psychological health and safety series, we discussed how Australian work health and safety (WHS) Regulations have recently been amended to focus on psychosocial hazards and risks. These changes have made it clear that workplace mental health is a legal responsibility of employers. (To revise psychological health and safety concepts, including the definitions of psychosocial hazards and risks, refer to this article.)

If your organization has begun to identify psychosocial hazards, or conduct psychosocial risk assessments, it may now be clear that many such hazards and risks are the result of how jobs have been designed. Indeed, Regulation 55A of the amended model WHS Regulations states this explicitly:

Model WHS Regulation

55A Meaning of psychosocial hazard

A psychosocial hazard is a hazard that:

(a)  arises from, or relates to:

          (i)   the design or management of work; or

          (ii)  a work environment; or

          (iii) plant at a workplace; or

          (iv) workplace interactions or behaviors; and

(b) may cause psychological harm (whether or not it may also cause physical harm).

In this article, we will explore a brief history of work design and outline the characteristics of jobs most associated with psychosocial hazards and risks.

A brief history of work design

“In the past the man has been first; in the future the system must be first” – Frederick Winslow Taylor (Vinoski, 2018).

The world of work changed forever during the Industrial Revolution when factory-based machine-operating jobs replaced craft-based cottage industries (Parker et al., 2017). Adam Smith (1776) famously formulated the concept of division of labor – breaking down a complex work process into a series of simplified tasks, each performed by a different person or group of people who specialized in this narrow task.

There were two rationales for this approach: (1) the same number of workers could produce far more output due to limiting unnecessary movements and handling of different tools and parts, and (2) lower-paid, unskilled workers could replace skilled craftsmen. Both of these ultimately resulted in cheaper mass production.

Fast forward to the late 19^th century. While working at Bethlehem Steel, engineer Frederick Winslow Taylor noted that managers knew very little about how specific jobs were performed (Masterclass, 2021). Taylor set about changing this by conducting workplace experiments. He broke jobs down into smaller components, timed each task, and evaluated the impact of resequencing the steps. These careful analyses allowed him to optimize production systems and thus improve efficiency and productivity.

Taylor argued that “management must takeover and perform much of the work which is now left to the men,” by which he meant that managers should analyze tasks, break them down into simplified elements, train employees to carry out these elements, and then closely monitor workers to enforce compliance with instructions (Parker, 2015).

The outcomes of Taylor’s studies were not only the simplified and specialized work referred to in the Industrial Revolution section, but standardized work and tools. In other words, each worker was required to do a particular job the same way. This standardization meant that workers had little personal discretion over how they completed their tasks and there was minimal to no opportunity for them to be involved in designing their roles. Management designed jobs and imposed those designs on employees in a top-down fashion (Oldham & Fried, 2016).

Characteristics of simplified, specialized and standardized jobs

• Lack task variety which makes them repetitive.
• Give workers little to no autonomy.
• The monotonous nature of the work makes it inherently uninteresting and unmotivating to many employees. As a result, such workplaces tend to have many layers of management and controlling supervisors who spend most of their time micromanaging employees.

Taylor’s work was pioneering in that he applied scientific methods (time studies) to management. In 1911, Taylor published The Principles of Scientific Management (Taylor, 1911). Time and motion studies (Gilbreth, 1911) complemented these job simplification principles. Ford added moving assembly lines in 1913 which revolutionized the automobile industry (Eschner, 2016).

In the decades that followed, scientific management (also known as Taylorism or a mechanistic approach to job design) had a profound impact on businesses beyond Bethlehem Steel. Simplified, narrow, and low autonomy jobs largely became the work design of choice, particularly in manufacturing industries. For example, in a study of manufacturing firms in the 1950s, researchers reported that most jobs were designed according to scientific management principles (Davis et al., 1955).

More downside than upside

However, around this same period, research began to show that workers were often unmotivated by and deeply dissatisfied with their simplified jobs, and that their mental health was adversely affected. Unsurprisingly, turnover, strikes and absenteeism increased (Fraser, 1947). Productivity also declined as workers actively engaged in behaviors that negated the efficiencies their roles were designed to generate. These behaviors included intentionally reducing output and being late (Walker & Guest, 1952).

In the long run, the cost advantages of Taylorist workplaces, derived from increased efficiency and productivity, can be swallowed up through reduced output of disengaged workers and salaries for middle managers. Competitive advantage may also ultimately disappear as such environments stifle innovation. Standardization is a significant barrier to creative thinking.

Have we learned our lesson?

Despite their well-established and problematic impact on employee mental health, simplified work designs still exist today. Roles where work is machine- or computer-based, or tightly managed, are examples. Modern improvement methodologies such as Lean and Six Sigma are also based on Taylorist principles (Vinoski, 2018).

One organization that has received substantial negative press about their production methods is Foxconn, the Chinese company Apple uses to manufacture the iPhone. The point of the quote below is not to demonize this particular company but to demonstrate the sometimes devastating effect of poor work design on mental health (Parker et al., 2017):

“In 2010…assembly-line workers began killing themselves. Worker after worker threw themselves off the towering dorm buildings, sometimes in broad daylight, in tragic displays of desperation – and in protest at the work conditions inside. There were 18 reported suicide attempts that year alone and 14 confirmed deaths. Twenty more workers were talked down by Foxconn officials” (Merchant, 2017).

