Cognitive Distortions on the Path to Wealth – Part I

Picture the scene, a drizzly cold evening. And a gathering of a dozen people at a local hospital or community center with a facilitator to guide a group discussion.

Good evening everybody! How are we all doing this evening?

Muffled responses around the room of – “Great”…..“OK….“Not so good”….“I have felt better”…. “The traffic was terrible”……“My dog was sick today”…..

I understand. I sympathize. I hear you. OK, everybody pull up a chair and get comfortable in your seats. Tonight, we are going to be discussing cognitive distortions. Now, can anyone tell me what cognitive distortion means or perhaps share an example of one?


Does anybody want to try and give an answer? Anybody…..?

Becoming a very awkward silence.


This is part of the challenge we face in talking about difficult things. It is hard to get started and open up. Hopefully the stuff that follows will resonate in some small way with you and get you thinking. But please be careful – don’t believe what you think!


This post is certainly not intended to poke fun at any group or individuals. The tremendous amount of support that those in the mental health profession provide to the million across the globe afflicted with mental health issues is something we should acknowledge. They are there every day to answer a phone, actively listen with empathy, gently nudge people towards a slightly different path, in many cases partner with them to provide a complete overhaul on how they think about themselves, their loved ones and the world around them. In short, they offer great care and guidance to try to let the struggling patient live better lives again. If any of you have been in receipt of such support, you will know exactly what I am talking about. And you will no doubt be immensely thankful for their work.

What I am going to try and do today is bring Cognitive Distortions front and center to our journeys toward wealth building and financial independence. It is our thoughts that make us happy, make us sad, drive us, distract us and often bring a ****-load of trouble.

First of all, what is a Cognitive Distortion and why should I care?

A definition that I like is as follows:

Cognitive distortions are simply ways that our mind convinces us of something that isn’t really true. These inaccurate thoughts are usually used to reinforce negative thinking or emotions — telling ourselves things that sound rational and accurate, but really only serve to keep us feeling bad about ourselves.

Oh crap, this is real heavy dude. You are telling me that I am lying to myself? I’m outa here. See ya.

Don’t give up, it’s not all heavy. Please stick with it. I am going to go through a few Cognitive Distortions and hopefully provide some perspective that you may relate to from the mind-games on your own journeys.

  1. Catastrophizingwe expect disaster to strike no matter what. We exaggerate stuff. And it will be badass bad. Our journeys towards FI are in very large part shaped by our ability to live below our means, save and invest wisely, and of course the volatility of the stock market. Open up your iPhone, Android financial news feeds any business day and I guarantee you will find more than one CNBC “expert” talking about the day of doom just being around the corner. It’s the oil price that’s creating havoc, it’s worry in the Asian futures market or it’s the rice index or the Baltic dry index at the root of our problems. What the heck actually are the rice index and the Baltic dry index? Is anybody still reading?


And there will be a slew of other “experts” equally projecting for a bull market and it will continue to roar. The earnings reports in Q1 are exciting investors, we are comforted by Yellen speech, and the Nasdaq is flashing technical signs of bullish behavior, yada yada, yada. Why do we read this gibberish? Someone will get it spot on, eventually. Maybe just once. Then they have to try and repeat that forecast next month, next year. Good luck with that. None of them (I am overgeneralizing here –see Distortion #2) have a clue about what the market is going to do but, hey, dramatic news headlines sell. They suck us in, get us skittish and when compounded by more noise from poorly informed financial advisors will have us stuffing our pillows and mattresses with hard-earned greenbacks and turning down the thermostat. They have us talking about it endlessly, losing sleep, waking up with nightmares and turning to our favorite blogs for answers. Financially savvy bloggers are a very rational and informed group, yet we still worry. Our minds simply race all over the place. Yes, the market swings – often wildly. The figure below plots the Dow (DJIA) performance over the last 50 years. The last 50 years has seen three very significant downturns in the stock market. But each bear-market came back to the original high in ~5 years or less. Don’t catastrophize. It rarely ends up badass bad. Keep calm and don’t let the market doomsters prevent you from investing on.

