February 9, 2012
The Science Fiction of Financial Markets
A lot of us feel when we look at the Dow Jones plunging [that] we’re in the grip of some alien force that slips human control. — Novelist Robert Harris
The stock market in May 2010 seemed to “come alive” when it swooned 1,000 points within minutes, Harris said in a bone-chilling radio interview that’s worth a listen for Main Street investors.
His new thriller, “The Fear Index,” which the London Telegraph called “unputdownable,” is about a hedge fund manager. But in the interview, Harris expressed his desire to take readers beyond the business reporter’s technical explanations for the market’s wild swings up or down. A solitary, $4 billion trade, the media widely reported, caused the 2010 Flash Crash that left an impression on the novelist. As Europe teeters on recession, it’s anyone’s guess how the Standard & Poor’s 500 stock market index has managed to soar more than 7 percent since Jan. 1.
Wall Street experts may be able to make sense of a hair-trigger market, but Harris’s sci-fi explanation is appealing to the rest of us. He invokes the imagination – or, perhaps I should say, the artificial intelligence lab at the Massachusetts Institute of Technology.
To hear Harris’ interview on National Public Radio, click here.Learn More
January 26, 2012
Questioning Wall Street Convention
Walk into your financial adviser’s or broker’s office, and the conversation inevitably leads to your portfolio’s “asset allocation” and “total return.”
Financial planners, the media, investors – we’ve been under Wall Street’s spell for three decades. But a small chorus of skeptics, bucking the orthodoxy, argues that brokers and planners don’t always match investments with an individual’s goals and needs. The human gets lost – in more ways than one.
“People are being guided by the asset management industry,” said Boston University finance professor Zvi Bodie, co-author, with consultant Rachelle Taqqu, of “Risk Less and Prosper: Your Guide to Safer Investing.”
The industry’s premise is that “you can’t afford not to take risk,” he said, referring to the tenet that more risk means a larger potential return. But what happens if you roll the dice and lose? “They never say that,” he said.
Keen to this critique, Barclays in London and a few other large investment houses have started pitching wealthy clients by focusing on their “unique” circumstances.Learn More
January 3, 2012
Research Illuminates Credit Card Habit
It’s 2012, so kiss the money spent last month goodbye. But if any skeptics out there still need confirmation, here it is:
Academic research shows that compulsive purchases are more likely with credit cards, which put distance, in space and time, between the act of buying the item and paying for it.
“The pain of paying is somewhat dulled” by using plastic, Priya Raghubir at New York University and Joydeep Srivastava at the University of Maryland, show in their research paper titled, “Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior.”
If reducing your use of credit cards – even converting to a cash budget – is a New Year’s resolution, click “learn more” at the bottom of this post to see six previous articles on Squared Away about credit card behavior and psychology. They might help readers better understand a bad habit many of us share. …Learn More
November 22, 2011
Game Highlights Tough Choices for Poor
In May, Squared Away’s very first post was about an eye-opening “game” in which players take on the role of someone who is poor. The player is assigned a job and a paycheck. Every financial decision ricochets through the monthly budget, often in unexpected ways. Lives, children, and work choices are affected – poverty even creates unique ethical decisions.
The game, Spent, is so powerful, because its creators interviewed clients of Urban Ministries of Durham in North Carolina, which operates a food pantry, clothing closet, and homeless shelter. A local advertising firm, McKinney, designed the game in conjunction with Urban Ministries.
To play Spent, click here.
To read more, click here.Learn More
November 10, 2011
Are You Conscientious?
In a recent study of five personality traits, conscientiousness was the strongest determinant of an individual’s financial well-being.
Angela Lee Duckworth at the University of Pennsylvania and David Weir at the University of Michigan compared how people did on a personality test with their financial well-being after age 50. They examined the Big Five traits: conscientiousness, emotional stability, agreeableness, extroversion, and openness to experience.
Their finding about the power of conscientiousness adds to a spate of research combining psychology and economics to predict why people earn more, save more, or prepare for retirement. In another study, Australian researchers found that a child’s level of self-control, as early as age 3, can predict whether he or she will experience financial problems later in life.
So, what is conscientiousness and do you have it? I could tell you about it, but watch the video interview of Duckworth instead, on the University of Michigan Center for Retirement Research’s website.
Hint: is your desk clean?
Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.
September 29, 2011
Spenders Yield to ‘What the Hell Effect’
We all know the feeling. While mentally savoring the appetizers on the menu, our resolve to diet slips away. That same feeling has already hit by the time we slap our credit card down on the counter at Macy’s.
It’s so common that psychologists have named it the “what the hell effect.” Once poised at the edge, we might as well leap, right? But after the leap, people who usually try to maintain a certain level of self-control in their everyday lives feel awful.
Three marketing professors have now teased out the conditions that trigger this during the act of charging something on a credit card. They have found that people spend more money if they already have a balance on their credit card. But, oddly, a high-dollar credit limit on the card can mitigate that effect and help to restrain the cardholder’s spending.
Their findings are counterintuitive and a bit difficult to grasp. Here’s how Keith Wilcox, a marketing professor at Babson College in Boston, explained them in a recent interview with Squared Away: … Learn More
September 20, 2011
Fraud Victims Can Be Profiled
Which profile describes the most common victim of investment frauds like Bernie Madoff’s?
a. Tech-savvy young adult
b. Man over 50 earning high income
c. Elderly widow on fixed income
Widow, you say? That’s the stereotype, said Laura Carstensen, founder of Stanford University’s new Research Center on the Prevention of Financial Fraud.
“The old woman who’s demented and living on her own, and the guy who knocks on her door and sells her the policy – that does exist, but it doesn’t represent older people,” she said. Older people who have a history of long-standing relationships are often better at determining who they can trust, she said.
The correct answer is b: Man over 50 earning high income.
Fraudsters feed successful men’s egos by appealing to their investment savvy, enticing them to get into a deal others might not understand. By building up their egos, a fraudster ensures that the victim isn’t thinking clearly when he agrees to invest, said Doug Shadel, a member of the Stanford Center’s board who co-authored the AARP Foundation National Fraud Victim Study.Learn More