Making financial decisions inherently involves risk. We often hear news stories about individual bankruptcies, institutional financial mismanagement, governments in different countries declaring financial defaults, global financial crises, and much more. And success stories too.

In his book, Carl Richards raises a critical point, many believe that having a well-organized long-term financial plan is the key to making sound financial decisions. However, he argues that life is unpredictable, and sometimes, we need to make decisions based on the situation at hand. He emphasizes that our decision-making is often influenced by fear and greed.

From what I’ve observed, there are several valuable lessons that we can apply in our entrepreneurial journey. Let me summarize them as per my observation.

Align Decisions with Goals and Values:

Financial decisions, both personal and entrepreneurial, should be aligned with long-term goals and core values. Carl Richards emphasizes this alignment in his book, highlighting the importance of acting in accordance with one’s vision and personal values that can be applied as entrepreneurs as well. For entrepreneurs, this means ensuring that business decisions resonate with the company’s mission and contribute to its overarching goals. By aligning decisions with goals and values, entrepreneurs can build a business that is sustainable and true to its purpose.

Recognize the Behavioral Gap:

Carl Richards in his book defines the behavioral gap as the gap between investment return and investor return. Investment return refers to the return generated by an individual with his or her investment over the period of time. And Investor return refers to actual return earned by the individual. Investment return is a calculation made by forecasting and investor return is affected by personal biases. Investor return can be affected by uncontrollable factors such as currency depreciations, plunging asset values during natural disasters, sudden events and many more. But most of the times investor return are largely affected by personal biasness. Simply fear and greed. Carl Richards emphasizes that investors often don’t do as well as their investments because of emotional reactions and biases. This happens even when the investments themselves are doing fine. It’s crucial for investors to recognize this gap so they can make better decisions and avoid common behavioral mistakes in managing their money.

Control Emotions:

The challenge lies in controlling our emotions to make rational decisions and act accordingly. This is precisely what Carl Richards brings into discussion in his book.  The majority of investors stuck in the decision taking whether to invest in new business/ asset or to liquidate current assets. We often panic and make wrong decisions. People often let fear and greed drive their investment decisions, especially in the stock market. They react impulsively to single news events.

Simplicity in Planning:

The concept of simplicity in financial planning resonates strongly with entrepreneurs. Richards advocates for simplicity in decision-making processes, highlighting the value of clarity and focus. In entrepreneurship, complex plans can lead to confusion and hinder progress. By keeping business strategies and financial plans simple and streamlined, entrepreneurs can navigate challenges more effectively and stay aligned with their goals.

SMART Goal Setting:

This is somewhat similar learning to being simple. As perusing entrepreneurs or business students, we often talk about SMART goals. Setting clear and actionable financial goals is crucial. And the goals must be purpose driven. Working toward a long-term goal helps you stay focused and keeps your main purpose intact. Consider this example: Suppose someone unexpectedly earns high profits in the business in a few months’ times. If that person rushes to buy a house on credit, expecting the same high returns, while their original plan was to buy a house in five years, they should pause and think. Can I truly afford those payments? What if I lose profits next year? What can sustain me? What do I need in order to sustain the business? Should I reinvest in the business?

Avoid Overestimation and Do Independent Research and Analysis

Entrepreneurs often face the temptation to overestimate their capabilities or market conditions, leading to excessive risk-taking and financial instability. Richards warns against overtrading and overconfidence, which can result in significant losses. In entrepreneurship, avoiding overestimation means staying grounded in reality, conducting thorough market research, and making informed decisions based on realistic assessments.

The author talks about the problems of overtrading in investments. People constantly checking the stock market, trying too hard to recover losses, or making too many attempts to make more money. It’s often driven by fear and greed and can result in a lot of confusion. This happens a lot in stock market and cryptocurrency trading, especially with beginners who often struggle. Even experienced traders can end up in financial bankruptcy overnight. Entrepreneurs often make the same mistake by over investing in business and buying unnecessary assets to the business. For example, in my 12 years’ experience in the pharmaceutical field, I’ve witnessed people who start their own pharmaceutical distribution or pharmacy businesses. They often do well and start making good money. However, they sometimes make the mistake of expanding too quickly by taking on a lot of debt. They assume they’ll continue making profits and forget about the uncertainty in the market. This can lead to closing a company with losses and debts that they can’t repay.

