This is a guest article by Scott Treadwell, a long-time Consumerism Commentary reader and graduate student at the University of New Hampshire. Scott is studying finance and is conducting a study in behavioral finance. Please look for the survey below and help Scott conduct his study.

We are only a year removed from the greatest financial crisis that has been seen since the Great Depression, and many voices have vowed reform throughout the industry and have assured us that these events would never happen again. The world of academia, however, needs to catch up to reality. As our engine of intellectual innovation, they should be on the cutting edge, but the same flawed precepts that have been taught to our business and finance students over the past twenty years continue to be taught (although the smart instructors will deliver the material with a caveat).

The standard methodology has been the Efficient Market hypothesis. Since news and information is so prevalent, academics assume the massive army of savvy investors that are active in the financial markets will instantly price the stock at the appropriate value. Given that assumption, most variables in the financial markets including human error are factored out and statistics are easily utilized to measure risk.

However, factoring out the human element was a mistake. Humans are the actors who analyze stocks and choose to buy, sell, or hold, thus determining the stock price. This is true whether the investor is an individual trading in her own account or a manager of a large mutual fund or trust. Based on recent events, it became clear that these three key assumptions surrounding efficient markets were incorrect:

1. Prices DO NOT reflect all available information. Not all information that is acted upon is available to the public. Frequent and chronic insider trading nullifies this effect. The problem is not just Wall Street; corporate executives and employees with a shareholder interest in their own company can, and do, cash out before unfavorable information becomes public, although few get caught.
2. Public information IS NOT always interpreted correctly. For example, many companies’ exposure to Mortgage Backed Securities was clearly stated in their financials, however that was determined to not be a problem until default rates skyrocketed. Some in the financial community warned that the level of risk was being underestimated for years, but inertia trumped their few voices and valuations remained unchanged, and wrong.
3. Human Beings are NOT rational actors. Many precepts of economics are based on the assumption that the average human will optimize his economic interest at any given time by making the optimal decision. If this were the case, impulse consumer buying, groupthink, and stock market booms and busts would never happen. This is like saying that when there is a fire in a crowded theater, people will calmly line up in the reverse order of their seating arrangement and orderly file out of the building because they know this behavior is in their best interest. The concept sounds ludicrous in that context, so why is it applied to financial markets? People panic due to fear, they over-extend themselves due to greed, and they make foolish decisions. In other words, they behave like humans, not robots.

Enter the field of behavioral economics and finance, one that has been on the fringes of academia for many years. Once viewed as a disparate group of contrarians who analyzed strange aberrations in the market, their work was discounted by mainstream. However, in light of recent events, academics and investors are paying new attention to this field and the body of research conducted over the past several decades.

So what is behavioral economics? Essentially, it is study of trading behavior that is not rational. The trading behavior of humans is analyzed to gain insight about financial markets and to account for deviation from normal behavior. Here are some examples of these unique trading patterns:

• emotional or vested attachment to stocks
• panic selling and impulse buying
• recency effect (you are more quick to sell a stock you just bought rather than one you have owned for awhile)
• disposition effect (people are more willing to sell stocks that increase in value and hold the stocks that decrease losers)

Now the next question is, why do you care? Accepting where we went wrong is the first step, however everyone from finance professors to Wall Street professionals need to understand how the forces in play that can shape the investment environment now and in the future. If non-rational human behavior is truly a large factor in the market, we need to be aware of it and consider it as we formulate our individual investment strategies.

In order to gain some more insight about individual behavior, I have a quick survey about your trading habits. It’s quick, easy, and totally anonymous. The goal is to gain as much input as possible. Five minutes of your time will yield great results which I will be happy to share with Consumerism Commentary readers once the data and reports are available.

Please complete this anonymous survey.

Editor’s note: I completed the survey in under two minutes. Please take a moment to complete the short questionnaire and help Scott, a graduate student, complete his research study and earn his Master’s degree. ~ Flexo

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Quick Survey: What Drives Your Trading Decisions?

Investors make better decisions when they separate emotions from the thought process, but it’s practically impossible to achieve the goal in perfection. Regardless of how hard one tries, emotions will always be present. The best an investor, or anyone who makes decisions about finances, can achieve is awareness of the ways psychology prevents optimal decision making.

I took Kiplinger’s new investor psychology quiz, which focuses on the ways investors’ brains work against us as we try to make solid investment decisions. I answered seven of the eight questions correctly. The quiz was a good reminder of the brain’s subtle ways of changing perception and understanding of a situation.

Here are some interesting aspects of psychology that hinder the best decision-making.

Recency effect

We tend to remember better events that happened most recently. While at the peak of a bubble, like we’ve seen in real estate and stocks, several years of increases hide the reality that bubbles burst when high prices are not supported with fundamental value. Likewise, if you are asked to review your experiences at a restaurant, even if you have visit that restaurant for decades, your most recent experience at that venue will have the most weight.

