Theory X and Y

January 2022

Theory X and Y – featured in the Hunts Post on 26.01.22

Anyone who has read or listened to anything about the brain would have heard about the part of the brain called the “amygdala”.

Which are basically two sets of cells located either side of the brain that help define and regulate our emotions.

We react to situations either with an immediate response or with a delayed, considered view.

I feel sure, like me, that you have responded in a certain way to a question or scenario and then at a later date, when you have had time for more consideration, come up with a different, more appropriate response.

Try and answer these three questions with your first thought and then again after further consideration:

1). A bat and ball cost £1.10 in total and the bat costs £1 more than the ball.

How much does the ball cost?

2). If it takes five minutes for five machines to make five widgets.

How long does it take 100 machines to make 100 widgets?

3). In a lake, there is a patch of lily pads. Every day the patch doubles in size.

If it takes 48 days for the patch to cover the entire lake, how long does it take to cover half of the lake?

Source: S Frederick Cognitive Reflection and Decision Making Journal of Economic Perspectives 19 (2005).

Don’t worry about how well you did in the quiz, Frederick tested 3500 people and only 17% scored three out of three, with 33% getting all of them wrong.

Theory X deals with your immediate response and Theory Y deals with your considered opinion. The way that we look at scenarios and how we react is important when it comes to both financial planning and investment management, and experience helps with theory Y.

When you first looked at suduko or a rubik’s cube, you probably found it difficult and although you may still, your experience teaches you that there are logical considerations needed.

Beacon started our Ethical portfolio’s over 10 years ago and decisions have evolved with experience and knowledge, due to the extra layers of research beyond normal portfolio construction and management. Theory Y if you like. Our outperformance of other Ethical portfolios is, we believe, because others use Theory X based on normal rules.

The same applies to financial planning. As a chartered and certified planner, the level of knowledge is vast and far exceeding that of the basic diploma level. Theory Y is therefore, in my opinion, more considered. Afterall, how can you consider things you don’t know? It’s another reason why we have specialists in almost every field, be that Education, Medicine or architecture, for example.

No-one knows it all but I would rather rely on Theory Y.

How did you do with your answers?

Answers:

1). 5p.

2). 5 minutes.

3). 47