dow graphic


  1. Overgeneralization – we come to a conclusion on a single piece of evidence. I think that most of you will have been burned by a bad piece of financial advice at some point in your lives – whether it comes from a family member, work colleague, friend or a financial advisor. PIE and I have written about our own experiences with financial advice. And we took a punch or two. But we got up, dusted ourselves down and are still in good shape financially. Financial advisors, as a breed, are not all bad. Although we shared examples of bad experiences with our former advisor, he did a few things for us well. And he was a genuine guy at heart with strong family principles. You may have found examples where you have a strong relationship with your own advisor that works well for you. Or have reached out on one-off basis for a specific piece of advice and paid an acceptable fee for that advice. The hard part with advisors is finding the good ones out there who can understand the client, their goals and can talk candidly when things get tough. This specialist breed exists. They don’t all manage portfolios like Humpy Dumpty – and that’s after he fell off the wall! We should not tar all with the same brush.


The other overgeneralization we can easily fall into is around year-end bonus/performance raise time. How many of us get rightfully excited about an incredible bonus or performance raise or stock options grant and suddenly make plans for expecting that award each and every year for the next 10 years and we’re sailing off into the sunset? No siree. Each year brings new challenges in our job – stretch goals that pull us to the edge and may be very difficult to meet. Companies like the ones Mrs. PIE and I work for face constant market challenges with drugs going off patent and generics coming on line or an unexpected late stage and costly clinical trial failure of a potential new drug that affects the long-range plan. Past human performance and/or company performance is no guarantee for future performance. We know that adage well but we struggle at times to apply it in our own lives.


  1. Fallacy of Change – we expect others will change to suit us if we just cajole them enough. We need to change people because we think our happiness depends entirely on them. It can take many of us a life-time to understand this but the only person who controls your happiness is YOU. We concoct ideas for what we think will make us happy. We set off on our various missions. We assemble plans, lay out the road-map, and build the endless spreadsheets. We steer many otherwise important conversations back to the subject matter for the mission. And then we get uppity when a loved one doesn’t fully understand the mission. Or has concerns about the implication of the mission on our children, extended family or close friends. We become unhappy because we are relying on them to quickly see things the way we see it. And we get very frustrated, may isolate ourselves at times and resort to cajoling and building the case for the mission like a high court lawyer who is trying to get his client out of jail-time. No, no , no! We have got it all wrong.


  • What will make you happy?
  • What will make me happy?
  • What will make the children happy?
  • What will make our family happy?
  • What can I do to explain my ideas better? Which of these ideas concern you?
  • What would our dream lifestyle look like?


It requires patience, openness and often deep soul-searching to navigate these conversations. And it has to be done at the right time. A glass of wine or two and laughter never hurts with those conversations. We can’t change others. We can only change ourselves and provide opportunity for others to come join the ride if they choose to.


  1. Over optimism – the human tendency to report the sunny side and lose the thread of reality. This is a huge factor in corporations where strategic decision making goes awry. Decisions with an element of risk have essentially two components. The first is judgment about the likelihood of a given outcome and the second is the value or utility placed on it. When judging the likelihood of a positive outcome, human beings are inherently overoptimistic or overconfident. We see things playing out as fine and dandy….double rainbow in the sky…..a bed of roses….. and that creates problems. Especially for ourselves. This optimism generates unrealistic forecasts and an underestimation of the challenges ahead. We need to be wary of over-optimism by reaching out regularly to others for candid, timely and unambiguous feedback. This improves our learning environment. And these very blogs we voraciously read and contribute to allow us to do just that. We put our stories and plans out there for others to critique. We receive supportive comments and we hear agreement on our plans for SWR, estimated future expenses, timeline expectations etc. But we also hear quite different opinions and adjust accordingly – if not immediately, after we process the collective information thoughtfully. That is part of our learning environment, a little rain on our parade and often our dose of reality.


