The Problem With Precision In Financial Planning

There was a time when I thought the optimal goal of financial planning was to collect vast amounts of information, boil all of that information down to an extensive list of assumptions and finely-tuned projections, and then to “click a button” and calculate precisely what a client should do based on those assumptions. 

I thought that was the most professional, responsible, logical, and most importantly, helpful, form of planning that could be done. But I was wrong.

Why? Because such planning has the effect of creating a presumption of precision, an overconfidence in the proverbial Plan A that leads to doubt in the inevitable Plans B and C, or even a despair that leads to the abandonment of planning altogether. 

ADVERTISEMENT

Here’s how Nobel prize-winning economist, Friedrich Hayek, put it:

“I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretense of exact knowledge that is likely to be false.”

This underscores something that is true in the practice financial planning and beyond: Life is “indetermined and unpredictable,” and it often requires us to make meaningful and challenging decisions based on “imperfect knowledge.” 

I think we can do a better job acknowledging just how true that is in financial planning.

For example, markets are highly efficient and growing only more so. We have a couple centuries of data that have and will be…