Want to get better at money? Be a big fish in a small pond

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Want to get better at money? Be a big fish in a small pond

Humans are a troubled lot.

Although capable of periodic acts of courage and sacrifice, we are far more likely to feel vulnerable than heroic. Our days are filled more by worry than by triumph.

We grow old, not young.

This is our fate.

But many of us tend to make life even more difficult than fate or human nature requires. We place ourselves in crappy jobs and tie ourselves down with debt. We spend too much and invest too little.

All of us know this. Yet many of us continue to engage in financial and career self-destruction.

Our vulnerability and worry increase.

And we grow frail, not wiser.

Which begs the question: What is wrong with us?

The answer, no doubt, is more than we have time for in this article and much more than I’m capable of understanding. But let’s look at one concept (relative deprivation) that plays a role, and consider one approach (embracing a famous cliché) that can help.

What is relative deprivation?

Relative deprivation is exactly what it sounds like. It’s when you experience deprivation, relatively speaking. No sensible person would say if you don’t have a million dollars, you are somehow deprived. But if you’re the only poor person in a neighborhood of millionaires, that’s exactly how you will feel.

Social scientists use relative deprivation to explain a wide variety of phenomenon. It plays a role in stress, addiction, terrorism, and just about every social ill you can imagine.

In his book “David and Goliath: Underdogs, Misfits, and the Art of Battling Giants,” the writer Malcolm Gladwell argues relative deprivation is a pervasive and insidious force in our lives, and that avoiding it is the key to career success.

Essentially Gladwell says that choosing to spend your time with the "best and the brightest" has a depressing effect. Attend Harvard or MIT, he says, and you'll tend to feel inferior to your peers. That will have a debilitating effect on your performance.

Gladwell builds his argument upon the work of Oxford professor Herbert Marsh, who dubbed the phenomenon the Big-fish-little-pond effect. And the evidence of the effect, at least in terms of academic performance, is extraordinarily strong.

How the Big-fish-little-pond effect affects our money

Gladwell argues the big-fish-little-pond effect is at the root of lots of poor career decisions. In a speech he gave at Google's headquarters, Gladwell said as human beings we are drawn toward elite institutions, but "we dramatically underestimate the cost of being at the bottom of a hierarchy."

I go even further. I think the big-fish-little-pond effect is at the root of lots of poor decisions of all kinds — including personal finance.

We do dramatically underestimate the cost of being at the bottom of a hierarchy. Yet we live in a country that reinforces the message we are at the bottom. We see great wealth on TV and in the movies, and come to believe it is our due. We celebrate entrepreneurial CEOs of unicorn companies, and wonder why we can’t be like them.

The effect is that we tend to underestimate our value and belittle our accomplishments. The affluent call themselves middle class. The middle class calls itself poor. We borrow too much in the hope of appearing more successful than we are. We work too hard and too long. And always we look at those above us in the hierarchy with a sense of grievance and failure.

There is an answer.

The way to avoid relative deprivation and all its attendant woes is to be “a big fish in a small pond.”

Why be a big fish?

If we make choices that increase the portions of our lives where we are at the top of a hierarchy, while reducing the portions where we’re at the bottom, things get better.

Fast.

I’ve adopted the idea of being a big fish in a small pond as the basis of almost everything in my life: career, finances, hobbies, etc.

I believe the key to success, financial and otherwise, is to spend as much of life as possible in “small ponds,” i.e. situations:

  • where your authority is clear, even when you are not the sole authority or the leading authority
  • where you lead more often that you follow
  • where you are often responsible for others, but seldom responsible to others

I have a blog dedicated to this concept. And you’re more than welcome to read it. But for now, let’s look at five “big fish in a small pond” techniques in personal finance.

Avoid loss

In the risk/reward debate, big fish in a small pond opt for safety. Social scientists say temporal relative deprivation is a big deal. When you’ve had something to which you feel entitled (the right to vote, electrical power, preferential treatment because of your race or gender, etc.) and then lose it, you grow angry and self-destructive.

The same thing happens when you lose money. An investment goes bad, and fury and panic set in. That leads to more poor investment decisions. It’s a wiser course to seek reasonable returns from reasonably safe investments.

Eliminate debt

There are a hundred million reasons to avoid debt. And there are a hundred million articles about personal finance that can explain them. Here’s the primary reason big fish loathe debt: It can force you out of your small pond and into a particular type of big pond (terrible jobs that pay well) in order to service the debt.

Own a small business

Having your own business, no matter how small and no matter how little cash it brings in, is good for your soul and your finances. As the head of a small business you are, by definition, a big fish in a small pond. Just as spending too much time at the bottom of a hierarchy hurts your overall performance, every moment you spend running a business improves your performance. Your purpose is not to make the business better. The business’ purpose is to make you better.

Invest for influence, not affluence

Unless you’re already a billionaire, you don’t have authority on Wall Street. Invest in stocks and you are always a small fish in a big pond, subject to forces you cannot control. A big fish in a small pond, by contrast, chooses investment opportunities based on how much influence they can wield and how much expertise they can accumulate. A big fish invests in things where they has some control — such as rental properties, peer-to-peer lending, and their own small business.

Embrace minimalism

Relative deprivation exists because humans, by their nature, seem to value what others have. There may be some evolutionary reason for this. Perhaps it’s part of the drive that led us to cross the oceans and map the genome. Or maybe we’re just sad and jealous creatures. One way to avoid the urge to keep up with the Joneses is to try keeping up with a completely different set of neighbors — the millions of people around the world who have adopted a philosophy of reducing the amount of stuff in their lives.

You can find more on how minimalism can help you manage money right here.

Image: sidekick