Posts Tagged "psychology"

A woman laying on the ground, exhausted.

Financial Decisions Wear Us Down

Are Americans suffering from financial-decision fatigue?

After the relative calm of rising financial markets though the 1980s and 1990s, Americans have lived through a series of booms and busts. First came the Internet boom of the late 1990s, which busted. Then the real estate market took off just as “emerging markets” plummeted. That was only a prelude to the worst financial-market collapse since the Great Depression. The stock market is now bouncing around like a bungee jumper.

Roiling markets in recent years have spurred decision after decision – about retirement, home buying, downsizing, mortgage refinancing, spending on large purchases such as a car, and where to find a good job.

Investors are advised to stick with a long-term plan and not react to every market fluctuation. In reality, there’s a history of research showing that dramatic gains and losses do cause people to change their behavior. Many Americans decided to abandon the stock market after the 2008-2009 decline, which pummeled 401(k) balances.

Researchers at Boston College’s Center for Retirement Research (CRR), which hosts this blog, identified a related set of decisions. The Center surveyed people who had lost 10 percent or more of their retirement savings: 57 percent decided to delay retirement, save more money, or both.Learn More

A man, head in hands, sitting in front of a monitor depicting a stock crash.

How Emotions Drive Investing

With the Standard & Poor’s 500 stock index down 13 percent in three weeks, new research confirms what many people believe to be true: emotions drive investment decisions that can lead to costly mistakes.

In a forthcoming paper in the Journal of Market Research, three business professors were able to show for the first time that an investor’s prior experience with buying and selling a company’s stock – not cold, hard analysis – is what determines whether he or she would repurchase that same stock at a later date. When the entire market plunges hundreds of points, as it has this week, the tendency to be led by one’s emotions is only magnified.

Money-losing stocks are “associated with disappointment and regret,” the researchers wrote. “Simple reinforcement learning deters them from repeating the behavior that previously caused pain.”

Their paper, “Once Burned, Twice Shy,” adds to a growing literature that attempts to clarify the psychology of financial behavior. It’s a twist on one classic study that determined that people feel the pain of financial losses – or “regret” – far more acutely than they feel the joy of gains. Other studies have firmly established that investors more often sell winning stocks than losing stocks. … Learn More

The Bane of Financial Plans

There’s something about getting a will together, checking in on one’s retirement fund, or finally paying down that credit card that causes the procrastination gene to kick in.

In this recent video on CBS, Harvard behavioral economist David Laibson explains the reason for this tendency: “present bias.” Humans put more weight on the present than on the future, so it’s easier to delay the hard work until later. No surprise that’s true for financial tasks, which can be overwhelming, emotional, complex, or unpleasant.

“We humans have wonderful intentions about what we’re going to do,” he explains in this video. But when the time comes to do it, “We decide once again to push it further into the future.”

Laibson uses a simple example from a well-known 1980s experiment in which researchers asked people at Amsterdam workplaces whether they would want a healthy fruit snack, an indulgent chocolate bar, or potato chips next week. Most chose fruit.

On the day they were to receive the snack, the researchers said they lost the workers’ previous selection and asked them to pick again. The preferences flipped, and most chose chocolate.

Laibson goes on to apply the fruit/chocolate concept to financial decisions. The video was recorded last month, but the topic – human behavior – never gets old for Squared Away.Learn More

How People Think About Credit Cards

The austerity program millions of Americans adopted at the onset of the Great Recession is officially over: consumer debt is on the rise again.

Before we run our personal debt back up to its ceiling, it’s a good time to examine the different ways people think about their credit cards.

First, the economists. They have a clear definition of credit cards. The act of buying something on a card and adding to a balance is known as “dissaving.” The opposite is also true. Americans, for example, cut up their credit cards with a vengeance after the 2008 recession. They paid down some $180 billion in revolving credit card debt between September 2008 and April 2011. This gave a big boost to their savings, as far as economists were concerned.

But regular folks naturally link credit cards to spending. Kim Cooper, a Philadelphia financial consultant, said she used to feel that paying down a credit card meant she could buy more shoes or shop at Lord & Taylor again – with her card. This common mentality indicates just how integral credit has become to our buying habits.

The problem comes when the bill accumulates and becomes a monstrous financial obligation. And according to new data, Americans are piling up debt: in May, revolving credit – primarily credit card debt – grew by $3 billion, or 5 percent, to $793 billion (still far below the August 2008 peak of $974 billion), according to the Federal Reserve.

Overall debt also increased, for the eighth straight month. This includes revolving credit as well as auto, student, boat, and other personal loans.

Cooper eventually paid off her cards, but understands why people get into debt. “When I paid down the bills, it was never part of my thinking that a zero balance was the goal,” she said. The goal for her was being able to afford the minimum payment. “That’s not the way to think about it,” she said. …Learn More

A woman looking at a Guggenheim art exibit where an entire room is wallpapered with 100,000 $1 bills.

Money Is What You Make of It

Hans-Peter Feldmann, winner of the prestigious Hugo Boss Prize for contemporary art, displayed the precise amount of his $100,000 prize in this wall of overlapping dollar bills on display at the Guggenheim Museum in New York.

Feldmann’s art often groups similar items found in daily life to unearth their meaning. “Bank notes, like artworks, are objects that have no inherent worth beyond what society agrees to invest them with,” the museum said. “At its core, this formal experiment presents an opportunity to experience an abstract concept — a numerical figure and the economic possibilities it entails — as a visual object and an immersive physical environment.”

The exhibit is on display through November 2.Learn More

Income Source or Security Blanket?

Americans have squirreled away some $7.1 trillion in their retirement accounts. But once they actually retire, they don’t seem to know what to do with their money.

The U.S. income retirement system is in the throes of a foundational shift from guaranteed employer pensions to a system that puts most of the burden onto employees to make sure they have enough retirement income. I’ve been hearing recently about the heated debate on how Americans who are retiring are handling their finances under the new system.

Some worry that retirees are using up their personal retirement account (PRA) assets too quickly, while others believe they aren’t using the funds as retirement income, as intended when they were working and saving the money. By not spending it, they may be unnecessarily lowering their standard of living. …
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A lit lightbulb floating in front of a blue sky with a large puffy white cloud.

Finding Motivation to Control Spending

In a May 5 Squared Away blog post, I provided a list of financial planners’ five favorite tools for helping people control their spending. In this post, I’m providing their motivational suggestions.

Here are the five tips, based on my informal survey of planners. Each tip includes the psychological rationale behind it.

Find the “Aha! Moment.”

Some clients respond when they see, in detail, how much they’re spending and what they’re buying. Bonnie A. Hughes, a northern Virginia planner, is a big believer in mild shock therapy. She’s had great success by showing clients how much their income would fall if they were laid off, divorced, or dropped out of the workforce. Or she shows them just how much they’ll need in retirement, and it’s usually a big number.

Reason: The Aha! Moment provides the self-motivation that clients must possess and that planners can’t provide. …Learn More