A cause and solution

One of the world-leading researchers in the field of work design is Professor Sharon Parker, head of the Centre for Transformative Work Design based at Curtin University in Western Australia. Her research has uncovered a key reason poor work designs seem to persist:

“We’ve been doing some research looking at how do people design jobs, what we call “naive job designers”, which is basically just managers and everyday people. How do they design jobs if given a chance? And our research basically shows that people design very bad jobs. People slip into designing Taylorist sort of jobs with very little variety, very little autonomy. So, if you just leave it to people to intuitively design work it’s not necessarily going to deal with some of the hazards that might occur” – Professor Sharon Parker (2015)

The solution is that HR, WHS and line managers who have responsibility for designing jobs need training. In particular, they need to be able to identify psychosocial hazards and control the risks from these hazards through work design (and redesign in the case of existing jobs). All three groups need to make the case for this training to senior leaders. Remember: poor work design is now against the law.

Key takeaways

• Poorly designed work harms employees’ mental health by exposing them to psychosocial hazards and risks.
• Poor work designs have their origin in manufacturing jobs designed during the Industrial Revolution and a theory of management from a century ago called Scientific Management, or Taylorism.
• Jobs that are simplified, narrow (specialized) and standardized lack task variety and give workers minimal autonomy.
• Taylorist principles still dominate much contemporary work design despite research showing such jobs are bad for workers and bad for business outcomes.
• HR officers, WHS professionals and line managers need training in work design to create (and redesign existing) jobs to prevent harm in line with WHS regulatory requirements.

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Designing ‘Good Work’

Recent changes to WHS Regulations around the country have shone a spotlight on employers’ legal obligations to prevent harm to workers’ mental health. In the last article in our psychological health and safety series, we discussed how poorly designed jobs expose workers to psychosocial hazards and risks. We traced the historical development of ‘Taylorist’ jobs, those with low task variety and low autonomy, and reviewed research demonstrating the negative impact of these work designs on employees and the businesses they work for.

Few topics in industrial/organizational (I/O) psychology have attracted as much attention as job design, work design and work redesign (Oldham & Fried, 2016). There are currently more than 17,000 academic papers on these topics (Parker et al., 2017). In this article we will explore this research to answer the following questions:

• What is ‘good work’?
• How is good work designed?

We will also offer a simple visual tool.

What is ‘Good work’?

Safe Work Australia defines ‘good work’ as:

• healthy and safe work where the hazards and risks are eliminated or minimized so far as is reasonably practicable, and
• work that optimizes human performance, job satisfaction and productivity (Safe Work Australia, 2015).

This definition captures two main aims of good work, to: (1) prevent harm to health and (2) optimize performance. Let’s dive a little deeper into each of these now.

The new WHS Regulations focus on psychological (mental) health. The mechanism of harm is job strain, also known as occupational or work-related stress (Figure 1). In other words, substantial research demonstrates that psychosocial hazards can lead to psychological and/or physical harm by creating a stress response (van der Molen et al., 2020; World Health Organization, 2022). Therefore, from a psychosocial point of view, good work is work that is not too stressful.

Figure 1. How psychosocial hazards can lead to psychological and/or physical harm (Workplace Health and Safety Queensland, 2022).

Worker performance has also been a focus of work design research. One antecedent, or prerequisite, that researchers have consistently shown plays a role is motivation (Hackman & Oldham, 1976; Herzberg, 1964; Humphrey et al., 2007). Thus, to design good work, that is, work that prevents harm to health and optimizes performance, it needs to be:

• motivating, and
• not too stressful.

Work that is motivating and not too stressful has obvious benefits for employees. But it’s important to understand there are also substantial advantages for employers. Motivated and less stressed-out workers are more satisfied, take less time off, are easier to retain, and are more productive (Parker, 2015; Safe Work Australia, 2015; Workplace Health and Safety Queensland, 2021).

Designing good work

One of the ways that academics make sense of the vast number of work design studies is to develop models or frameworks based on this evidence. The Job Demands-Resources (JD-R) theory of burnout is a particularly helpful guide when it comes to understanding how to design good work (Bakker & Demerouti, 2014; Bakker & Demerouti, 2017; Bakker et al., 2005; Demerouti et al., 2001).

Burnout is characterized by both a loss of health (often described as exhaustion) and reduced professional efficacy (poor performance) (Maslach & Jackson, 1981; Maslach & Leiter, 2016). According to the JD-R theory of burnout, job performance depends on the balance between worker exhaustion (a measure of health or job strain) and engagement (motivation). These, in turn, depend on the balance between job demands and job resources (Figure 2). Over time, if job demands remain high and there are few job resources to buffer these, burnout will be the result.

Job demands are aspects of work that cause job strain (stress). Examples include a high workload, difficult-to-meet deadlines, and emotional demands. You’ll recognize these examples from past articles as psychosocial hazards.

By contrast, job resources stimulate motivation (also called engagement) and include feedback, reward and recognition, job control, job security and supervisor support. You may also recognize the opposite of these job resources, e.g., low job control or inadequate recognition, as psychosocial hazards. Importantly, job resources can buffer (lessen the impact of) job demands.

A simple work design tool

Figure 2 serves as a simple visual prompt to guide work design. The goal is to reduce job demands and increase job resources. Figure 2 can also be interpreted to mean that job demands decrease workers’ mental health (by increasing job strain or stress) whereas job resources increase mental health (by increasing motivation).

Figure 2. JD-R model of burnout.

In an upcoming article, we will cover the more practical aspects of work design using a model developed by leading Australian scholar, Professor Sharon Parker. This model will explain how to increase job resources and ensure tolerable job demands.

