Relying on previous experiences can hurt your bank account. Here’s how to change that habit.

The term "law of the instrument" was coined in 1964 to describe the cognitive bias that involves relying too heavily on a familiar tool. Here's what that means for your money.

Hammer and nails

While the psychologist Abraham Maslow is best known for defining the hierarchy of needs, his vast catalog of writing has produced many gems. His 1966 book, The Psychology of Science, includes these words of wisdom:

I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.

While the term law of the instrument was coined two years earlier by philosopher Abraham Kaplan to describe the cognitive bias that involves relying too heavily on a familiar tool, the actual concept predates both men.

Let’s take a look at how this bias operates and what that means for your financial life.

Tools on wooden table

Understanding what you’re trying to build

The law of the instrument comes into play in daily life if you refuse to adapt to changing circumstances by adding further tools to your toolkit. For example, many designers learned their design skills in Photoshop. Yet today, Figma is a far superior tool for many of Photoshop’s functions (which is why Adobe purchased the company). Most notably, Figma allows global collaboration on a level never before achieved by a design platform.

Regardless of personal preferences, many businesses have adopted Figma due to increasing numbers of remote workers needing to collaborate. Focusing solely on Photoshop could harm your chances of developing Figma skills necessary for future employment opportunities.

This cognitive bias has been likened to the French concept of déformation professionnelle (viewing everything through the lens of your own profession) as well as the Einstellung effect (coming to quick conclusions by using previous solutions that worked).

The Einstellung effect involves using a heuristic that might not be appropriate for the current situation. And this is where it could affect your financial life.

Tunnel vision

Breaking bad habits

Einstellung means “attitude.” In the case of the Einstellung effect, your attitude toward previous problems dictate how you approach present situations. While this could be applicable and provide the best solution, often it does not.

Thus, this bias creates tunnel vision. You look at a challenge in front of you and automatically reach for your trustworthy hammer instead of pulling out a range of other tools at your disposal. Sure, learning mastery with another instrument might be uncomfortable at first, but access to a diverse range of skills will always suit you better in the long run.

At the very least, it could present you with solutions you hadn’t considered before.

That’s how we arrive at a critical juncture in finances. Interest rates recently surpassed 7%. The companies that benefit most from soaring interest rates—namely, big banks—have been experiencing record profits for two years in a row. And they’re using money from customer savings accounts to offer mortgages (and other loans) at these high rates while returning, on average, .16% back to their customers.

This is where the law of the instrument comes into play: most customers will not look for better options for storing their money. True, the last round of I Bonds were sold at record rates, but we’ve covered the issues with variable rate bonds. Since they’ve grown accustomed to having their money parked at their bank, they don’t really consider how much better their money could be working for them.

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Here’s some data that highlight this fact: even though 34% of respondents in one survey said they wanted to save more money, 88% of respondents said they were unwilling to switch banks regardless of fees or lower interest rates. Inertia is real—and here we see how cognitive biases often work in conjunction.

Even saving money is a challenge for many, as one Buzzfeed article recently highlighted with Millennials and Gen Zers. Storing away 10% of your paycheck for savings and another 10% for retirement is impossible if you’re barely making enough to survive—or if what you’re able to save isn’t being rewarded.

As with any cognitive bias, knowing that you’re a victim of the law of the instrument (or any of its analogues) is the first step in working through it. A plan to overcome this bias could look something like this:

  • Identify the specific problem you’re grappling with: my money isn’t working for me
  • Understand how broad of a problem it is and how it’s impacting your life: the lack of return on my money is harming my chances to save up to buy a house or for retirement
  • Look at the variables within your control and put aside variables outside of your control: I can’t change big banks but I can put my money elsewhere
  • Recognize resources and options that are available to you right now: there’s this one company I’ve been hearing about…
  • Strategize about the best next steps to take: I’ll think about unbanking

Empowering yourself by stretching beyond preconceived boundaries and applying new knowledge and skills are healthy practices at any age that stretch across many domains of life. It’s particularly important when it comes to getting the best value for your money, as that’s one domain that will help with most other areas of your life.


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