Financial planning is not only complicated, it is complex: there is a difference

Yes, until very recently, I thought complicated and complex were also synonymous, but after reading General Stanley McChrystal’s book, team of teamsI was admonished and educated.

The book, ostensibly aimed at business leaders, guides us through the fascinating philosophical and practical framework required to bring together a myriad of the world’s elite fighting forces in pursuit of a common cause. And the big takeaway for me, which has serious financial planning implications, was, “Being complex is different from being complicated.”

How is that? Well, something that’s complicated can be confusing and have lots of moving parts, like an internal combustion engine, but ultimately “it can be broken down into a series of neat and tidy deterministic relationships.”

Using financial planning as an example, there are standard quantitative elements of financial planning, such as investments, insurance, taxes, wealth, retirement, and education, that comprise a topic that is both deep and broad, but at the same time, if you knew exactly what wanted to achieve, he could theorize precisely what steps needed to be taken within each element, even in conjunction with the others, that should result in a successful scenario, at least numerically speaking.

In short, there is a textbook approach to financial planning, and we can limit the practice to a search that is complicated, but nonetheless computational, rational, logical, and therefore predictable. But financial planning is not only complicated…

“Complexity, on the other hand, occurs when the number of interactions between components increases dramatically: the interdependencies that allow viruses to spread and bank runs to spread; this is where things quickly become unpredictable,” McChrystal tells us. “The reality is that small things in a complex system may have no effect or a massive one, and it’s virtually impossible to know which will be the case.”

Financial planning is complex because us they are complex. You and I are not just dollars and cents, and often we don’t even make sense; in fact, the field of behavioral economics has shown that we are more driven by emotions than by equations. That unpredictability is compounded by the interdependencies of everyone involved in the financial planning process: spouses, ex-spouses, partners, children, parents, planners, attorneys, CPAbosses…

It is like the proverbial example of the iceberg: what we see on the surface is the quantitative, but underneath is the vast qualitative.

But I don’t want it to sound hopelessly complex. The good news, the great news, is that by better understanding ourselves, even the most complex, though not necessarily easy, financial planning scenarios can be made surprisingly simple. By knowing what is most important in your life, it can become clearer what to do with your money.

That’s why the most important part of financial planning is actually life planning. That’s why even financial planners need financial planners. And that’s why real life financial planning is never a product, but a process.

Cousin: You want hear How does the resolution of complexity sound? Listen to this interpretation from JS Bach’s Prelude to Cello Suite No. 1 in G Major. You’ll hear Yo-Yo Ma play a 300-year-old piece of music that can be reduced to rote math, but you’ll hear him push and pull, grow and calm, imbuing notes on a page with a story inside. a story. The song builds and builds to the point of tension before resolving into what feels like perfection. Enjoy.

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