Key takeaways

• Good work prevents harm to mental health and optimizes employee performance.
• Good work is good for workers and organizations.
• From a psychosocial perspective, good work is work that is motivating and not too stressful.
• Good work can be designed by increasing job resources and ensuring tolerable job demands.
• The JD-R model of burnout is a useful framework to guide decisions around work design.

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How is Your Financial Wellbeing?

There are many definitions of financial wellbeing and financial wellness. The one we use at Well Excel was developed by the Consumer Financial Protection Bureau by listening to consumers (CFPB, 2015b). The CFPB defines financial wellbeing as comprising four elements: having financial security and freedom of choice, now and in the future (Figure 1). The CFPB views financial wellbeing as “a continuum – ranging from severe financial stress to being highly satisfied with one’s financial situation” (CFPB, 2015a). They conclude that with learning, effort, opportunity and support, we can move along the continuum to greater financial wellbeing.

Figure 1. The four elements of financial wellbeing according to the Consumer Financial Protection Bureau (reproduced from CFPB, 2015b).

Financial wellbeing is not objective

If you don’t have a high income, there is good news: you don’t have to be wealthy to achieve financial wellbeing. The CFPB’s research team describe financial wellbeing as a “highly personal state, not fully described by objective financial measures” (CFPB, 2015b). In other words, some people have a high level of financial wellbeing even though they are far from affluent. Equally, there are well-off people with low levels of financial wellbeing. If it’s not all about how much you earn, what does contribute to financial wellbeing?

Professor Elaine Kempson and her team from The University of Bristol developed a model that describes the factors that influence financial wellbeing (Figure 2) (Kempson et al., 2017). This model is useful as it is makes clear that some factors are more within our control (financial knowledge and experience; attitudes, motivations and biases; and financially capable behavior), while others are less so (social and economic environment). This can help alleviate the feeling some of us experience when financially stressed that it’s all our fault. Some of us live in countries with limited government safety nets, where there are economic downturns, where healthcare is prohibitively expensive and where unemployment is high. We need to acknowledge that these influences are tremendously unfair or unlucky, but ultimately out of our control.

Figure 2. Kempson et. al’s Financial Wellbeing Conceptual Model (reproduced from ANZ Banking Group Ltd, 2018)

Financial wellbeing is not about income but financial behaviors

Kempson’s model has been used in research by a major Australian bank to measure people’s financial wellbeing using a scoring system, and to estimate the contributions of each factor to people’s overall score. The results are presented in Figure 3. This data supports the CFPB’s finding that objective household income plays much less of a role in overall financial wellbeing than we might imagine – a tiny 7% in this particular study.

Figure 3. Contribution of each factor to financial wellbeing (reproduced from ANZ Banking Group Ltd, 2018).

The most significant factor is financial behavior, accounting for 45% (almost half) of the overall financial wellbeing score. What might come as a surprise is that although money issues can seem incredibly complex, only two specific behaviors are especially important: (1) taking active steps to save money and (2) not borrowing for everyday expenses (i.e., using credit or loans). This is great news as our behavior is something that, with the right tools and strategies in place, we can change.

Practical Tool: Measuring financial wellbeing to know where to begin

Measuring financial wellbeing using a scoring system is powerful as it allows for advice and decision-making to be customized to our specific circumstances. For example, if we score low in financial wellbeing, this means we have day-to-day money issues like covering basic expenses and debt. Our financial plan should begin with the goals of managing debt and spending. If our score is a bit higher, or we’ve improved our situation since starting on the financial wellbeing journey, our financial plan can focus on future goals such as saving for an emergency fund. If our score is higher still, or we’ve moved through the stage of building an emergency fund, our plan should shift to even longer-term goals such as saving and investing for retirement.

1. Complete the ANZ Financial Wellbeing Calculator here.
2. Make a note of your score. Remember to be compassionate with yourself whatever the score. For benchmarking purposes, the average financial wellbeing score for adult Australians is 59/100 (ANZ Banking Group Ltd, 2018).
   1. If you scored more than 80/100, you are in the “No worries” group. You have behaviors that contribute positively to financial wellbeing, high levels of confidence managing money, and substantial amounts of savings, investments and superannuation (retirement funds).
   2. If you scored 51 – 80/100, you are in the “Doing OK” group. You’re in the middle of the range and part of the largest group (in Australia). You can meet your current commitments and have savings for the future. You are less likely than those in the “Getting by” group to have debt and tend to have income that is relatively stable.
   3. If you scored 31 – 50/100, you are in the “Getting by” group. Your financial behaviors, confidence in your money management skills and belief in your ability to control your financial future are below average. If you rely on wages, your income may vary each month. You may have had time off work in the last 2 years due to illness or unemployment.
   4. If you scored 30 or below, you are in the “Struggling” group. You are likely to have no savings. You find it a constant struggle to pay for regular expenses such as food and to meet bill and credit payments. You have low confidence in your money management skills, and limited belief in your ability to control your financial situation. People in this group scored the lowest of all groups in the two key financial behaviors of active saving and avoiding borrowing for everyday expenses.
3. What is the next step recommended for you? Read the guidance that is tailored for your situation.

Key Takeaways

• Financial wellbeing is having financial security and freedom of choice, now and in the future.
• The biggest influence on financial wellbeing is NOT income but financial behaviors.
• The two most impactful behaviors for creating financial wellbeing are active saving and not borrowing for everyday expenses.
• It is possible to move along the continuum from financial stress to financial wellbeing through learning, effort, opportunity and support.
• Financial advice should be tailored to your specific circumstances. A financial wellbeing score can inform decisions about where to focus your efforts.

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Fixed and Growth Mindsets: What Are Yours?