Here’s how this can damage you: In the midst of a recession, it seems like the stock market keeps getting lower. All we see is bad news like financial scandals and corruption. We forget that over the long term, the stock market has been the best way to grow your money. So we abandon the stock market and miss out on those gains when the economy rebounds.

Confirmation bias

There are certain things we want to believe. Several years ago, a friend told me that “real estate always goes up.” There’s the recency effect again. Also, to believe that any investment can’t fail, we must ignore information that does not fit in with that philosophy. We seek out the studies or opinions that match our own as we look for confirmation.

Here’s how this can damage you: If you are looking to buy a house, it would be smart to look for reasons that the purchase will be financially sound over the long term. You will cite the usual positive aspects of home purchasing, including the fact that it’s an asset likely to appreciate and you receive a small tax break on mortgage interest, but you’ll likely ignore the fact that you’re likely to move out of the house before buying gains its advantage over renting.

Losing money is painful

The brain reacts to losing money the same way it reacts to pain. As pain is something we are built to avoid, we also try to avoid any potential for losing money. On the surface, this sounds like it would be a good thing, producing decisions that are more likely to side with gaining rather than losing. What really happens is that if we are presented with a situation where we have an even chance of winning $150 or losing $100, we won’t take the chance.

Here’s how this can damage you: The fear of losing money and experiencing the associated pain will keep us from taking risks. For people invested in the stock market, the pain experienced when reading those quarterly statements with negative returns causes many to sell at the wrong moment. They’ll miss out on the market’s rebound. While the stock market has a great track record over long periods of time, if you’re only invested when the market is decreasing, your performance will never match the stock market.

Want more? Here’s a list of cognitive biases. Just about everything pertains to financial decisions in some manner.

Photo credit: Martin Pettitt

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Investor Psychology: Why We Fail to Make Good Financial Decisions

This is a guest article by Well-Heeled, creator of the blog Well-Heeled, With a Mission. If you enjoy this article, subscribe to her blog using her RSS feed.

Last week, boyfriend picked me up at my apartment. I dressed up in a red dress and put on sparkly earrings. We went to one of my favorite restaurants and ate by candlelight. It was a lovely night and romantic night, but is it wrong to say that boyfriend paying definitely upped the romance factor?

Maybe I’ve been “socialized,” (oh society and its expectations about the financial aspect of love and dating) but there’s something inherently more romantic when the man pays for dinner than when the couple goes splits on the bill. At first, I felt slightly guilty about that. After all, why should the man paying be more romantic?

I’ve been raised to be a financially independent woman. I read a lot of history and nonfiction books that discuss the intersection of love, money, and power. Maybe that’s why when I was in high school, I was always uncomfortable with guys — even friends — treating me to dinner. As I’ve grown older, though, I’ve realized that sometimes, I should just stop analyzing everything.

Boyfriend and I take turns paying for things or we split it down the middle. I think it all evens out at the end. But last evening was a real, old-fashioned date. And, according to real, old-fashioned romance protocol, he opened the door, pulled out my chair, and paid for the dinner.

Most of my girlfriends agree with me: The first date, the guy pays. The dates after that, couples will take turns paying or split the check. Or perhaps, one party will pick up the check for the dinner and the other will pay for the movie tickets. Whatever the arrangement, I’ve discovered that the most important thing is that neither side feels like they’re mooching or taken advantage of. And if boyfriend paying for a special dinner makes the night seem more special, well, I suppose I don’t have to beat myself up for it.

I’m not giving up my “independent woman” card. I can support myself, yes, but I hope I’m never so independent that I can’t let a little romance in my life.

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Men Paying for Dinner: Is It More Romantic?

About the author: This is a guest article by The Weakonomist, an anonymous blogger responsible for everything at Weakonomics.com. As a banking insider he’s witnessed the economic implosion from inside the bubble. You can usually find him at the corner of Wall Street and Main Street throwing rocks at traffic.

My retirement accounts have dropped as hard as any index, I’ve watched friends and loved ones lose jobs (and fear for my own), you can’t go through 30 minutes of news without a sad story about someone losing their home. You can’t trust your government, you can’t trust Wall Street, some can’t even trust their own families with money anymore. We have no money, no way to make more money, and no end in sight to this vicious cycle. All of this is a result of the worst recession since the Great Depression, but none of the above is the worst thing we’ve lost.

As much as I pretend to be an amateur economist, I’m just as much an amateur psychologist. I’m a student of behavioral economics. And our economy has taken its worst blow in the form of self-esteem. More powerful than the loss of trillions in wealth and more devastating than losing your home is the long term effect these events have on your state of mind. It’s important not to get caught in this trap as it can hinder you from getting back on your feet. Let’s look at three examples of how you might get damaged:

The Terrified – Knowing the rules for retirement saving, our friend here diligently saved 15% of his income for retirement. After 10 years of saving he is basically no better off than before because the markets are so down. Distraught, he loses faith in the market’s ability to fund his retirement. He won’t put any more money into stocks and mutual funds because he’s afraid of losing it.

