By Brian Hufford, CPA, CFP®
Decision theory has always intrigued me, with its insights into how we should vs. how we do behave when confronted with uncertainty. Decision theory is the study of how humans make decisions about the future when they are uncertain what will happen. Making a decision is the important first step in any effort to manage risk.
Blaise Pascal is considered the father of decision theory. His famous “wager” on the existence or nonexistence of God introduced the essential elements of dealing with an unknown future. Pascal stated, “God is, or he is not. Which way should we incline? Reason cannot answer.”
He framed the question in terms of a game of chance, where at some infinite point in the future a coin is flipped. Would you bet “heads,” God is, or “tails,” God is not? Pascal had several important insights from this wager.
First, we all must play the game. The fact that we are alive forces us to be participants in this wager of God’s existence. Second, the consequences of winning or losing this “bet” overshadow the 50-50 odds of the coin flip. If God exists, the consequences of winning are eternal bliss; of losing, eternal damnation. If God is not, how we live does not really matter.
Finally, Pascal refused to define belief in postmodernist terms as mere mental assent. In his words, one cannot simply wake up one day and express belief in God. It was actions during a lifetime that exhibited whether true belief existed. To Pascal, winning this wager of God’s existence became the narrative of his life with his commitment to a monastic lifestyle.
How does all this wagering on the afterlife affect our decisions in this life, especially as it relates to money, investing, taxes, retirement, and debt?
- There is a reckoning at age 65 for a lifetime of financial decisions. Pascal lived his life based on a wager about the existence of an afterlife. The wisdom of our spending and saving decisions during our lifetime will be seen at age 65 should we be fortunate enough to live that long. This reckoning should carry sufficient weight with us to be intentional about how money passes through our lives.
- We all must play the game, so we should play to win. My father was a depression-era child and refused to take risks in his occupation or with debt. He was frugal, but provided for all of the needs of his family. His win was providing for “needs” while avoiding risks. It worked. As a young man, this seemed incredibly boring to me. Ultimately, we do not know the financial challenges or opportunities we may face ahead. But the best decisions are filtered through a longer-term lens, not just “can I afford the mortgage payments?” The win is the right long-term outcome achieved through wisdom applied to money.
- The consequences of our financial decisions might have a much larger impact than we can imagine. “Can I afford to purchase an office building?” One consequence could be the existence of a valuable asset at age 65 with a mortgage that has been repaid. A better consequence could be a fully funded pension and a valuable asset at age 65 with a mortgage that has been repaid because of proper debt and tax planning. An awful consequence could be, “I became disabled and lost the building because I didn’t have adequate disability and overhead insurance with a cash reserve.” The building decision itself is simply one of many priorities that must be weighed. Life does not happen in a straight line.
- Financial success is not merely a matter of “belief” in yourself and a positive attitude. Just as Pascal defined “belief” as actions and not mental assent, we must apply ourselves with a great amount of intention to pursuing hoped for outcomes. Outcomes are not won by merely visualizing them. This involves goals, planning, and consistent effective implementation.
In the end, perhaps the game of money will be put back in the box. Maybe the ultimate measure is who we become in this life, and how much we laugh as we roll the dice and move our pieces around the board.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or [email protected].
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