“It’s not always people who start out the smartest who end up the smartest” – Carol Dweck

The concept of a growth mindset – and its opposite, a fixed mindset – was pioneered by research psychologist Carol Dweck, now based at Stanford University. Mindsets have received significant scientific and mainstream media attention in recent years. But what exactly are mindsets and what does the science reveal about them?

Before we explain what mindsets are, let’s go back to the beginning of Carol Dweck’s journey. The mindset story begins with failure. Or more accurately, attitudes about failure. Over 30 years ago, Carol Dweck and her colleagues noticed that some students were derailed by tiny setbacks whereas others bounced back from failure. After studying thousands of children and young adults in school and college settings, Dr. Dweck coined the terms “fixed mindset” and “growth mindset” to describe the beliefs we have about intelligence and learning (Mindset Works, 2017a).

What are growth and fixed mindsets?

Let’s now consider the most basic question. What is a mindset? As Dweck and her colleague David Yeager explain, mindsets are “implicit theories about the malleability of human characteristics” (Yeager & Dweck, 2012, p. 302). In other words, mindsets refer to whether people believe that a quality or characteristic is changeable.

Growth mindsets are incremental theories: beliefs that things can change gradually over time i.e., incrementally. By contrast, fixed mindsets are entity theories: beliefs that qualities are unchangeable. When we have fixed mindsets, we believe that our characteristics are “fixed, nonmalleable trait-like entities” (Dweck et al., 1995, p. 267).

What does the “implicit” part of “implicit theories” mean? Yeager and Dweck (2012) describe mindsets as implicit to convey they are ideas we hold that are rarely made explicit. They are beliefs we have that we don’t often think about, describe or explain. This means they may be hidden to us.

What does the “theory” of “implicit theories” mean? Yeager and Dweck (2012) explain that “like a scientific theory, they [mindsets] create a framework for making predictions and judging the meaning of events in one’s world” (p. 303). Mindsets are thus “lenses” through which we experience our world; they impact our interpretations and therefore our responses.

To illustrate the difference between growth and fixed mindsets, let’s consider the area in which they are most often discussed, intelligence. Someone with a fixed mindset believes that our intellectual ability is permanent. Someone with a growth mindset believes that we can increase our intelligence incrementally through effort and learning. It is important to recognize that believing intelligence is malleable does not imply that everyone has the same potential or will learn with equal ease. Rather, it means that any individual can develop their intellectual ability further.

Why do mindsets matter? In her book Mindset: Changing the way you think to fulfill your potential, Dweck summarizes the conclusions from decades of research.

People with growth mindsets:

• embrace challenges
• persist in the face of setbacks
• put in more effort
• change strategies in response to failure and criticism, and
• take opportunities to learn from others (Dweck, 2017).

All of this leads to the main benefit of a growth mindset: better outcomes, that is, higher levels of achievement.

By contrast, people with fixed mindsets:

• try to avoid challenging situations
• give up when confronted with obstacles and failure
• put in less effort
• do not respond effectively to criticism, and
• do not seek out opportunities to learn from those around them.

As a result, even though they may achieve early success because of their natural abilities, they may have lower achievement over time. This is the sentiment expressed in the quote that opened this post.

Figure 1 summarizes the key differences between the two mindsets in relation to challenges, obstacles, effort, criticism, success of others, outcomes and worldview.

Figure 1: The two mindsets (graphic by Nigel Holmes – Mindset Works, 2017b).

While much of the mindset literature focuses on intelligence, Dweck believes that we have mindsets relating to a range of characteristics including personality, character, social skills, creativity, physical abilities, willpower, and motivation. She also thinks a person’s mindset regarding one quality may differ from their mindset about another. For example, “it is possible for a student to believe that intelligence can be changed but that personality cannot, or vice versa” (Yeager & Dweck, 2012, p. 304). Therefore, it’s more accurate to say that we hold mindsets, plural, rather than a mindset, singular. It is also possible, Dweck asserts, that someone can generally hold a growth mindset about a particular quality, but that certain experiences will trigger a switch to a fixed mindset (Dweck, 2017).

How do fixed and growth mindsets show up in your personal and professional life?

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The Upside of Conflict in the Workplace

When you hear the word conflict, what thoughts spring to mind? If you’re like most people, your answer is likely to be negative. Because we perceive conflict to be a bad thing, many of us fear or avoid it, or think something is terribly wrong when it appears. In this article we will dispel three common myths about conflict and offer two practical tools to turn conflict into an ally.

Myth #1: Conflict is avoidable

“Peace is not the absence of conflict, but the ability to cope with it” – Dorothy Thomas

This myth stems from the belief that there are groups of people for whom conflict doesn’t exist. It sounds plausible because we all know people who seem to have harmonious relationships with colleagues, their boss and employees. However, if we dig a litter deeper, for conflict not to exist would require that these people agree on everything, all the time. It now becomes clear that this isn’t possible. Conflict is inevitable; we can’t avoid it, no matter how hard we try.

Amy Gallo, author of the Harvard Business Review Guide to Dealing with Conflict, explains we are so uncomfortable with disagreement that we seek out people who see the world the same way (Gallo, 2019). This creates the illusion that conflict is avoidable.

Tool #1: Normalize conflict

The way to address this myth is to normalize conflict (Davey, 2019). Many of us stay silent because we believe disagreeing is mean or unkind (Gallo, 2019). Normalizing conflict provides permission to speak up at work. How exactly can you do this? Gallo uses the mantra “Sometimes people are going to disagree with me. And that’s okay.”