The Failure – This guy has worked hard his entire life. He never made a ton of money but was able to finally buy a house in 2004. He lost his job and then lost his house. Saddled with the guilt of letting his entire family down, he has lost the will to pursue the American Dream.

The Worthless – School never came easy to this guy, but he worked hard and got all the way through college. Having been told all his life that a college degree will help in his career, he graduated only to find there are no jobs to be had. He feels there is something wrong with him. Despite his desire to contribute positively to society, he instead sees a world that doesn’t want him.

These three guys have the same thing in common, they followed the rules, they played the game, and they lost. Due to factors they couldn’t control their self-esteem and faith in the system is tarnished. If you’ve seen the effects of depression first-hand you know exactly how bad this can be.

But all hope is not lost for these folks. They need to get back on their feet and find ways to get over this slump. It will do no good for them to try and convince themselves it’s not their fault and they couldn’t have stopped it, the human mind is too stubborn to accept that. Instead they must trick their own consciousness into feeling good again.

Our Terrified friend must forget about the past. Rule number one of the investment rules he learned was that past performance is no indicator of the future. That goes for the good years and the bad years. Don’t pull out of the market, because if the month of March has taught us anything it’s that the best returns come right after the worst ones.

The Failure has forgotten what the American Dream is all about. Half of the dream of success is failure. You can’t completely win at something until you’ve lost. It’s true some people hit a stroke of luck and it makes it look easier, but if you give up on a dream because of a setback then you aren’t working hard enough for it. The only way not to feel like a failure after a loss is to turn that loss into a lesson and then create success.

Finally, Worthless can look into new methods of adding value to this world. If you’re out of work or hate your job, volunteer. Making your resources available to a cause without an expectation of being compensated is perhaps the greatest value offered to the world. It fills whitespace on a resume, makes you a few friends, and most importantly makes you feel needed.

Just as a recession can be a vicious cycle of layoffs, deflation, and negative market returns, your mental health in this environment can be a downward spiral of pessimism, depression, and fear. However identifying these feelings is the first step towards recovery, just like an economist identifies the weakest points in the world of commerce. Be proactive; help yourself and help others stem these emotions and we’ll all work faster towards recovery.

If you enjoyed this article, please visit Weakonomics and subscribe to the blog’s RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.

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The Greatest Loss of This Recession

About the author: This is a guest article by Dr. Bonnie Eaker Weil. Dr. Bonnie was named by New York Magazine as one of the city’s top therapists. Her most recent book, Financial Infidelity, was released in paperback edition on March 31.

Whether or not you’re specifically struggling with money in your relationship, one thing can’t be denied: it’s a hot-button issue, and one that most people can use a bit of help with. One of the best and biggest things I believe a couple can do is construct what I call a “Money Gram” — or a money family tree. This helps couples to understand each other’s attitudes, fears, beliefs and patterns in both families’ money histories. It’ll help give you a heads-up on what could produce potential conflict, or explain why you’ve been having trouble in certain areas.

You need to ask yourselves such important questions as:

• “How was money handled in my family?”
• “Was I aware of any financial troubles as a kid?”
• “How did this affect my view of money?”
• “Was money used as punishment or reward?”
• “How has this influences my finances as an adult?”

These are some topics to get you started — I discuss many more in Financial Infidelity -– and you should have no trouble coming up with more on your own, once you get started! You may know the answers to these questions for yourself, but knowing your partner’s answers as well is almost equally as important if you’re going to move on from a power struggle that often exists around love and finances.

Then, integrate this with what I call “the money love language” — which I teach in Make Up, Don’t Breakup — i.e. giving each other a safe place to be honest about your fears (both financial and otherwise) and using a communication style that affirms where each person is coming from. By doing this, you can slowly begin to erode the stigma that money often creates. It’s absolutely crucial that this stigma be done away with in an intimate relationship, if that relationship wants to move forward. Often couples mistake a lack of communication about finances for a lack of compatibility, but integrating a few of these tasks and dialogues can prove that’s not true!

Another important tip in the compatibility of a relationship is to make sure you fight fair. Have a ten minute heart-to-heart weekly with a figurative emotional “bullet proof vest” to protect from hurt, anger and defensiveness, as you listen and echo back what you heard. It is essential to walk in your partner’s shoes rather than trying to be right. Instead of shame and blame you should give three solutions, and your partner has to pick at least one. Fighting fairly creates the tension that gives you passion and makes you feel safe.

If you enjoyed this article, please visit Dr. Bonnie Eaker Weil’s blog. You can also subscribe to the blog’s RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.

