Back in 2002, the US Secretary of State for Defence, Donald Rumsfeld whimsically declared; “There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know.” Most people just laughed.

In psychology there are 4 stages of competence. Psychology teaches us that we would all do well to remember where exactly we are on the chart before we make decisions.

The 4 stages are: Unconscious Incompetence, Conscious Incompetence, Conscious Competence and Unconscious Competence. Think of it as learning a new skill or developing a new idea. In the first phase you know nothing about the skill and, indeed, you don’t even appreciate that you don’t have the skill. You don’t know what you’re missing! Curiosity and a natural desire to learn are the prime drivers in getting people from stage 1 to stage 2 – we know what we don’t know. Humans find a particular comfort zone here. We are good at testing what we don’t know and we learn from our mistakes.

This learning takes us on to stage 3 where we know what we know; and by implication we recognise that there’s other stuff that we don’t know. In stage 3 we use our known skills over and over and this helps explain how we interact with others and how we make decisions. Complacency then takes over and moves us on to stage 4 where we become so adept at knowing what we know that we perform skills unconsciously. This leads us to multi-task where it is so easy for us to perform one task that we can do a second one without any fuss. Think of driving a car and putting on your make-up at the same time!

When making financial decisions we should always fall back on what we know. Pushing out into the unknown can be dangerous and can have consequences that we don’t even know about. MMPI has a business philosophy that we only deal with concepts that we know. This helps us control the risks associated with stepping into the unknown abyss of financial uncertainty. MMPI also has a policy of only dealing with people that we know – this eliminates the unknown risks of dealing with strangers.

Finance can be complex for a lot of people. It has a mathematical basis that people find confusing. A sizeable proportion of people just don’t understand numbers. People tend to adopt certain biases. They will buy the cheapest insurance possible having no regard for the consequences where a claim arises. They will be attracted by glossy brochures or fancy sales talk. They will haphazardly move from one stage of competence to another without spending sufficient time learning at stage 1. Of course, finance is not the only area where people display such indiscipline. It is, however, the most observable because it is a regulated activity.

In Ireland, the Consumer Protection Code is compulsory reading for all.