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BRITISH PHILOSOPHER G.K. Chesterton, in his 1929 book The Thing, introduced an idea now known as “Chesterton’s fence.”
Here’s how he explained it: Imagine two people walking along a road when they discover a fence blocking the way for no apparent reason. As Chesterton tells it, the first person looks at the fence and says, “I don’t see the use of this; let us clear it away.” But the second person disagrees: “If you don’t see the use of it, I certainly won’t let you clear it away.”
Why not remove the fence? The second person explains his reasoning. “Go away and think,” he tells the first person. “Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”
In other words, Chesterton is saying don’t remove something before understanding why it’s there. Indeed, even when something appears counterproductive—like a fence blocking a road—there’s likely a reason behind it. People don’t construct things for no reason.
Chesterton’s admonition, then, is that we should seek to understand why something exists before deciding to change it. Why is this so important? As Chesterton explains, the key risk in making any change is that it may trigger unintended consequences.
Perhaps the most famous example of this phenomenon occurred in China in the late 1950s. The Communist government decided that sparrows needed to be eradicated because they were damaging crops. A nationwide campaign encouraged citizens to kill sparrows, along with other pests. But because birds feed on locusts, the unintended consequence was that the locust population boomed. This resulted in even greater crop damage, triggering a famine that killed an estimated 45 million people.
That’s an extreme example and, to be clear, Chesterton wasn’t arguing we should never make any changes. Rather, he was simply advocating for a more structured approach to decision-making—including financial decisions. Considering a change? Here are five questions you might ask:
1. Urgency. A key challenge in making financial decisions is that, more often than not, the questions aren’t simple. Suppose you’re considering a change to your portfolio’s asset allocation. A single change could have at least three effects: If you’re making the change in a taxable account, it might generate a capital gain or loss. A shift in your asset allocation might also change your portfolio’s growth trajectory. Finally, it might change your portfolio’s risk profile. Because of this uncertainty, it’s easy to get stuck on a financial decision.
There’s a solution, though. In my view, there are three priorities to weigh in making financial decisions. They are, in order: managing risk, pursuing portfolio growth and, where possible, managing taxes. Evaluating decisions through this lens can be useful because it helps to answer the question, “How urgent is the proposed change?”
If you’re changing your asset allocation to reduce your portfolio’s risk level, you might decide that’s the most important thing—more important than whether it affects the future growth of your investments or if it results in a tax bill. On the other hand, if the reasons behind the proposed change are lower down on the priority list, you might proceed more deliberately, spending more time thinking about the potential for unintended consequences. For example, I’ve discussed the “magazine cover indicator.” Financial headlines have been found to be contrary indicators and shouldn’t be relied upon to drive financial decisions. With news headlines, in other words, the risk of unintended consequences is high.
In fact, we just marked the 25th anniversary of one of the more famously incorrect predictions. The cover of Barron’s magazine on May 31, 1999, declared that Amazon was a “silly” idea and dismissed Jeff Bezos as “just another middleman.” To be sure, Amazon’s stock could have gone either way. Still, this is an example of where Chesterton’s fence could have been helpful.
2. Importance. Another reality of financial decision-making: Some decisions are simply more important than others. A change to your asset allocation—moving dollars from stocks to bonds, for example—might have a very significant impact. It would thus be worth careful consideration. But with other decisions, the impact might be more limited.
Author Karsten Jeske, who runs the Early Retirement Now blog, is highly analytical, often carrying calculations out to three decimal places. But for some decisions, his recommendation is—unexpectedly—to “just wing it.” If we can’t be sure how a decision will turn out, but it wouldn’t make a big difference either way, we shouldn’t get too hung up on it. In those situations, in Chesterton’s terms, we don’t have to worry as much about upsetting the status quo.
3. Probability. In his 2023 book Decisions about Decisions, Harvard Law School professor Cass Sunstein offers a recommendation: Don’t focus on the likelihood of being right or wrong with any given decision. In many cases, that’s simply too difficult to know because the decision involves making a prediction. For that reason, Sunstein suggests not trying to forecast the likelihood of an event. Instead, where possible, he suggests weighing the cost of being wrong against the benefit of being right, both of which are easier to estimate without having to make a forecast.
4. Tax impact. Another key investment challenge: Decisions often involve weighing multiple unknowns against each other. Suppose you have an investment you’d like to sell but aren’t sure if it’s worth the tax impact. You can’t know the answer to this question because you don’t know how each investment will perform in the future. If you’d sold Amazon 25 years ago, you would have been very unhappy. If you’d sold Enron, on the other hand, you might have paid a bundle in taxes, but you’d also have sidestepped its subsequent bankruptcy.