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Knowing Your Financial History is Crucial to Your Future

About the author: This is a guest article by Matt Wallaert, a behavioral psychologist and the Lead Scientist at Thrive, a free financial advisory website that helps people organize their finances and plan for the future with personalized feedback from its behavioral advisory engine.

I’m an owner. While I rent an apartment in New York City (the average apartment in Manhattan is worth $1.5 million; I won’t be buying soon), I’ve never leased a car or rented my furnishings because, generally speaking, I simply prefer to own than to buy.

But with the mortgage meltdown and the recent issues surrounding overconsumption, home ownership is becoming an active question, rather than the default standard. Rebecca Tuhus-Dubrow wrote a piece for The Boston Globe recently summarizing the debate and the angle was clear: homeownership needs rethinking, and is probably dramatically less good than we think it is.

I liked the article and a number of interesting academics weighed in to contribute, but the focus was on the social impacts of owning, rather than the personal ones, and I think that misses a key part of the equation. How we feel about owning versus renting, and how it changes our behavior, is worth exploring, particularly as owning wins in some unusual ways.

I should be clear that I’m not trying to argue that owning a home is intrinsically better than renting an apartment. As Tuhus-Dubrow points out, many of the disadvantages of a home rental are due to inadequate legal protections, rather than the actual rental procedure itself. Instead, my concern is with the psychological consequences of owning versus renting in general, whether it is an apartment, or a car, or a computer. I’m going to talk about apartments, just because they make a handy example, but feel free to insert “leased car” if it makes you happy.

Consider the typical renting New Yorker in their mid-20s. Few would argue that looking for an apartment is pleasant, and most would label it down around the 5th or 6th circle of hell. You have to find a place you can afford, that you like, that accommodates your lifestyle, that is in the right location, and is decently hard to do, given the actual raw number of rentals available in any given area.

Assuming you manage to actually find a place you like, you then have to actually get it, which can be harder than it sounds when people are going on and off the market at lightning speed. Renters live in a constant state of indecision: should I put a deposit down on this place now? If I take two minutes to talk myself into believing that it is the perfect place for me, will it be snatched away, leaving me with only the certainty that it was the best of all worlds and now I can never have it? Few people enjoy the process and fewer still come out feeling “happy,” and it is no wonder: a home is supposed to make you feel permanent, not dissatisfied.

And yet renters go through the process again and again, year after year. For many, it isn’t a choice: as Tuhus-Dubrow points out, renters don’t enjoy all that many legal protections and many of them get priced out or forced out of their housing, throwing them back onto the market. But even for those that could stay, many of them don’t because of the torture of knowing that you could have something different. Because you can move, you want to – knowing that other options are out there, it is part of our personal psyche and our national culture to want to explore them.

The problem is that psychologists have shown fairly conclusively that this type of comparison is almost certain to make you unhappy. The more options there are to consider, the more time you spend thinking about them, the more difficult the decision, and the more regret you feel when you actually pick one. And renting means always having options: there is always another apartment you could easily take, another car you could easily drive.

Owning alleviates this problem. While you can still compare your home to others (and many people do move several times over the course of their lives), increasing your attachment an object makes it harder to let go of and increases its value in your mind. Psychologists call it the endowment effect and it breaks down simply: there is value to feeling like something is “yours.” And while we can certainly think of our apartments as part of our domain in a psychological way, there are plenty of reminders in daily life that we don’t own them and never will.

And it isn’t just mental. The psychological value of owning translates to real value in your interactions, as almost anyone that has ever rented something intrinsically knows. You scratch the floor and don’t feel particularly bad or try to get it fixed (unless motivated by worry about your damage deposit). You beat the hell out of a computer until the lease runs out and you get a new one. No one puts premium gas in a rental car.

A home is a decision you don’t have to make again, or at least not for awhile. And there is value, sometimes, in less: less comparison, fewer decisions, less movement. Even as renting and leasing allow us to maintain our flexibility, they demand that we give up any number of psychological benefits. Sometimes it is a good trade, but more often than not, our instinct towards ownership is probably a decent one. Especially when it lets us save our time and energy for the decisions that matter; less “where will I live tomorrow?” and more “what will I do today?”.

If you enjoyed this article, please visit Thrive and Thrive’s blog, Good to Grow. You can also subscribe to the blog’s RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.

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A Home of My Own: Why We Buy

Human beings aren’t logical, and it doesn’t take a scientist from Vulcan to prove that fact. A corollary to this statement is that human beings do not make logical decisions when it comes to their personal finances. Consider some things that could happen if people thought about the financial consequences of every choice:

• People would save a greater portion of their income, creating havoc for retailers.
• Consumers would buy only what they need, destroying the market for luxury items.
• The Joneses wouldn’t have anyone following them and might die of loneliness.
• Families would not have children, savings hundreds of thousands of dollars.
• Environmentally conscious options more expensive than the alternatives will not be pursued, causing the planet to eventually perish (sooner than otherwise).

