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Tricky, Tricky

Way To Wealth


Way To Wealth


Tricky, Tricky

Luke DeBoer, CFP®

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Admittedly, personal finance can be a very boring topic. Reading about Roth conversions, life insurance, portfolio construction, or Social Security claiming strategies isn't exactly page-turning material. However, there is one area that can be extremely interesting to most everyone: behavioral psychology and how in impacts our money decisions. 

Why is it so interesting? Well, you probably think of yourself as a rational person. You likely think that your decisions are based off of known facts and a logical reasoning process. You'd be wrong. Don't get me wrong, much of our decisions are informed by our logic but most of our decisions are a result of various inherent biases or norms. You react to hidden triggers as easily and often as everyone else, in all likelihood. I'm not trying to insult you here (I suffer from these behavioral ticks as well), just stating what we know to be true about human behaviors.

Most people behave strangely and those behaviors can have real-world impacts on your finances.

Don't believe me? Consider the following examples. 

In 2013 researchers gave chocolates to students. The students were in two different groups: students in group 1 were asked to simply choose their favorites while those in group 2 were asked to choose their favorites but to put a lid over the chocolates they didn't choose. On a 7-point scale, those who put a lid over the chocolates they didn't choose rated their favorite chocolates a full point higher than those rating their favorites but while still being able to see their non-favorites. 

Why should this matter? They all had the same chocolates! The sample size was large and makeup of the participants was fairly consistent. They should have had pretty close final ratings for their favorites, even if the favorites themselves weren't the same; yet one group was significantly happier with their ultimate choice. The results show and reinforce a form of thinking known as buyer's remorse. We can battle this through the power of literally removing from our line-of-sight the things we didn't choose. 

On Personal Finance:

Be wary of this with your investments. It may be tempting to track the investments you didn't take part in, to play the what-if game, but it'll only make you unhappier and less likely to maintain a consistent strategy.

There was a recent study wherein a large group of surgeons were tracked and observed. They were all learning a new technology and technique for a certain procedure and their own errors were fed back to them. You'd think, especially with a highly intelligent and educated group such as doctors, that they would be rational people and when confronted with their own mistakes they'd accept them, learn, and then fix them going forward. That didn't happen. 

For the most part, the surgeons, when presented with their errors, neither admitted fault (usually blaming external factors instead) nor changed their actions on the next procedure.

However, when the researchers changed course and presented the surgeons with their colleagues' errors, they overwhelmingly learned and improved their own results! The mistakes were the same yet being told that someone else was a screwup and that they shouldn't be like them caused much greater positive action. Simply remarkable. If we were all perfectly logical then the "who" in terms of mistakes shouldn't matter, only the fact that a mistake was made.

This behavioral oddity is known as blame shifting or sometimes called projecting. 

On Personal Finance:

You can either battle it by attempting to alter your inherent bias or you can harness it by asking your financial adviser (or researching yourself) what others who are like you are doing wrong, which will likely cause you to want to do the opposite.

Back in the 1960's, researchers went around to homeowners and asked if they would be willing to put a very large, ugly sign in their yard that said, "Drive Carefully." Not terribly surprising was the fact that very few, 17%, said yes. 

Interestingly, a different set of homeowners said yes at a far higher rate (76%) to the exact same sign. Why the difference? This second set had been asked, 2 weeks earlier, if they would be willing to put a small sticker in their window that said, "Be a safe driver." Nearly everyone who was asked to put the small sticker up agreed to it. This action led to a very high number saying yes to the follow-up request of putting the large, grotesque sign in their yard just 2 weeks later!

This one is called by various names but most commonly it's the idea of Consistency or Commitment. When we say yes to something or become a part of a group we tend to agree to most everything associated with that thing or group (we see this in politics all the time). 

Remember that survey question at the top? Odds are pretty good that if you said yes to it that you actually did read this whole thing. If that question hadn't existed there are a good chunk of readers who probably would have closed out early. Small commitments explicitly made lead to larger commitments.

On Personal Finance:

Commitment is likely the reason why those who save and invest in an HSA also tend to save more in their other retirement accounts too (they're now committed to retirement success).

It's why turning on even a very small auto-contribution to a Roth IRA or taxable investment account is so important.

It's why having an Investment Policy Statement is such a pivotal move (clients of DeBoer Financial can expect communication on this in the very near term), as putting into writing your investment approach is likely to greatly increase your long-term discipline (and hopefully thereby your long-term results too).

So you want to do well financially? Remember that your actions don't typically map to your intelligence level and account for it. 

Action Items Regarding This Article

- Only review the investments you do hold, not the ones you don't. Leave the analysis and search for improvements up to a third-party like a financial adviser.

- Ask around for other people's mistakes. You're far more likely to take action as a result of those than your own.

- Open and contribute (even if just, for example, $10 per month) to a Roth IRA or taxable investment account.

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