In the chapter “Ignore Advice, make fun of forecast”, Carl Richards criticizes relying too much on financial advisors and experts. He says that “personal finance is personal” so as own or collaboratively started new business, hence others recommendations should be adapted to our own financial situations carefully. He also mentions that even experts can be wrong at times. So, according to Carl Richards, it’s good to learn from experts but to be yourself when handling your finances. I agree with this advice. In the world of investing, there are many experts who push their ideas, but what works for the average person might be different. Plus, the expert’s opinion might not be up-to-date when someone refers to it. The level of financial knowledge and literacy of an entrepreneur or business partners greatly affects their financial behavior. In my own opinion researching and forecasting financial trends and financial tools is the most effective method for gaining financial knowledge and making informed decisions about your financial needs, taking ownership of their financial strategies, entrepreneurs can mitigate risks and capitalize on opportunities more effectively.

Avoid Impulsive Actions:

Carl Richards points out the importance of controlling of impulsive behavior, which he sees as dangerous and yet associate with the emotions of fear and greed, flip side of a coin that can’t co-exist at the same time. He suggests that this idea serves as the central theme of the book. To avoid impulsive actions, he recommends simplicity in decision-making, maintaining a clear and unwavering long-term plan, guarding against overconfidence, and wisely analyzing others’ insights when handling personal finances. These principles collectively help individuals make more sensible financial choices and avoid impulsive traps.

The most eye-opening part of the book is how our emotions strongly influence our financial decisions. The author, Carl Richards, shows us how our feelings can sometimes lead us to make irrational choices when it comes to money. This is a clear reminder for any person/ company to be cautious and avoid making quick, impulsive decisions.

While this book is engaging and insightful, some readers might find it boring due to repetitive themes like simplicity and human emotions. Additionally, it could have been made so attractive if included practical financial tools for everyday personal finance management.

Long-term Planning:

Long-term planning is essential for entrepreneurial success, as highlighted by Richards and Buffett. Entrepreneurs must have a clear and unwavering long-term plan that guides their actions and decisions. By staying focused on long-term goals and objectives, entrepreneurs can navigate uncertainties and challenges more effectively, ensuring the sustainability and growth of their business ventures.

Emotional Awareness:

As an individual, I often think about the role of fear and greed in financial decisions. Warren Buffett, a highly experienced figure in the stock market, offers valuable insights. He observes that ordinary people tend to buy stocks when their prices are rising rapidly and sell them when prices dip slightly. However, according to this stock market veteran, we should do the opposite. We should buy stocks when others are afraid and sell when others are overly confident.

The challenge lies in controlling our emotions to make rational decisions and act accordingly. This is precisely what Carl Richards brings into discussion in his book.  The majority of entrepreneurs are stuck in the decision taking whether to invest in new assets or to liquidate current assets. We often panic and make wrong decisions. People often let fear and greed drive their investment decisions, especially in the stock market. They react impulsively to single news events. So as entrepreneurs make quick decisions which can end up in bankruptcy or losses so that recovery of losses takes a long time. Emotions aside business should be considered as a separate thing from personal life.

Conclusion:

Absolutely, the learning outcomes of the “Behavior Gap- Simple ways to stop doing dumb things with money” can be valuable for any entrepreneurial team. Any entrepreneurial team can ask the following questions before starting, expanding, diversifying or at any point of taking decisions.

1. Do we have a long-term plan?
2. Is our plan simple?
3. Have we done enough research and forecast based of researching?
4. Are we ready to move on?
5. Are we overestimating ourselves?
6. Do we have enough control over the financial aspects of our business.
7. Is it an emotional decision and what will be the emotions arise while we follow the plan?

Ultimately, by understanding the impact of emotions on financial decisions and adopting sound financial practices, entrepreneurs can achieve greater success in their ventures.

Reference

Richards, C. (2012). Behavioral Gap- Behavior Gap- Simple ways to stop doing dumb things with money. Penguin Group (USA) Inc. Penguin Group