Thankfully, people do not base all decisions on financial rationality alone, and thus our economy, species and planet continue to survive and thrive, although the economy has been taking a beating recently. Emotions and money are linked, but there are some instances when an individual will be better off by separating the two as much as possible.

Investing during a highly-volatile market. Your asset allocation should relate to your time horizon, not react to the current hype in the news. If you had decided that you could withstand short-term market plunges with the goal of a long-term gain through stock market investing, don’t let fear and panic dictate changes when the market dives.

Evaluating products and services. Advertising and marketing are important. This is how a company gets information about its products and services to the public. Every year, the advertising industry advances further, using scientific research that explains how emotions are tied to everyday decision making.

The commercials that you see on television are developed specifically to influence shopping decisions. Even non-profit organizations use your emotions to their advantage; how many times do you see commercials for charities using videos of children who appear to be malnourished and obviously in need of help?

Chances are we’re being marketed to in ways we are unaware. Product placement in television programs in passé, now even presidential candidates are advertising in video games. This is a game the consumer can usually not win. Thankfully there are resources that help us see through the marketing noise, such as Consumer Reports, Charity Navigator, and GuideStar.

Getting out of debt. If you’re in debt, there’s a chance that your emotions led you there. While it’s true that many people are in insurmountable debt due to circumstances beyond control like a medical emergency or a natural disaster, a good portion of people are in debt because they enjoy spending money without thinking about or understanding the financial circumstances.

Some authors and radio show hosts want to have these people get out of credit card debt by playing to their emotions, the cause of debt in the first place. This only solves a short-term symptom, the debt, rather tan the underlying problem, spending decisions based on emotion. It is likely that someone who lets their emotions control their spending as well as their path to reduce their debt will fall back into debt later on. This is why I suggest the “Debt Avalanche” method of getting out of debt. It helps separate emotions from your decisions, a pattern than will help keep you out of debt once you reach that point.

Purchasing a house. I wrote recently about ten tips for buying a house in any market. Ron from The Wisdom Journal wrote in with this comment: “One thing I would add, and it’s very difficult to do, but try to take emotion out of the buying process and especially the negotiation process. Emotions can cause you to pay too much and make a decision that you’ll later regret.”

You want to live in a house that you will like, preferably for a long time. That has to be a part of your decision making process. If you plan in spending a lot of time with this major purchase, it should very well be with a product that makes you happy. The danger comes in the belief that that particular house may be the only one for you. You might fall in love at first sight with your soul mate, but a house is just a house. Don’t get so caught up that you feel you must have the house at any cost and be willing to pay any price to get it.

A better understanding of how your emotions are involved with money is a key to overcoming the influence for certain important decisions as much as possible. Here are a few articles that could help.

When It Comes to Money, Emotions Run High, Psychology Today. “Despite our best efforts, economic decisions can be influenced by emotion. Researchers offer a neurological explanation: The part of the brain that controls negative thinking can often override logical thought…”

The Psychology of Money (series), PsyBlog. “Until recently social scientists didn’t know much about the psychology of money. That has changed with an explosion of fascinating findings on how it affects our emotions, our personalities, our sexual behaviour, our risk-taking and society at large…”

How to Treat a “Money Disorder”, Sarah Kershaw, The New York Times. “Among the problem financial behaviors identified by psychologists in recent years are: overspending, underspending (aka Depression mentality), serial borrowing, financial infidelity (“cheating” on a spouse by spending and lying about it), workaholism, financial incest (lording money over relatives to control them), financial enabling (throwing large sums at, say, adult children who then are not motivated to support themselves), hoarding, and plenty of guilt and shame around poverty and wealth…”

Emotions are intricately linked with the financial decision making process, and are in fact necessary to make the correct choices in many situations. Even a small effort to put feelings aside in certain circumstances and think rationally could go a long way towards improving the quality of those decisions.

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Emotions and Money: When to Keep Them Separated

I don’t want to belittle the condition of the economy currently. Someone who is close to retirement may have just lost a significant portion of their intended source of income if invested solely in stocks. If you listen to the media and politicians, you might get the impression that the American public is “freaking out” about their money right now and experiencing the downstream effects of high anxiety.

The Today Show’s Dr. Gail Saltz, a psychiatrist, recently appeared on this show and claimed that stress due to money has increased “hundredfold.” The video clip also describes people’s current attitudes as a “state of panic” and “intense fear.”

Dr. Saltz admits that “watching the media constantly is a terrible idea, like being stuck with needles.” That’s a great comment to hear on a popular television show. She also says that more people now will be seeking professional help for their anxiety due to the economic downturn.