Myth #2: Conflict means the relationship/team is not meant to be

Relationship experts, management consultants, mediators and conflict researchers all agree that conflict is a normal part of any healthy relationship (Brett & Goldberg, 2017; Davey, 2019; Shonk, 2021; The Gottman Institute, n.d.). “Happily ever after,” whether in personal or professional relationships, only exists in fairytales. Conflict signals there is work to be done, not that the relationship is doomed.

It also turns out that we attribute the cause of many conflicts to simply not getting along, labelling the conflict a ‘relationship issue’. However, Gallo (2017) says we need to get better at identifying the source. She categorizes conflicts into four types:

1. Relationship/personal: Gallo says, despite what we think, most work-related conflicts begin with one of the other three conflict types. Of course, if the conflict is not dealt with constructively, it can evolve into a relationship conflict. We can determine if things have turned personal if there is disrespect;
2. Task: disagreement over the objective e.g., improving customer service vs increasing revenue. Gallo refers to this as the ‘what’ of the conflict;
3. Process: agreement regarding the goal, but disagreement about how to achieve it. This is the ‘how’ of the conflict;
4. Status: disagreement over who has the power or authority to make the decision. This is the ‘who’ of the conflict. Gallo has found that status conflicts are more common in cross-functional teams.

Tool #2: Get clear about the source of the conflict

Don’t assume that your conflict is personal. Physician and relationship researcher Anthony Suchman recommends looking out for thoughts such as “If you like my idea, you like me”, and “If you don’t like my idea, you don’t like me” (Friedman, 2016).

Determine whether the issue is really a task, process or status conflict by trying to identify your counterpart’s objective, opinion on the best process and belief about who’s in charge. Then get clear about your own objective and perspectives on process and status. Comparing you and your partner’s ideas will highlight any sources of disagreement.

Myth #3: Conflict is bad

There is no question that when conflict is mismanaged it can cause tremendous harm to individuals, teams and organizations. This is referred to as destructive conflict and is what most of us think conflict is.

We all learn ‘how to do conflict’. If your ideas about conflict stem from painful childhood memories or previous unhealthy relationships, you may expect all disagreements to end badly (Segal et al., 2020). If your early life experiences included feeling powerless, you may find conflict traumatizing and benefit from professional support.

The good news is that conflict doesn’t have to be destructive; it can also be constructive or productive (Ashkenas & Bodell, 2013; Burkus, 2013). It all boils down to how it’s handled. We can unlearn our ideas about conflict and change how we respond.

There have been many documented benefits of constructive conflict in the workplace including:

• better work outcomes (creative friction leads to innovation)
• opportunities to learn and grow
• improved relationships (resolving conflict together builds trust and closeness)
• higher job satisfaction, and
• a more inclusive work environment (Gallo, 2018).

In a follow-up article, we will dive into ways to handle conflict constructively.

Key takeaways

• Conflict is a normal part of healthy relationships because people don’t always agree.
• We often incorrectly assume conflict at work is personal when it may be task-, process- or status-related.
• Constructive conflict in the workplace is beneficial.
• Rather than attempting to eliminate conflict, we should focus on learning ways to transform destructive conflict in to constructive conflict.

Related articles:

• The Science of Teams and Effective Collaboration
• Four Myths About Collaboration and Teamwork
• How Leaders Help Their Teams Build Trust

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A New Take on Decision-making

 “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent” – Charlie Munger (quoted in Lowe, 2003)

In a previous article we unpacked three surprising truths about decision-making. The first was that substantial psychological research shows that even if you’re smart, you’re irrational and make dumb decisions all the time (Duke, 2018, 2020; Kahneman, 2011). The reason? Cognitive biases.

Knowing when NOT to make a decision

Accepting that we all make stupid decisions at times, the next obvious question becomes, “How can we make smart decisions more often?”. One counterintuitive way to answer this is to apply an inversion technique and ask, “How can we make dumb decisions?”, and then avoid doing those things.

Adam Robinson, chess master and hedge fund advisor, has identified seven factors that lead to what he calls “stupid decisions”:

1. being outside our normal environment or changing routines
2. being in a group
3. being in the presence of an expert or being an expert ourselves
4. simultaneously doing any task that requires intense focus
5. information overload
6. physical or emotional stress, or fatigue, and
7. rushing or a sense of urgency (Farnam Street, n.d.).

This list yields seven strategies for improving the quality of our decision-making by identifying when not to make a decision because it will invariably be bad.  Robinson says that any one of these factors can lead to stupid decisions, but when combined the impact is additive.

Consider being stuck in traffic on the way to an important meeting. How many factors are at play? Now imagine the vehicle is a hire car and you’re driving in an unfamiliar city. Let’s up the ante further; you’ve just stepped off a long-haul flight and that meeting you’re headed to is actually a job interview for a once-in-a-career opportunity. What are the chances you’ll make a wrong turn or two? Or worse still, get into a fender bender? This is how decision-making errors can play out.

Practical tool: reminding yourself when NOT to decide

1. Prepare a list titled “Don’t make decisions when….” that includes a summary of the seven factors in your own words.
2. Place this list somewhere prominent in your workplace or home as a reminder.
3. The list will be more meaningful if you can identify examples from your own life when you made poor decisions due to one or more of these factors. Brainstorm as many examples as possible, aiming for at least one per factor. Give particular attention to any factors you disagree with.
4. If you can’t think of any examples, you’ve potentially fallen victim to another thinking error called bias blind spot (APA Dictionary of Psychology, 2020). This cognitive bias is especially problematic because it leads to the belief you don’t have cognitive biases! Engage a trusted friend to help with Step 3; those who know you well are more likely to see what is obscured from your view.

