“It was totally worth it.” In this case, “it” referred to a Vitamix blender that a friend recently had purchased. He wasn’t the first. Indeed, I don’t know anyone who has purchased a Vitamix blender and didn’t share my friend’s effusive sentiment, even after spending between $429 and $719 (for the new line of G-Series models). For a blender.
But despite my appreciation for these friends and their opinions, I can’t help but notice their errors in judgment, explained by behavioral science, that, if followed, could lead to an unwise purchase for you or me.
To be clear, it’s not their purchase of the blender that I’m questioning. Rather, it’s their insistence that said purchase is a universal must. Worth, you see, is relative. What is “worth it” for you may not be “worth it” for me. Ultimately, determining the worthiness of your next purchase depends on many factors, but chief among them are 1) the joy you receive from using the product, 2) your personal cash flow, 3) how much you will use the product, and 4) the cost of available alternatives.
Anthony Anderson is a funny dude. The Emmy-nominated actor has been making people laugh on television and in film for 20 years. But now he’s bringing his sense of humor to a surprisingly unfunny topic—the need for life insurance.
“I know firsthand from friends and other family members who’ve never had a policy, who’ve never thought about having a policy. And then all of a sudden someone passes in their family and they don’t know what to do,” Anderson told me.
Fair enough. Many people aren’t even aware of the need for life insurance, and that lack of education is a big concern for Anderson, and a major driver of his dedication to public awareness. But as we continued our conversation, it shifted focus. What it seemed to begin revealing were some of the tragically comic, ridiculous reasons that many people choose not to buy life insurance. Here are the Top 5:
5) I’ve got more important things to insure.
“People insure their flat screen televisions, they insure their cars, they insure jewelry, but they don’t insure themselves,” says Anderson with a chuckle. He’s also evidently frustrated by this reality. “If it weren’t for themselves, they would have none of those things to insure.”
A friend of mine had a lifelong dream of opening up a coffee shop and was willing to put a highly successful career on the line to pursue it. Fortunately, he was presented with an amazing opportunity to test-drive his grass-is-greener ideal, and the results might surprise you and offer guidance that you can apply to your next big decision.
Dave had it all planned out, even down to the lighting and indie musicians that would be playing on Thursday nights in his vision of the perfect coffeehouse.
Then he got an opportunity that most of us don’t have before we make the plunge: He got to learn the ropes working at the best café in Chicago. He immersed himself in coffee culture for a week of training that was nothing short of blissful. Then, he got a chance to put it to work for another few weeks.
His findings? In an average eight-hour day, he got to interact with customers and craft their coffee concoctions for approximately 20 minutes. The remaining seven hours and 40 minutes were spent with dirty dishes. Lots of dirty dishes.
In a new CNBC series on which I’ll be a regular contributor, I offered some “Straight Talk” on Social Security retirement benefit strategies that, while simple, are all too often missed.
It should be no surprise, because Social Security is an incredibly complex animal. Did you know that each U.S. married household represents potentially thousands of different Social Security options? It’s likely that you’ll need to confer with a financial advisor specializing in Social Security distributions in order to determine how you can get your maximum benefit.
Does market volatility tempt you to question your investment strategy, even if it’s well thought out and carefully implemented?
Does it weaken your resolve to resist the sky-is-falling siren song heard so frequently in the financial media, or the sales pitch du jour?
Having the right investment strategy is important—really important—and surely contributes to long-term success in building wealth. But no matter how superlative your strategy, it’s your willingness to stick with it that ultimately will help you meet your financial goals.
When it comes to investing, rely on long-term wisdom
When it comes to the market’s peaks and troughs, investors often don’t react as rationally as they might think. In fact, in times of extreme volatility or poor performance, emotions threaten to commandeer our common sense and warp our memory.
It’s called “recency bias.”
What the heck is recency bias?
Recency bias is basically the tendency to think that trends and patterns we observe in the recent past will continue in the future.
It causes us to unhelpfully overweight our most recent memories and experiences when making investment decisions. We expect that an event is more likely to happen next because it just occurred, or less likely to happen because it hasn’t occurred for some time.
This bias can be a particular problem for investors in financial markets, where mindful forgetfulness amid an around-the-clock media machine is more important today than ever before.
Try thinking about it this way. In the high-visibility and media-saturated arena of pro sports, every gifted athlete knows that the key to success can be found in two short words: “next play.”
The most compelling findings regarding financial decision-making are found not in spreadsheets, but in science. A blend of psychology, biology and economics, much of the research on this topic has been around for years. Its application in mainstream personal finance, however, is barely evident. Perhaps a simple analogy will help you begin employing this wisdom in money and life: The Rider and the Elephant.
First, a little background.
Systems 1 and 2
Daniel Kahneman’s tour de force, Thinking, Fast and Slow, leveraged his decades of research with Amos Tversky into practical insight. Most notably, it introduced the broader world to “System 1” and “System 2,” two processors within our brains that send and receive information quite differently.
System 1 is “fast, intuitive, and emotional” while System 2 is “slower, more deliberative, and more logical.” The big punch line is that even though we’d prefer to make important financial decisions with the more rational System 2, System 1 is more often the proverbial decider.
Many other authors have built compelling insights on this scientific foundation. They offer alternative angles and analogies, but I believe the most comprehendible comes from Jonathan Haidt.
“Greece is a tiny player in global capital markets. Its default is 100% certain,” says Larry Swedroe, Director of Research for The BAM ALLIANCE and the author of 14 books on investing, including his most recent, The Incredible Shrinking Alpha, co-authored with Andrew Berkin.
“The only question is how much and what they default on,” Swedroe continues. “But with a GNP that is similar to Rhode Island’s, Greece’s default should have little to no impact on the world’s economy, at least not directly.”
So why is everyone so worried?
Because raging forest fires are kindled from a single, tiny spark. “Greece’s default could trigger a broader contagion, like a run on Portuguese banks or a lack of confidence in the ECU, that may have wider ranging implications for larger economies,” says Swedroe, my colleague.
“You don’t really do this stuff—do you?” The question came from a major network anchor after the camera stopped rolling. The topic was budgeting.
He certainly isn’t obtuse, and he wasn’t being patronizing or condescending. It was a legitimate question that accurately reflects the underlying perception held by most people in any demographic–that budgeting is for those just scraping by and young people just getting started. A tedious chore reserved for those lacking the means to do otherwise. A humble state from which most of us hope to graduate.
But this is a misconception. In truth, the budgeting process can help people at every stage of life and every income level articulate and align their deeply held values with their financial priorities, which is the first step on the path to integrating money and life. However, there is more to be gained from the discipline of budgeting (at least in terms of raw dollars) for those of means. Better said, there is less to be lost by families who earn especially high incomes.
Like the Blue Jays’ Daniel Norris, a good financial planner is true to him- or herself.
“Stop asking questions, Maurer, and do what I tell you to do,” said the general agent for the Baltimore region of a major life insurance company.
“I made over a million dollars last year!”
“I buy a new Cadillac every two years — cash on the barrelhead.”
I was told how to dress: Dark suits, white shirts, and “power ties” that weren’t too busy. Light blue shirts were allowed on Wednesdays. Never wear sweat pants, even to the gym. Enter and exit the gym in a suit. Your hair should never touch your ears or your neck. Facial hair was strictly forbidden. Jeans, outlawed.