I haven’t seen much evidence of panic in my daily interactions, other than what I hear on the radio from politicians. Long term prospects are likely to still be good. I can imagine that panic might set in when someone has their entire portfolio investments tied up in companies that failed or someone set to retire and rely on investment income, but that should serve as a reminder to have an asset allocation appropriate for your needs and reduce exposure to risky investments like stocks when you are relying on the money being available.

Are you panicking or anxious about money right now? Is your financial situation affecting other aspects of your life? Also, do you think the media are accurately portraying people’s attitudes? Share your thoughts, anonymously if you like.

If you want to watch the Today Show clip, it’s available inside this article. RSS readers, please view this article on Consumerism Commentary to view the video.

Again, today’s questions: Are you panicking or anxious about money right now? Is your financial situation affecting other aspects of your life? Also, do you think the media are accurately portraying people’s attitudes?

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Is Anxiety Controlling Your Actions?

One of my favorite musical “acts” is Blue Man Group. The Blue Man Group explores, with primitively modern musical instruments, society, detachment, and collectivism. You may remember them from Intel’s old Pentium commercials. You may also remember them from the television show Arrested Development, in which the character Tobias, played by David Cross, auditioned for the show and failed, later declaring, “I blue myself.” Blue Man Group has shows in New York City, Boston, Las Vegas, and a few other cities, as well as a touring rock show, with each show similar but not identical to the others.

I recently picked up the latest Blue Man Group CD and DVD combination package, How to Be a Megastar! and watched the program. It includes fantastic music and visual performances as I expected, but I am equally intrigued by the special features, including a documentary-style interview with the creators of Blue Man Group, Phil Stanton, Chris Wink, and Matt Goldman.

When originally devising the concept of the Blue Man, the creators struggled at first. These three percussionists, who were working day-jobs as caterers in New York City, were ready to abandon their vision. At the right time, they received a sign. While watching television, they came across an interview with an expert on religion and philosophy. In this interview, the expert was asked to summarize the prevailing philosophical thought across the world, to which he answered: “Follow your bliss.”

Stanton, Wink and Goldman then knew that despite their difficulties, they must continue to create their vision through completion, even if success would never come. Thankfully for them, success did come, and Blue Man Group is now a cultural phenomenon. But the interview made me think about this particular philosophical idea.

First of all, what is “bliss?” Wordnet defines the word’s most common sense: a state of extreme happiness. The true path is the path that leads you towards a state of extreme happiness. In fact, in the interview, the creators of Blue Man Group went on to say that the journey is more important than the destination.

Am I following my bliss? I’m not sure. There was a time when I thought I had my life planned out, but year by year, I allowed this path to change. I’m now quite far from what I thought I would be doing with my life by this point, the age of 32. My job is fine, but it’s not intellectually, emotionally, or artistically stimulating. I like writing for Consumerism Commentary, but I’m not a particularly good writer. I enjoy building online communities, and that may be my personal strength for the moment, but is it my “bliss?”

Who should follow this advice, to follow one’s bliss? Perhaps not everyone has the luxury of doing so. The world needs janitors, truck drivers, bus boys, and others who perform thankless jobs — the jobs children often don’t think of when they are asked what they’d like to be when they grow up. But then again, are we sure that these individuals are not following their bliss? Perhaps their “extreme happiness” is satisfied simply by providing for their family in any manner possible.

In the case of the creators of the Blue Man Group, they needed to complete their project before they could be satisfied. With success, it seems their project may never be complete; shows are revised, new tours are initiated, and new audiences are born constantly.

After leaving the arts world, I thought my goal would be to volunteer for causes about which I feel strongly or become a to philanthropist as much as my budget allows. It seems I may be too picky to do so at the level at which I would be making a difference, and in some cases, to do so at all. Even though the organization closest to meeting my requirements is strongly involved in the activity I wish to support, having been close to that organization with intimate knowledge of its administration, I’d prefer not to do business with them. Unfortunately, no other organization is similar.

Do you follow your bliss?

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Following Your Bliss: Good Advice or Bunk?

When I first read The Millionaire Next Door by Thomas Stanley and William Danko, it didn’t inspire me. It’s not that I disagreed with the authors, but I found the book uninteresting. It was one of the first financial books I read after beginning Consumerism Commentary, and it came highly recommended from readers here and participants in The Motley Fool’s community.

Without getting too much into my problems with the book, I will say that the idea that a “millionaire” is more likely to be your local business owner rather than someone born into a family of money was new to me.

Recently, PNC Wealth Management conducted a survey of people with more than $500,000 free to invest as they like, a fair definition of “wealthy,” and possibly “millionaire” once you begin including home equity and other assets. Only 6% of those surveyed earned their money from inheritance alone. 69% earned their wealth mostly by trading time and effort for money, or by “working.”

Here are some interesting statistics I pulled from an article discussing the survey results.