The root cause: cognitive overload

It’s easy to imagine our less-than-optimal mental state during the driving scenario above. What exactly is going on? It all boils down to how our brains process input. Cognitive Load Theory (CLT), developed by educational psychologist John Sweller, offers a helpful explanation (Sweller, 2019).

We have two major memory systems: working (short-term) memory and long-term memory. We use our working memory to hold and manipulate information for short periods. The problem is that we can only process a few pieces of information at once. Scientists debate the exact number, but it’s generally believed to be two to three items. And, we can only retain these pieces of information for about 20 seconds (Sweller, 2019).

Cognitive Load Theory tells us that when we receive too much input, or attempt too many tasks simultaneously, we’ll hit a point called cognitive overload. In this state we don’t have the mental resources to sort information. We are temporarily impaired and can’t make even mundane decisions well, let alone complex ones.

In the first part of this article, we learned a number of warning signs that cognitive overload is present. The next set of tools will help you avoid cognitive overload in the first place and know how to respond when it happens.

Practical Exercise: avoiding and working with cognitive overload

Reflection questions

1. Rethinking multitasking. Based on what you’ve learned about cognitive overload as well as factor 4 in the list above, how effective do you think multitasking really is?
2. Rethinking interruptions. Considering what you know about cognitive overload, what impact do interruptions have on your thinking and thus the quality of your decision-making?
3. Rethinking meetings for group decision-making. How might being in a group (factor 2), and being in the presence of an expert, or being an expert yourself, (factor 3) contribute to cognitive overload? Consider what other input you might need to process during a meeting beside information relevant to decision-making. Are there better alternatives for groups that allow all parties to bring more cognitive capacity to the deliberations?

Strategies

1. Avoiding cognitive overload at work. If you began to think of your working memory as a finite resource, what would you do differently at work to avoid cognitive overload? Here are a few ideas to get you started:
   1. Turn it off. What inputs can you remove, especially noise and visual distractions? Warren Buffet works in an office without a computer or cell phone (Altucher, 2011). While you may have less control over your professional environment, what small changes could you make? Do you really have to be contactable via multiple channels for the entire day?
   2. Chunk your time. Can you organize your work day so you’re only doing one thing at a time and interruptions are minimized e.g., by allocating blocks of time to particular tasks like email?
   3. When you need to undertake a complex, cognitively demanding task, can you break it down into a series of smaller activities that can be done one at a time?
2. Managing cognitive overload at work. Make a list of tasks you perform regularly that you can do without much conscious thought. These activities relieve cognitive load because your brain can perform them automatically. Add a title to your list: ‘To help me avoid bad decisions, do these tasks when my brain needs a break. Only one at a time!’.
3. Managing cognitive overload at home. Repeat steps 1 and 2 focusing on your personal life. You may like to add calming strategies such as yoga, meditation and mindfulness practices to the step 2 list. Many activities of daily living can be completed mindfully by bringing all of your attention to the present moment and avoiding the temptation to multitask. For further tips on how to be more mindful in everyday life, click here.

Key takeaways

• Psychological research shows that we all make poor decisions and that we make them frequently.
• One of the reasons we make poor decisions is due to cogntive biases. Another is we make decisions when cognitively overloaded.
• A quick way to improve the quality of our decision-making is to become aware of the circumstances that lead to cognitive overload. By keeping a visual reminder in our environment, we can begin to identify when these factors are at play in real time and choose not to make a decision.
• A better long-term strategy is to implement changes that make cognitive overload less likely. Remember that working memory is a finite resource; it should be guarded.

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Rethinking Stress

When most of us think about stress, the association is that it’s bad and therefore needs to be eliminated. But, have you ever noticed that you perform better when you are a tad nervous? The stress response is a hard-wired biological mechanism designed to get you into action.

It turns out that you need a certain amount of stress to perform whether that performance involves writing an email, running a race, sitting an exam or navigating through traffic. In psychology, this link between arousal (stress) and performance is known as the Yerkes-Dodson Law.

Optimizing stress

“The ultimate goal of those studying stress is not to ‘cure’ us of it, but to optimize it” – Robert Sapolsky, Stanford University neurobiologist (2015)

The relationship between stress and performance was described more than a century ago by psychologists Robert Yerkes and John Dillingham Dodson (Yerkes & Dodson, 1908). They discovered that mild electrical shocks (stressors) could motivate rats to complete a maze, but that when the intensity of the shocks was increased, the rats would move about randomly trying to escape. What this means is that increased arousal can improve performance, but only up to a certain point. When arousal becomes excessive, performance diminishes.

The Yerkes-Dodson Law (Figure 1) resembles an inverted U (Pietrangelo, 2020; Yerkes & Dodson, 1908). When stress is low, we feel tired, bored and unmotivated. Performance is, not surprisingly, weak. As stress increases, performance improves and peaks as inactivity gives way to energy, alertness and motivation. As arousal increases further, performance becomes impaired as we move into fatigue, overload and anxiety.

Figure 1. The Yerkes-Dodson Law describes the relationship between arousal (stress) and performance.

Intensity and duration

“…the response to stress depends on the nature, intensity and duration of a stressor” (Sapolsky, 2015)

We all understand that severe stress is detrimental. But what the Yerkes-Dodson law tells us is that intensity matters: mild-to-moderate stress is beneficial. At the right level, stress is a highly effective form of mobilizing us into action. However, when excessive, it’s counterproductive.