Does any of this resonate with you? Or do you have it all under total control? If you are comfortable, please share your cognitive distortions on the path to wealth building or on the road to achieving your goals in general. We would love to hear from your experiences.

There is much more to come on this topic. Look out for future posts in this series of Cognitive Distortions on the Path to Wealth.



  1. Great post. Not sure if you follow the Irrelevant Investor at all, but he just discussed how in 1955 Benjamin Graham (the godfather of value investing) predicted stocks were overvalued. By 1965, stocks had appreciated 230% since that statement in 1955. Every where you turn people are talking about how another BIG equities correction is due. You see people moving to mostly cash positions.

    In the end no one knows what the markets will do. Some will get lucky with their “educated” guesses and others will be completely wrong and miss out on huge bull markets. At the end of the day, I know that I cannot guess what the markets will do, so that’s why I buy and hold “forever” with no intent of selling 🙂

    1. Thanks for stopping by and enjoying the post. Yes, good to know there are doomsters back in those days casting their nonsnense predictions. We have not moved on much in certain ways. Hold and don’t fold, I hear you.

      And thanks for the high praise of the post. As we get started with blogging, we are going to get a few things right (hopefully) and learn how to adjust our styles to improve our writing.

  2. It’s funny how the human mindset can affect how the market go. Value seems to be effected with confirmation bias on the up and ‘Catastrophizing’ the other way. As investors we just have to see through the smoke and see where earnings will go (which for DGI is the only important thing).

    Very good thoughts and well described 🙂


  3. Agreed that confirmation bias is a big issue. Selective thinking is easy to get drawn into. And like our investing approaches, we have to remain disciplined to keep it at bay. The topic itself of confirmation bias gives me additional ideas for part II of the series. Thanks for the suggestion!

  4. Great post and an important topic we all suffer from!

    Over-optimism reminded me of the stat that ~70% of drivers considered themselves to be above average drivers. This approach also leaves people to rest on their laurels instead of taking further action to constantly improve their skills within a field.

    The scary thing with much of this is that it is extremely difficult to become aware of our blind spots. It has been my case, that once I find out I have a problem, I can fix it. The fixing part might be hard, but at worst, it takes a month or two to rewire a bad habit. I may have had the bad habit for a decade, so a month or two is not too shabby.

    Your points on catastrophe resonated with me because we recently had a scare with our pet, and since then, my girlfriend and I have been prone to thinking of a soon to be future catastrophe, in our home or within our lives. We both know it is highly unlikely, but the stress we feel is still real (just from us thinking about the event).

  5. Thanks for the feedback!

    George Carlin once said ” have you ever noticed anybody driving slower than you is an idiot and anyone going faster than you is a maniac?”

    Completely understand the pet thing as we have a cat nearing the end of her long and happy life. Hope your pet is on the road to recovery.

    Catastrophe scenarios? Don’t believe what you think. Your blog tells me that you are doing a ton of things really well and have some great philosophies. Continue to embrace them and only good will follow.

  6. I love this kind of insight! It’s like CBT meets Finance 101–I think it’s SO important to analyze why we think and do what we do. Both in my financial life and my life in general, I feel I tend to catastrophize. One little thing goes wrong, and I’m ready to throw the baby out with the bathwater (eg one rough week at work, and suddenly I’m looking at job listings online). Great post, keep ’em coming.

    1. Thanks for swinging by! The mind games of FI planning can be as challenging as our saving missions. And in the crazy rush of work and/or family life, how often do we get the time to just…..think?
      Sport is a balance of physical, mental ability. FI requires practical saving skills (the physical analogy) and mental fortitude also. Both aspects have to be kept fully in shape. Reframing those little events that we often overplay as doom/gloom is the trick and practice is the key.

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