• 36% of earners and 27% of heirs are concerned about an economic recession.
• 77% of earners and 67% of heirs believe they have a lot of control of their financial future.
• 39% of earners and 21% of heirs are moderate or risky investors.
• 75% of earners and 50% of heirs have less stress thanks to their wealth.
• 51% of earners and 33% of heirs believe their wealth has led to increases of happiness.
• Heirs are twice as likely to believe that their wealth causes more problems that it solves.
• 37% of earners and 25% of heirs believe that luck played a major role in their financial success.

For me, the choice is clear. There is only one option if I want to find myself with $500,000 of investible assets: earn rather than inherit.

[Yahoo Finance, MarketWatch: Earnings Growth]

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Most Wealthy Individuals Earned, Not Inherited, Their Wealth

Recently, I wrote about Jung Typology and Finance, looking at the first of four dimensions used by psychologists and career coaches for categorizing personality preferences. Introverts and Extraverts draw their energy from individual or group activity, and that difference can have an interesting effect on opinions and behavior with regard to money.

The second dimension in the Myers-Briggs version of this personality typology pertains to information gathering. People who take the test are categorized along a dimension whose extremes are “Sensing” (S) or “Intuition” (N). Wikipedia provides a good layman’s definition of this aspect:

Individuals with a preference for sensing prefer to trust information that is in the present, tangible and concrete: that is, information that can be understood by the five senses. They tend to distrust hunches that seem to come out of nowhere. They prefer to look for detail and facts. For them, the meaning is in the data. On the other hand, those with a preference for intuition tend to trust information that is more abstract or theoretical, that can be associated with other information (either remembered or discovered by seeking a wider context or pattern). They may be more interested in future possibilities. They tend to trust those flashes of insight that seem to bubble up from the unconscious mind. The meaning is in how the data relates to the pattern or theory.

The first thing that pops into my mind is stock analysis. While everyone who analyzes stocks looks for facts, I think those on opposite sides of this spectrum will have a different approach. The Sensing individuals might look at a company’s underlying strengths and weaknesses, identifiable in annual reports, for example. On the other hand, those who gather information via Intuition might be more prone to looking for patterns inherent in performance. Both approaches are highly technical.

Perhaps you’ve heard of the Elliott wave principle. This is a method of predicting market trends based on patterns on historical up-and-down movement. The tricks with this principle is that it’s hard to know where you are in any particular “wave.” Someone with an Intuitive personality might be drawn to this type of analysis.

If you’ve read personal finance books, you’ve probably noticed how authors try to reach both types of personality. Often, a particular lesson begins with a story, illustrating a positive or negative approach. The story is usually light on details, but Intuitive people might be able to relate to the story and understand the point the author is attempting to make. If the author is smart, he or she will continue by supporting the story with details and facts that support the conclusion.

When either approach is missing, either half the audience will be bored or the other half will be mistrusting. It’s possible that Robert Kiyosaki’s “Rich Dad” series falls into this category. The books are strong on story and emotion, perhaps drawing in the Intuitive audience. Yet, the books are short on actionable details, frustrating those, perhaps Sensing individuals, who look for facts and hard data.

Who would be better at managing their own finances, the Sensing or Intuitive individual? I think the Sensing individual should be trusted with managing the family’s finances above the Intuitive individual. The type of analysis required, including net worth, expense reports, and budgets, involve the hard data favorable to Sensing individuals.

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Jung Typology and Finance: Sensing vs. Intuition

Ginger is a fashionista in her late 20s — a wife and graduate student striving to have it all. She wrote this article for Consumerism Commentary, but Ginger also publishes the blog Girls Just Wanna Have Funds, and you can subscribe to the blog’s RSS feed here.

Let me preface this by stating that I am not suggesting that women marry solely for money, I am after all a believer in love and commitment as a solid foundation for marriage. However, I am suggesting that women who marry partners that are financially savvy, motivated by money and have aligned views about their attitudes to money, are indeed smarter than their counterparts who don’t when choosing a life partner. I will detail the benefits of choosing a partner that has a solid financial plan in place and uses money as a tool and not a crutch.

Financially Savvy

Women who choose financially savvy partners fare better than their counterparts who don’t. Why? These women know that in order to have a marriage built to last that finances play a huge role in the viability of the marriage. I know it sounds like we’re discussing a corporate merger but bear with me; after all, marriage in some respects is like a business.

1969 Inc., said it best when asked for her insights to marriage,

It’s like running a corporation. A business venture. You have to go into it knowing that it could fail or it could succeed beyond your wildest dreams and make you rich… If the employees don’t share the vision, believe in the vision and work together, the endeavor will fail. Some businesses will get rich. Some will barely make ends meet. Some will never make a dime. The money does not measure success. The sense of accomplishment will come from the daily struggle… the love of what you do, working together day in and day out.

