The Standard & Poor’s 500 stock index has climbed steadily and surpassed its 2007 peak last week, and even sluggish European markets are showing signs of life as investors rush back in.
This interregnum between the collapse of global financial markets in 2008-09 and the next bubble – whenever and wherever that may occur – is a good time to reconsider investor behavior.
In this video, Ben Jacobsen, a finance professor at Massey University in New Zealand, discusses behavioral economics, market panics, and “strange” and inexplicable behavior.
“Most people,” Jacobsen concludes, “have a great difficulty assessing risk and what risk is.”
Check out another blog post about research confirming that people tend to rush in when the market is rising and pay dearly for stocks and then sell in a panic after experiencing large losses. Morningstar data also indicate that long-term investors have better returns if they buy and stay put.Learn More
Impulse purchases – new spring clothes or an expensive dinner out – can create a rush. But a few minutes of pleasure can blow a hole in the budget for a month. If it’s chronic, it can eat into savings for a down payment or retirement.
The reason for these rash decisions is obvious: see it, want it. But for people who want to better understand – and prevent – their impulse buys and remain on budget, FinCapDev, which is hosting an online competition for a financial literacy app, recently posted a reading list of three research papers that explain why we can’t resist buying stuff.
One study has confirmed that store browsers actually are vulnerable to impulsive purchases, because the act of browsing through a store’s merchandise produces positive feelings. “It is a state of high energy, full concentration, and pleasant engagement,” researchers wrote in a 1998 paper that is probably relevant to online browsing. Can you relate? …
As I sat in an orthopedist’s office last week watching the doctor poke and prod my mother’s legs – an irritated nerve may be causing her severe pain – this thought struck me: long-term care is often an unspoken topic but one of enormous magnitude.
I’ve always taken for granted that my active mother, who plays a killer game of bridge, wouldn’t need much medical attention for another 15 years. I have evidence of this, I’d convince myself: her mother lived to age 92 and some uncles lived even longer. The pain makes it difficult for my mother to walk her dog, though she gamely hobbles through her day and even insists on league bowling on Wednesdays.
It’s so much easier to shove aside worries about long-term care for the elderly – our own or our parents’ – than it is to contemplate the financial and deeply emotional issues required to care for an aging parent. The video below tells a true story about what happens when the requirements of care slam us hard, as they often do.
Violet Garcia is a single mother of Filipino descent living in Kodiak, Alaska, which is situated on an enormous island south of Anchorage. The public school worker cares for her elderly mother, who can’t be left alone. Garcia aspires to send her middle son away to college soon, but that will create a problem on Sundays, when he takes care of his grandmother so his mother can run errands. …
Over the past 25 years, the difference in wealth held by white and black households in the United States has nearly tripled, to $236,500.
In December, Squared Away wrote about the difficulty that black families have in trying to accumulate wealth so they can pass it on to their children. New research out of Brandeis University’s Institute on Assets and Social Policy now finds that the gap between the median net worth for white and black households has widened to a chasm, as blacks have fallen farther behind.
The study also quantified the reasons for the widening gap and found that the difficulty of building up housing equity is the largest factor.
A house is usually the single largest asset owned by middle-class American families. But starkly different homeownership patterns between blacks and whites – ownership rates are lower for blacks, who also own their homes for fewer years than whites – accounted for 27 percent of the increase in the wealth gap.
Housing’s impact has been “incredibly large” and is the “key driver” of the growing black-white wealth gap, said Thomas Shapiro, the institute’s director. “It’s part of the disadvantage that keeps working its way through the life course” from one generation of a black family to the next, he said. …Learn More
Repeated loud warnings by financial advisers fail to reverse the human tendency to panic when the market plunges and to rush in after it’s gone up.
Withdrawals from 401(k)s and IRAs surged between 2001 and 2003 after high-tech stocks declined, but the money went back in in 2005 through 2007 after the S&P500 index had soared nearly 27 percent in 2003 and 9 percent in 2004, according to new research by Thomas Bridges, a graduate student in economics, and Professor Frank Stafford, for the University of Michigan Retirement Research Center.