Insight

The right amount of arousal for peak performance varies from person to person and changes over time for each individual (Smith, 2020). Recent research has also found that the optimal arousal level depends on the complexity and difficulty of the task to be performed (Gould & Krane, 1992). More complex tasks require lower levels of arousal to maintain optimal performance (Chaby et al., 2015).

What this all means is that performance optimization requires personal experimentation. The goal is the ‘Goldilocks’ sweet spot – not too little stress, not too much.

In addition to the intensity of the stressor being important, duration also plays a role. Transient (short-term, acute) stress is helpful whereas ongoing (long-term, chronic) stress is problematic. Neuroendocrinology pioneer Bruce McEwen coined the term allostatic load to describe the problems that are caused when stress systems designed to help us survive become overworked. His research led to the understanding that the effects of stress hormones are biphasic (have two phases); they are protective in the short-term but potentially damaging in the long-term (McEwen, 2013).

Tool #1: Change your stress mindset

Because most of us believe stress is bad for us, researchers have identified a new phenomenon of “meta stress” where people report feeling stressed about feeling stressed (Brady et al., 2018)!

If you believe stress is universally bad, it’s time to change your mindset. Yes, high intensity stress and chronic stress need to be avoided, but short-term, mild-to-moderate intensity stress is good for you. View it as a way to enhance performance outcomes (Crum et al., 2020).

Performance excitement instead of performance anxiety

The stress response is usually discussed in the context of feeling afraid and responding to danger. But in what other circumstances do we experience sweaty palms, a racing heart and a dry mouth? When we are excited.

It turns out that feeling scared and being excited both trigger the stress response. They are both states of high arousal in which the stress hormones epinephrine and cortisol surge; the only difference is that we associate excitement with positive emotions (Khazan, 2016).

Harvard Business School professor Alison Wood Brooks has studied how people perform in anxiety-provoking situations such as singing in public or giving a speech. What she discovered was that most people try to calm themselves down, an approach she says is entirely wrong (Brooks, 2014). Being calm in the body represents a state of low arousal which we know is not helpful for performance.

Brooks found that it is easier for our brains to make the leap from negative high-arousal (feeling scared, nervous or anxious) to positive high-arousal (feeling excited), than to go from negative high-arousal to positive low-arousal (calm) states (Khazan, 2016). This brings us to our next tool.

Tool #2: Anxiety reappraisal

The technique Brooks used in her research was a cognitive strategy called anxiety reappraisal; she directed people in her studies to say either “I feel nervous” or “I feel excited” prior to their performance. Those in the excitement group objectively did a better job. 

This technique didn’t lower feelings of nervousness or reduce heart rate because the stress response was still active, but the reframing meant that the stress enhanced performance rather than diminished it. Brooks recommends we ditch the slogan “Keep Calm and Carry On” and replace it with “Get Amped and Don’t Screw Up”.

Cognitive reappraisal has been widely studied as an approach to regulate stress. If telling yourself that you’re excited doesn’t appeal, another version of this method is to say “I have what it takes to manage this (fill-in-the-blank)” (Crum et al., 2020).

Key takeaways

• The relationship between stress and performance is called the Yerkes-Dodson Law.
• Stress is not universally bad. Short-term, mild-to-moderate intensity stress enhances performance.
• The goal of stress management should be optimization, not elimination.
• Cognitive reappraisal can be used to reframe stress as excitement. Getting amped up, not remaining calm, is what helps us not screw up, i.e. perform.

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The Psychology of Financial Wellbeing

In a previous article, we explored how to assess and improve your financial wellbeing, so you can enjoy more financial security and freedom of choice. Today we focus on the psychology of money, and how that plays a major role in your financial wellbeing.

Thinking about money like a human being

Morgan Housel, a former columnist at The Motley Fool and The Wall Street Journal, and the author of The Psychology of Money (2020), has been writing about the psychology of money since the 2008 global financial crisis. Housel believes the way we think about and are taught about money is too much like physics, with rules and laws, and not enough like psychology, with emotions and nuance.

Housel explains that money is often taught as a math-based topic where data and formulas prescribe what to do. However, in the real world, he says, we don’t make financial decisions on spreadsheets. We make them around the dinner table or in meeting rooms where our personal histories, unique perspectives on the world, ego, pride, marketing and incentives converge.

Let’s take a look at four lessons on the psychology of money from his book, along with two tools.

Lesson 1: No one’s crazy

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works” (Housel, 2020, p. 9)

We have all had vastly different financial experiences. The generation and region of the world we were born into, the family we were raised by, and our specific economy and job market all mean we have learned different lessons about how money works. Because personal experience is far more compelling than what we learn second-hand, we end up seeing the world through different lenses. Housel explains, “We all think we know how the world works. But we’ve all only experienced a tiny sliver of it” (Housel, 2020, p. 13). It’s not surprising then that there is so much disagreement about money management, sometimes even among experts.

Another reason we find money decisions so difficult, says Housel, is because we are all relatively new to this game. The idea of saving and investing for retirement, for example, has only been around since the 1980s. Index funds are less than 50 years old. Mortgages, credit cards and car loans didn’t take off until after World War II.

Housel concludes that we do some crazy things with money, but no one is crazy. What looks unwise to you might make sense to me. We are all making decisions based on our own highly individualized experiences, and they make sense to us at the time we make our choices.

Lesson 2: Luck and risk

“Nothing is as good or as bad as it seems” (Housel, 2020, p. 23)

Housel argues that the world is far too complex for our financial results to be purely determined by our effort and decisions. Because luck and risk are hard to measure and hard to accept, we often overlook the role they play. Housel cautions us to keep this in mind when judging people including ourselves. We often attribute other people’s failures to bad decisions while chalking up our own failures to the downside of risk.

