In Ancient Greek philosophy there were three ways you could try to persuade someone. You could appeal to their emotions, what was known as pathos. You could appeal to authority or expertise, which was ethos. Or you could appeal to reason and logic, known as logos. These three techniques (pathos, ethos, and logos) became the basis for Aristotle’s Rhetoric and had a profound impact on how people tried to persuade others throughout history.
In the martial arts community, pathos, ethos, and logos were all employed at different points in time when trying to persuade outsiders as to which fighting style was most effective. As Allen Farrington and Sacha Meyers highlight in Bitcoin is Venice, initially the martial arts community relied on pathos. Starting in the 1960s Hollywood movies showcased dramatized fight scenes to play on audiences’ emotions and convince them that one way of fighting was better than another. Following this, the community re-oriented to focus on ethos, or appealing to an authority figure such as a sensei or teacher. It wasn’t about what techniques were the best, it was about respecting tradition and listening to the masters.
Unfortunately, neither pathos nor ethos allowed one martial art to be tested against another. We didn’t know if karate was better than kickboxing or judo was superior to taekwondo. It wasn’t until the 1990s when the Gracie family popularized their style of Brazilian jiu-jitsu and created the Ultimate Fighting Championship (UFC) that everything changed.
With the UFC, every martial art could be pitted against every other. We didn’t have to rely on what an expert claimed in their dojo. We could test it in the octagon instead. It was a logical way to determine which fighting style was the best. It was logos. Long story short, after many tests, the Gracie family and their Brazilian jiu-jitsu reigned supreme. Logos succeeded where pathos and ethos had failed.
I bring up the evolution of rhetoric within martial arts from pathos to ethos to logos because the same thing is happening in the personal finance community. An area that was once dominated by appeals to emotion and authority (pathos and ethos) is now being inundated by those using data and reason (logos).
If you want to understand this transition, consider one of the most well known personal finance books of all time—Think and Grow Rich by Napoleon Hill. Written in 1937, the book focuses on how your mindset influences your wealth. The idea is that you can simply “think” your way to riches. As Hill states:
When you begin to think and grow rich, you will observe that riches begin with a state of mind, with definiteness of purpose, with little or no hard work.
As intriguing and emotionally appealing as this idea is, unfortunately, it has no basis in empirical reality. Like many other such works in personal finance, the core idea of the book is about getting rich quickly and easily by following a simple set of mental principles.
Unfortunately, this is the problem with pathos in the personal finance community. It sounds enticing and makes you feel good, but it’s advice is typically hollow and untestable. As stated in Bitcoin is Venice:
Knowledge arrived at by [pathos] can of course be legitimate, but we can only know this by providing a proof. If practical…a proof requires a test…In fact, the point in these circumstances is to avoid such a test at all costs. It is the feeling of knowledge that must be preserved; not the fact of it or lack thereof.
The fact remains that there is no way to test whether your mindset actually makes any difference when it comes to building wealth. Of course, I’m not arguing that mindset is irrelevant in building wealth, only that it can’t be tested and, therefore, is unfalsifiable. It’s religion, not science.
To test whether a particular mindset is useful for building wealth, we would need to do a randomized controlled trial where one group of people followed one mindset and another group followed a different mindset. And then we would have to compare how those two groups of people built wealth over time. Unfortunately, this isn’t possible. We can’t control a person’s mindset with a pill or a machine. And even if we could, the ethics of doing so are another story altogether.
But we can disprove this mindset idea by simply inverting it. Oh, you’re poor? It’s because you aren’t “thinking” the right thoughts. I can’t even type these words without laughing. Did the dogecoin millionaires think themselves into wealth? What about all those lottery winners? Maybe Warren Buffett’s children have had the right “mindset” their entire lives.
The absurdity of mindset for wealth building is revealed in its extremes. Of course, many people have found Hill’s work useful. I won’t deny this. But there are lots of ideas that are useful to people even if they aren’t necessarily true. Historically, many of the arguments in personal finance have been made in this way. Appeal to emotion or authority. Don’t prove what is true, just state what you believe to be true.
Now compare this line of thinking to what was put forth in The Millionaire Next Door, a personal finance book that relies heavily on empirical data and research. Before this book, people believed that the rich were living it up with sports cars, mega mansions, and a daily dose of caviar. The image of the rich came from what we saw in the media (television/movies/etc.) and from what other famous rich people told us (i.e. experts). It was pathos and ethos once again.
And while these depictions were true for some rich people, The Millionaire Next Door demonstrated that this characterization was false for most rich people. This book taught us that most millionaires don’t have huge houses, fancy cars, nor a caviar addiction. With one fell swoop, an entire sector within the personal finance industry came undone. Logos hung ethos and pathos out to dry.
And thanks to modern information and computing systems, these kinds of revelations will only accelerate in the future. Old, flawed ways of thinking will be pushed out by new data and evidence.
This has been my goal each and every week on Of Dollars And Data and with the publication of my book Just Keep Buying. I’ve tried to demonstrate that a lot of what we have been told by personal finance experts and their emotional appeals are false. Whether we are discussing cutting spending versus raising income, buying the dip, or maxing out your 401k, many of our beloved personal finance beliefs are simply not true.
One of the reasons we know all this is because we can test these beliefs in a way that we couldn’t 20 years ago. We have better data and faster computers now, so we can simulate things more easily today than in the past. As a result, evidence-based investing has taken off and shows no signs of slowing down. Whether we are trying to understand peoples’ personal finances or the complexity of their portfolios, logos has taken control of the ship. Pathos and ethos need not apply.
This doesn’t mean that pathos and ethos aren’t useful. In fact, I find both of these rhetorical techniques quite effective depending on the circumstances. For example, if you want to sell a digital watch, you don’t brag about its technical features (logos), you demonstrate how it could save your life (pathos). But, when it comes to your money, I find data and evidence more convincing than belief and conjecture.
Of course, not everyone will be convinced by logic. And that’s fine. Because I don’t need to convince everyone. I just need to convince those who are open to hearing more. Thankfully, it’s been working.
As I shared recently, Just Keep Buying has sold over 35,000 copies worldwide in its first six months. For context, a typical New York Times bestseller (in nonfiction) sells about 21,000 copies in its first year. Logos is winning. Slowly, but surely.
For everyone that has followed along, thank you for being a part of the journey and, as always, thank you for reading.
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This is post 316. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data