What’s the solution? No amount of research can help investors predict which way a stock will go. But if you own a mutual fund and are considering selling it, the task might be easier. According to the data, high-cost funds underperform low-cost funds, on average. So, if you own a high-cost fund, you could weigh its annual expenses against the tax cost of selling it.
Suppose you have a $10,000 investment in a mutual fund that charges 1% in annual expenses. That would be $100 a year. If you switched out of that fund and into an index fund charging, say, 0.03%, you’d save nearly $100 each year going forward. Now let’s consider the tax side of the equation. If you have a $1,000 gain on the fund you own and pay 20% in taxes on that gain, the tax cost would be $200. Result: After two years, you’d come out ahead on this decision, and you might decide to proceed.
5. Alternatives. In the tax example above, you’ll notice I left something out: I assumed that the only difference between the two funds was their expense ratios. But that’s an oversimplification. Any two funds will likely perform differently going forward, and that difference could easily change the result. Very few financial questions can be evaluated with simple calculations. That’s why, especially where there’s less urgency and more uncertainty, I recommend viewing decisions in less binary terms. Instead, look for ways to split the difference, so you remain in the center lane.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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#3 reminds me of a thought I’ve had often in the past. There is one way to make certain that mistakes or failures (“learning experiences”) do not happen. That is simply to do nothing. One of my sons is launching a business and I’m serving as a “work when I want to” advisor! Recently, I noticed that he made a few mistakes with his first major business judgments. But he’ll be fine….made more right decisions than mistakes. He is doing something! Taking a risk is stimulating.
Well thought Out Risk Decision Making=Usually Good Returns!
Always an interesting article that is thought provoking Adam!
Numbers 4 & 5 remind me of my early engineering career. We were taught to “find an answer”. As a result, engineers tend to start by finding an answer, drawing a box around it, and saying “this is the answer”! In reality, there are many variables at play, and the qualitative and quantitative impacts of those variables, when fully assessed, might make “the answer” really a collection of answers – some of which might be satisfactory solutions and others that are not.
When unsure and planning to “just wing it” as Karsten suggests, I usually go 50:50. Not sure how to split the annual pre- and post-tax 401(k) contributions? Go 50:50.
Not sure whether to pay down the mortgage or contribute to the brokerage account with the annual bonus? Go 50:50.
Very helpful article. Makes for a good review checklist (or part of one) well before pressing the buy/sell button. Thank you!
It’s the urgency thing that always trips me up. When I decide to do something, whether it’s buying, selling or asking a girl out on a date, I have always had to do it NOW… and as a result whatever I’ve done has generally been mistimed.
It’s a miracle I have any retirement funds. It’s also a miracle I’m married.
Cass Sunstein’s advice is similar to “Pascal’s Wager”. When the subject of probability comes up in a discussion, its the likelihood of being right or wrong that I usually hear being argued. It is more important to focus on the costs of being wrong. I always learn something from your articles and it seems the more I learn, the better I appreciate the wisdom of adopting a “middle of the road path” in decision making. I could for example adopt a standard allocation, such as 60/40, simply because many experts have recommended it. But, if I derive the same or similar allocation myself, I will appreciate the logic behind it, and will more likely stick with it during future calm markets as well as wild ones.
Damn I wish I had thought of the Magazine Cover Indicator. Would have complimented Barroom Seminars. Early in my investing life I bought shares in some funds on the advice of magazine articles. The funds did take off splendidly. The problem is that the magazine didn’t tell me that problems were developing with the managing of the funds and I should have bailed before 2001.
Adam, Great piece! Reminds me of the words attributed to the late John (Jack) Bogle, “Don’t just do something. Stand there!”
Nice article Adam. I especially like #3 – evaluating the impact of results of decisions is a standard part of risk management. A low probability event that has a severe impact is worth addressing, often by insurance. Think fire or flood insurance.
Thanks for the Chesterton nugget. Change for its own sake is in vogue, and might affect our own thinking about our finances. This is another excellent “stop and consider “ article.
By the way, beyond Father Brown, G.K Chesterton wrote some thought-provoking fiction.
Adam,
Thanks for another great article! This one really sparked my interest; using Chesterton’s Fence followed by a decision framework provided an effective framework. Looking forward to your next one!
Bob
This is a great example of your writing that explains an important and useful personal finance tool. Thanks, Max