I’m thinking about how the Steely Dan lyrics, “When Black Friday comes, I’m gonna dig myself a hole…” seem fitting for the way some people approach the day after Thanksgiving. We make so many unconscious choices with money throughout the year, but during the holidays, no sooner does the mania of Black Friday strike, than we race out to shop.
It seems impossible to escape the financial news. You might even ask yourself, “Why should I care?” The answer is, you probably shouldn’t. The point is that we’re bombarded with all kinds of “information” that is supposedly making us more informed about markets and investing. The ‘news’ usually focuses on telling us what has happened. It certainly doesn’t help inform us of what is likely to happen.
In last month’s article, we looked at some of the reasons why many people have a hard time committing to a financial strategy that includes saving for retirement. We naturally have a bias toward living in the present. We tend to value immediate gratification versus the longer-term considerations of future rewards. Experiments have shown that our brains are wired to give us a biochemical “charge” (in the form of dopamine released) when we indulge in the short-term satisfaction of spending money or similarly getting something we want (such as a marshmallow now versus two marshmallows later.) Saving feels like depriving ourselves. Some people are naturally good at saving. How can the rest of us become better at it? Here are four key ideas that can help.
I realize many people are skeptical that stocks are a good way to save for retirement. It can seem like such a gamble or leap of faith. They just don’t trust that their hard earned dollars will be there when needed.
“Will I run out of money before I die?” I wish I could say there was a simple yes or no answer to that question. The answer is more complex, the result of many factors including probability, luck and skill. Nicholas Taleb in his book, Fooled by Randomness, highlights some of the ways in which common tendencies of the human mind interfere with clear decision-making. He begins by asserting that luck plays a larger role in our lives than we realize. We tend not to see it for a number of reasons.
I attended the FPA NorCal conference in San Francisco this week. In his talk on behavioral finance Barry Ritholtz talked about “expert forecasters”, the people we see daily who are willing to tell us the direction of stock markets, interest rates, gold, etc. One of his slides stated that expert forecasters’ predictions are no better […]
Click "Read More..." below to get to video. This week I had the opportunity to practice my speaking and did this impromptu piece on money and emotions. The most important point I want to emphasize is that any time our emotions become involved when we're making a financial decision it is very difficult for our analytical mind to step in and lead us to a better decision. This is based somewhat on last week's post on the reflective vs. the reflexive brains.
My reading this week led me to the intersection of neuroscience and money. Inspired by Jason Zweig’s book Your Money and Your Brain we'll look at the reflexive brain vs. the reflective brain. These concepts help us to understand some of the biological forces at play and how our emotions get in the way of good decisions.
Picture the following two scenarios. In the first, you open your mail and find a check for $500! In the second, you go out to your car and discover a $500parking ticket parking ticket. Compare your reactions. You feel great about the check, thinking of fun or practical ways to spend the money. The parking ticket, however – not so much. What a downer! In fact, you might say you feel twice as bad about the loss as you felt good about the gain. In the past 40 years, the field of behavioral finance has gathered significant data to suggest that our emotions about money can cause us to make errors in judgment of which we are not even aware.
Not long ago, I found myself engaged in the delicate task of trying to lead my son to a sensible decision without giving the impression I was telling him what to do. He was considering not taking traffic school for a speeding ticket. It’s rare to get the opportunity for a “do-over.” He could pay more for insurance in the long run if he passed up the chance today to make amends for the ticket. The consequences of a poor decision can last many years. I enlisted the old adage about “shooting oneself in the foot.”