Sherman Kent was an analyst for the Central Intelligence Agency (CIA) who researched the ways people talk about estimations they make[1]. Although his goal was to make better use of military intelligence, his research can be applied to your family’s personal financial planning. In fact, you can even use his work to help determine when it’s the right time to make an expensive purchase.
By understanding how estimates are framed and discussed, you can make better financial decisions. Estimates may be off because of the interests of the person making the assessment or how the information is presented. For example, people in general are more interested in avoiding losses than making gains.
Beyond that, Kent said estimates have two types of weaknesses.
Not knowing information that others have
The first weakness is that you could miss information that, to others, may be obvious. For example, if you’re estimating how many groceries you’ll need for the week but you forget you’ve got friends coming over Friday. You can help make your initial prediction more accurate by running your forecasts by a person you trust, such as your partner or father. In personal finance, this principle manifests itself in the need to do research before making a big purchase, including finding trusted advisors. By knowing what you need, how you can meet that need, what it will cost and how you will pay for it, you can make a better decision.
Not knowing what you can’t know
The second weakness is that some information is impossible to know. This is almost always tied to a prediction of the future. In CIA terms, this might be how another country will respond to an action. With some careful assessment and research, you may be able to assign some probabilities, but you may be surprised anyway.
The right time to buy is after you’ve done your research. You may still run into surprises — that car that seemed so perfect might turn out to have a major design flaw that leads to a recall, or the summer weather is hotter than expected, making your utility bills higher than you had budgeted. But with adequate research, you are less likely to suffer regret from something you should have known ahead of time.
Taking the time to uncover enough facts to help you make a decision leads to greater satisfaction with the choices that you make. That, in turn, will make you feel more confident about your family’s financial future.
