The Risk of Not Knowing What You Don’t Know

Personal Finance
lifewise unknown unknowns blog

Prior to the 1960s the risks of smoking—which in hindsight are quiet obvious—first began to be verified medically as the connection between cigarettes and lung cancer solidified. There had always been the obvious observation that smokers oftentimes had coughs and other health issues, but at that point the connection was always casual. By and large the medical effects fell into the category of unknown unknowns—people didn’t know what they didn’t know.

Enter the Johari Window, a.k.a. the Known-Unknown quadrant.

A Framework for Understanding What We Know and Don’t Know

The Johari Window was first developed in the 1950s by two psychologists as a tool to help individuals better understand themselves and their relationships with others. It defined specifically four quadrants—known knowns, known unknowns, unknown knowns, and unknown unknowns—as seen below.

Johari Window

When it comes to financial planning, examples can be easily identified for three of the four quadrants:

  1. Quadrant one (top left) describes the things that young professionals are aware of and understand, which in the context of financial planning would be things such as the need to save, the importance of insurance, or the necessity of being well-diversified.
  2. Quadrant two (top right), the known unknowns, simply describes items that young professionals don’t know, yet they recognize that they don’t know, such as how to most efficiently save (i.e. Roth vs. Traditional) or how much disability insurance they might need.
  3. Quadrant four (bottom right) describes in the context of planning those things that young professionals don’t know they don’t know. This quadrant is almost always different for everyone, but often includes things such as not knowing you don’t know that how your employer disability benefits are defined is extraordinarily important or that having only two times your salary in life insurance benefits is likely far inadequate to ensure your family has the financial support it needs if something were ever to happen to you.

It can also include taking too much risk in your portfolio and being completely unaware of it, and/or the consequences. A common example includes the Target Date Funds available in many employer sponsored retirement plans, which can vary dramatically in how aggressive or conservative they are even for funds with the same target date (i.e. 2055).

Revealing the Unknown Unknowns and the Real Value of Financial Advice

Now to be clear, financial planning is by no means rocket science. In fact, if anyone tries to convince you to the contrary, the apt advice would be to run the other way. With that being said, the financial complexities that many young professionals find in their lives are far from insignificant, and with an extreme shortage of time it’s often difficult—if not impossible with kids— to find the time to properly manage one’s own finances, let alone to exert the effort to uncover the items that we might not know, we don’t yet know.

Enter one of a (good) financial planners most important responsibilities: taking a 1000 LED flashlight to quadrant four. On top of gaining a deep understanding of who you are and where you want to go, helping to guide you and keep you on the path to getting there throughout all of life’s crazy curveballs, there is the critical responsibility of illuminating all of the risks, opportunities, and strategies for combatting the things you don’t know you don’t know.

This should also include a focused effort to shift as many things out of quadrant four and into quadrant one or two as possible. But why quadrant two and not simply quadrant one, you ask? Our goal with any client is to ensure that they understand as much about their situation as possible, however, many young professionals (and people in general) don’t necessarily want to fully understand the exact science behind the blood test that the doctor takes. And it’s no different when it comes to financial planning.

In general, most clients want to shift as many things from quadrant four to quadrant two—they now know that they don’t know what intricacies they need to look for when it comes to their disability insurance, but they do know that it’s important and more importantly that their financial planner is taking care to ensure that the coverage is adequate, and if not, how to resolve it.

 

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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