“They think I have $500,000, and if I don’t take it out now it’s going to be $50,000. It’s a panic mentality,” said Stafford, who was surprised by what they found.
Withdrawals increased again after the2008-2009 market collapse pummeled investors stock portfolios. The Michigan researchers found they withdrew their retirement savings for a variety of reasons, but primarily to pay mortgages and medical bills and also to make major home repairs.
His take on these grim findings: “These are the guys from Main Street trying to figure out Wall Street, and they can’t do it.”Learn More
A few more jobs reports like February’s might put a dent in the nation’s still-high unemployment rate. The Bureau of Labor Statistics said U.S. employment surged by 236,000 last month, nudging the jobless rate down to 7.7 percent.
But a summary of unemployment rates for various age groups, recently published online by the Urban Institute, showed variations in the rate, by age. Rates have been consistently lower over the past decade for older workers than for those in their 20s, 30s, and 40s – even during and after the Great Recession.
In a still-sluggish economy, one might wonder: are older workers who remain on the job somehow depriving younger adults of work?
There is “absolutely no evidence of such ‘crowding out’, ” concluded the Center for Retirement Research, which supports this blog, in a recent study analyzing the labor market from 1977 through 2011. To rigorously test this relationship, the researchers tried several statistical variations – even looking at the older-younger worker dynamic during the Great Recession. They kept getting the same result: no crowding out.
In fact, they noted that their own evidence and research by others suggests the opposite. When older people have jobs, they add to consumer demand and fuel the economy. The authors conclude that “greater labor force participation of older workers is associated with greater youth employment and reduced youth unemployment.”Learn More
The American psyche gets a lot of credit for fueling the boom in U.S. home prices, which ended in 2006. As houses increased in value, homeowners felt richer, and they spent more. Similarly, falling house prices led to declines in consumer spending as households found themselves poorer and less able to access credit, according to a new paper, “Wealth Effects Revisited: 1975-2012,” by economists Karl Case, the late John Quigley and Robert Shiller.
In this interview, Case explains this “wealth effect.”
Q: Why were our spending decisions influenced by our psychology during the housing boom?
Case: The increase in house prices was like magic. They went from the 1950s until 2006 without ever falling nationally. The numbers are astonishing. If you look at the Federal Reserve’s Flow of Funds Accounts, the value of the owner-occupied housing stock in the United States increased from $14 trillion to $24 trillion. All of a sudden the collective balance sheet of U.S. households had $10 trillion worth of assets that it didn’t have before. That’s a very big number.
The first thing I asked myself is, How did I behave? I bought a house in Wellesley [Massachusetts] for $56,000 in 1976. When I sold it in 1991, it was a $240,000 asset. I know my behavior changed. I was in my 40s, and I found myself with a quarter million dollars that I didn’t know I had. It made me feel wealthier, and I spent more and saved less than I otherwise would have. Home equity loans and second mortgages made it possible for homeowners to withdraw their newly acquired equity to finance a higher level of spending and/or a new or bigger home.
Q: How do we decide we’re feeling richer?
Case: Household wealth is made of many things: houses, cars, and financial assets. The value of any asset, including housing, is determined by what people are willing to pay for it. What determines that? Our expectation of whether it will go up in the future. If you have a house I think is going to go up 10 percent per year, I’m willing to pay more for it than if I think it’s not going up at all. That’s how psychology drives the housing market.
In annual surveys for another paper, we asked 5,000 people going forward 10 years, what do you expect the average annual increase to be in the value of your house? They said 8-10-12 percent per year. They were feeling better because their house was worth more. That leads to more spending.
Q: Is it fair to say the housing market was one of the primary influences on the economy?
Case: Absolutely. Our finding has been very controversial. Some people say housing’s wealth effect doesn’t exist. Our own earlier work suggested that it works when the housing market is on the way up but not on the way down. We now have evidence that it works in both directions. …Learn More