March 13, 2023
Dear Leland and Everett,
Sometimes making a change, even a necessary change, yields negative results in the short term. When I first learned this concept in business school, my professor labelled it ‘worse before better’. Though I learned the concept related to companies, it applies to individuals as well.
Stocks and flows
To explain this concept, let me introduce another: stocks and flows. Flows are pretty intuitive: they are the time and effort we put into an activity. The stocks, however, are less intuitive; they are whatever we have built up related to past activities. These could be capabilities, assets, or liabilities; the point is they exist independent of our short-term efforts. But stocks and flows impact each other: the more effort (flows) we put into a thing, the more stocks we build; the more stock we build, the easier and/or greater impact those flows become. Conversely, the less effort we put into a thing, the more those stocks dwindle. The challenge with behavioral change is that we often get confused by cause-and-effect: perhaps we add an activity and don’t see positive results, or perhaps we stop and activity and don’t see the negative results we expected; in either case it’s often the available stock that’s confusing our cause and effect.
Investing
The easiest way to illustrate this might be with investing, as it’s the most concrete and measurable. When we spend less than we make and invest our savings, our money compounds. At first the impacts of compounding are trivial: we don’t have much savings, and the compounding on a small amount is an even smaller amount. This might lead one to conclude that saving and investing don’t matter. Over time however, the impact of saving and investing (collectively, the ‘flow’ activities) becomes profound, such that in retirement we can live comfortably without an income, living off the assets (the ‘stock’) we accrued over time.
The reverse can be true as well: by spending more than we make, we take on debt. At first, the impact of taking on debt seems trivial: a small monthly credit card payment perhaps. Over time, however, the debt burden can become crushing, causing all sorts of financial discomfort and stress as the interest payments take up a larger and larger amount of our income.
I hope that you both start saving money as soon as you begin earning. If, however, you accrue debt in your younger years and decide to change course, you will learn to viscerally understand ‘worse before better’. Assuming for now you don’t have a sudden jump in earning (which happens, but unnecessarily complicates the point), you will need to cut expenses in order to move from spending more than you make to spending less. Cutting those expenses will degrade your quality of life: less dining at restaurants, fewer vacations, a smaller entertainment budget…in short, you will do less of the stuff you enjoy. And you won’t really notice a benefit! You will save for months and feel like you’ve barely put a dent in your loans, much less accrued any savings or wealth. Over time, however, you will start to pay down loans, and your interest burden will decrease; this will allow you to choose whether you add back a few luxuries or accelerate your savings (or even do a bit of both). Eventually you will pay off your loans and start building savings, which will allow you to reap the benefits of compounding and enjoy a far better lifestyle than when you were debt burdened. Unfortunately, you first have to go through the valley of ‘worse before better’.
Exercise
I am presently experiencing ‘worse before better’ with my exercise routine, for the same ‘stock and flow’ reasons. For what is now approaching three decades, I’ve neglected my health (or, more accurately, tended to my health sporadically). The short term impacts were always small: I didn’t really notice a deterioration in my health. But I was drawing down on my ‘stock’ of health slowly over time, and those drawdowns have compounded such that I am now weak, unfit, and brittle. As a result, my experiences these last ~6 weeks with strength training, cardio, and mobility work have been pretty unpleasant! Some days I feel tired and lethargic, some days I feel acute muscle soreness, and some days I feel stiff from stretching out creaky joints. I didn’t feel these pains when I wasn’t exercising! And yet, we all sorta know that exercising and stretching will lead to improved health; eventually I will feel better, I just need to go through the valley of ‘worse before better’ first.
Lessons
The lessons for you two? I think there are 5:
- Start saving as soon as you start earning. Habits matter; even if your income is small, save a small percentage. As your income grows, grow your savings. If you need to take on debt when you are young (say, to pay for a classes or a degree that will enhance your earning potential), pay it off aggressively, so that you can start saving and compounding interest.
- Maintain an exercise routine throughout your life. Be sure to include some combination of strength, cardiovascular, and mobility training. Your focus between the three may adjust over time. Your overall effort may wax and wane. But try to keep all three in your lifestyle in some way or another. Unlike savings, your health will naturally deteriorate over time; you may want to set periodic checkpoints (perhaps participating in a 5k race) to help you track the deterioration to make sure it doesn’t become too dramatic.
- If you fall behind on either #1 or #2, adjust course as soon as you can. Gird yourselves for the valley of ‘worse before better’. Most behavioral change dies in the valley of ‘worse before better’ because we don’t expect it; charting a course through the valley is the most effective way I’ve found to sustain the change (and achieve the outcome) you seek.
- Of course, saving and exercise are not the only types of stocks and flows you will experience in life, they just happen to be the most universal. Whenever you want to pursue behavioral change, think about how stock and flows might impact your trajectory, and to the extent possible, map out what you expect from the ‘worse before better’ phenomenon.
- When you are part of a group that needs to make a change, help that team anticipate ‘worse before better’. Stocks and flows are not intuitive, and experiencing discomfort from behavioral change often causes teams to revert back to old behaviors, even when we know those behaviors are no longer optimal.
How do we know we’re in the valley?
How do you know whether you are in the valley of ‘worse before better’, or if your change just isn’t working? Ah, this is the proverbial million dollar question. Sometimes this will be as much art as science, and you will just have to navigate and trust your instincts; somehow I feel like I can tell the difference between unhealthy and unpleasant-but-healthy pain in my exercise routine. As much as possible, however, you will want to measure. If you are paying down debt this is relatively straightforward: you can map out your savings plan and chart out how long it will take you to pay off your debt, and then accrue savings (with some reasonable assumption around investment compounding). If you are (like me) starting an exercise routine, combine the measurable with the subjective: the measurables might include weight, body fat %, muscle mass, how long it takes to run a mile, how much you can lift, and whether you can touch your toes (or perform other mobility movements); the subjective might include pictures with your shirt off, how you feel after a mile run, or how you feel when you wake up in the morning. You might not be able to plan your growth very accurately (at least not in the early stages), but you can at least track changes.
Set milestones, stack wins
After you’ve decided what metrics to track and (in the example of saving) come up with a plan, try to identify milestones along the valley of ‘worse before better’. If you are cutting expenses, how long until you are able to add back some perks? How long until you are able to recover to your current lifestyle? Knowing these things in advance will help you get through the unpleasantness of reducing your expenditures. If starting an exercise routine, start identifying goals that help you generate ‘little wins’. At first this just means doing a workout (this is my current stage). Eventually, you will be able to start formulating goals like “I want to cut 30 seconds off my mile time” or “I want to add 30 pounds to my bench press”. Maybe you identify a long-term goal that gets you excited; start breaking that goal down into manageable chunks, so that you give yourself goals you can accomplish this week and this month. Set the bar low to start: stacking wins matters hugely at this stage. Once habits have formed you can set more ambitious short term goals. Starting out you will need all the help you an get to survive the valley of ‘worse before better’, so set goals you know you can meet, then increase your ambition as you become more confident your habits are set.
I’d love to believe that you’ll never experience the valley of ‘worse before better’. The truth is that even if you maintain a savings and exercise practice, you will identify some behavior in adulthood you need to change. While you guys are young you learn so fast that your feedback loops are practically instant: you can get noticeably better at almost anything within a practice session. In adulthood this changes, and so you will need to learn tools to overcome the frustration that sets in when the learning curve of youth flattens out. I’m hopeful this note gives you a rough outline on how to proceed when you get there.
I love you,
Dad
Letters to Leland 