We tend to want to emulate the actions of successful individuals and avoid those of people we deem failures. But studying specific people can be dangerous, says Housel, as extreme outcomes are more likely to represent the extreme ends of luck and risk. Instead, he recommends looking for broad patterns of success and failure for actionable takeaways.

Reflection Questions

1. Do you have any financial heroes?
2. Do you attribute all their success to skill and hard work?
3. How much do you really know about their journey? Is it possible that the inevitable failures along the way have been edited out of their narratives?
4. Is it possible that they were lucky as well as skilled and hard working?

Lesson 3: Never enough

According to Housel, modern capitalism excels at two things: (1) generating wealth, and (2) creating envy. Social comparison can prevent us from feeling a sense of enough. For this reason, Housel believes the hardest financial skill to master is getting the goalposts to stop moving. Without this skill we will risk what we have and need for what we don’t.

What, in Housel’s opinion, is never worth risking, no matter the potential gain? Reputation, freedom, independence, family and friends, being loved by those who you want to love you, and happiness. Our best shot at keeping these things is knowing when to stop taking risks that might jeopardize them, that is, knowing when we have enough. Fortunately, says Housel, the most powerful tool for building enough doesn’t require us to risk any of what really matters.

Tool #1: Deciding what’s enough

1. What in your life would feel too painful to lose? Write these things down. Make the choice you’ll never risk them in the quest for more money.
2. Take a moment to consider some of the ways you compare yourself to others, even if not consciously. For example, do you feel worse about your possessions or wealth after scrolling on social media? Does this make you feel like you need to keep up with the Joneses?
3. If you’ve been in the workforce for some time, it’s likely that you’ve had raises, or times when you moved companies and scored a higher salary in the process. Did your lifestyle change with each raise or did you save more? If you engaged in ‘lifestyle creep’, stop to ask yourself if it made you any happier. If not, make the decision that any future raises will go towards saving for investing. When the time comes, set up an automatic payment from the account your salary is deposited into to a savings account earmarked for investing. This way you won’t have the opportunity to mindlessly spend the extra funds.

Lesson 4: Confounding compounding

“$81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65^th birthday. Our minds are not built to handle such absurdities” (Housel, 2020, p. 45)

Compounding is growth on growth. A small amount of money can become staggeringly huge over time due to the power of compounding. Housel says we find this so logic-defying that we underestimate what’s possible, where growth comes from and what it can lead to.

The “Oracle of Omaha,” Warren Buffett, is the richest investor in history. He is not, contrary to popular belief, the greatest investor as measured by average annual returns (was he your financial hero in the previous activity?). There is no question he possesses substantial skill. But what Housel points out is that the secret to Buffet’s extraordinary results is time. He began investing when he was ten years old and he is now in his nineties!

The tool for building enough is taking advantage of compound growth via investing. The secret is to start as soon as possible. Housel says we often spend all our effort trying to earn the highest investment returns as this intuitively seems like the obvious way to get rich. But this is a misconception. Good investing is not about always earning the best returns because these are one-off hits that are difficult to replicate. It’s about earning pretty good, uninterrupted returns over a long period of time. “That’s when compounding runs wild,” he says (Housel, 2020, p. 53).

Tool #2: Discovering the power of compounding

This activity is designed to showcase the confounding nature of compounding mathematics if we let time work its magic.

1. Open MoneySmart’s compound interest calculator.
2. Imagine you start investing when you get your first serious job at age 25. You start with an initial deposit of $500 and make regular deposits of $200 per month. How much money would you have at age 65 if your investments earned an annual interest rate of 8% (the historic return for the stock market)? (The number of years invested would be 65 minus 25.) Take a moment to consider the scale of this growth; $500 has turned into more than seven hundred thousand dollars. But the real surprise is how much of this is from interest alone! Jot down the outcome based on these figures.
3. Now let’s tweak the scenario. Let’s say you run up a pile of credit card debt in your twenties and don’t get around to investing until you’re 35. How much will you have at age 65 now? Are you surprised to see it’s less than half?
4. Now for a final scenario. Let’s say you still start investing at age 35, but you’re aware you got a bit of a late start so you decide to double your monthly contributions. Will you catch up to what you could have earned had you started at age 25? Run the numbers – you’ll see you get close, but don’t quite make it despite paying in TWICE AS MUCH FOR THE ENTIRE PERIOD YOU INVEST.

What is the take home message here? Even if you can only spare a small amount each fortnight or month for investments, the younger you start, the better off you will be. If you want to be really blown away, run the numbers starting at age 15. This may influence what you teach your kids about money. If they start investing as soon as they begin earning, and manage to avoid credit card debt, they will very likely become multi-millionaires.

Key takeaways

• Your decisions about money are based on your unique perspective.
• Be wary of trying to emulate successful financial ‘outliers’. While effort and skill certainly matter, the role of luck and risk tends to be invisible.
• The ‘secret sauce’ that drives financial wellbeing in retirement is investing. When it comes to compounding, the most important factor is time, not rate of return. Start today with whatever you can spare, no matter how small.
• Avoiding lifestyle creep as your financial position improves is a skill required for long-term financial wellbeing. You can build this skill by not comparing your possessions to others. Ironically, the more possessions others own, and therefore the richer they appear, the less wealthy they probably are as the more they spend, the less money they have to invest.
• When it comes to financial decisions, no matter how great your skill, there is always an element of risk. Some things in life are never worth putting on the line for more money. Decide what these are for you.

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