The reality is that personal finance issues are the leading cause of divorce and in order to live happily ever after, you must be on the same page as far as your finances are concerned. No, if, ands or buts about it. Capisce?

So what makes these women smarter?

Aligned Financial Values

When smart women meet a partner, they aren’t wooed by good looks and the smooth talk, after all those come a dime a dozen. These women are looking at how their potential partners spend money. Does he have an emergency fund? Is he current on their monthly bills such as the car payment and rent/mortgage? Does he spend more than he earns? They’re listening keenly to understand how their potential mates relate to money. Is it a tool? Is it a crutch? They know the difference and conduct business accordingly. Should the potential mate fall into the category of the above mentioned then it’s time to say good-bye. After all, who wants a man who isn’t interested in learning how to manage his money effectively? They are in it for the long haul, not a few cheap dates.

Motivated by Money to Create the Life They Want

Smart women are up to date on the latest issues in personal finance. They understand rate chasing, investing for the long haul and understand that while they may have substantial savings, practice and embrace frugality. They look for similar if not the same qualities in their potential mates. Smart women want to be able to relate not only on a romantic level, but also on issues regarding personal finance.

A Man with a Plan

Who wants a man with no financial plan in place? I certainly don’t. Where does he see himself in 2 years? 5 years? 10 years? Is he thinking long or short term? That answer will determine the course of the relationship. Ideally he should be able to think past next month’s car payment and project how much he will have in his savings account by year’s end. This an expectation for smart women, not a hope or a dream, but something they demand and require in a potential mate.

Take a few minutes to let it all sink in. Gone are the days when gold diggers were secretly envied because they were able to go for the gusto and stifle high pitched screams during musty sex with a shriveled up oil tycoon. Move over and make way for women who are in control of their financial destinies and not afraid to say it. They are armed with a positive net worth and not afraid to flaunt it.

Are you a smart woman?

If you liked this article, read more from Ginger at Girls Just Wanna Have Funds.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Smart Women Marry for Money, and Here’s Why

One of the most popular personality measurement systems is the “Jung Typology” test, also known as the Myers-Briggs Type Indicator (MTBI) test. These are popular in Psychology 101 college courses and corporate management seminars. The object of this test is to quantify an individual’s personality along four separate dimensions. Each dimension has two options on either end of the spectrum, and most tests provide a measurement of strength in either direction. This results in 16 separate personality types, with additional nuances due to the strength in the pull of either direction.

If you’re interested in determining your personality type, there is a free test at HumanMetrics.com. The test involves a series of questions designed to determine the root of your motivation. The results are best when the questions are answered quickly at face value, without thinking about choosing the “correct” response.

The first of the four personality aspects measures introversion vs. extraversion. Don’t think of this as whether you’re a loner or a social butterfly; the category has more to do with how you draw your energy. This is from the Wikipedia entry:

People with a preference for Extraversion draw energy from action: they tend to act, then reflect, then act further. If they are inactive, their level of energy and motivation tends to decline. Conversely, those whose preference is Introversion become less energized as they act: they prefer to reflect, then act, then reflect again. People with Introversion preferences need time out to reflect in order to rebuild energy. The Introvert’s flow is directed inward toward concepts and ideas and the Extravert’s is directed outward towards people and objects. There are several contrasting characteristics between Extraverts and Introverts: Extraverts desire breadth and are action-oriented, while introverts seek depth and are self-oriented.

Taking a financial viewpoint, which side of this spectrum is better for personal finance? Here are some thoughts.

Introverts may be more inclined to create budgets and analyze progress over time. The “reflect-act-reflect” method can be interpreted as “budget-spend-evaluate.” Introversion can manifest itself in the way an individual sets goals. Do the goals use internal metrics, like a competition with oneself, or do they focus more on parity with the surrounding culture or community? The latter may be the approach taken by an Extravert.

Extraverts thrive on the energy they derive from being around other people, and as a result, may have a more finely honed ability to use “small talk” and network with other people in larger settings. That could lead to better job opportunities and more money in the workplace. However, 40% of CEOs are Introverts or “closet Introverts.” They’ve learned how to act like Extraverts when necessary while retaining their own personality features.

In The Psychology of Money, the author, Adrian Furnham, cites a 1984 study.

[The study] found that extraverts tended to be more extravagant and less stingy than introverts. People with strong feelings of control over their money reported less general anxiety and tended to be more extroverted.

Managing personal money is a skill that is best tended by the introspective nature of an Introvert. While Extraverts can certainly handle the responsibilities just as well, if defined by their personality type, Extraverts will find introspection draining. Does this mean that Introverts tend to be better money managers?

Not all successful CEOs are extroverts [USA Today]

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Jung Typology and Finance: Introversion vs. Extraversion

I found this in my spam e-mail box today. It’s not spam, it’s marketing from Charles Schwab. The message is interesting enough for me to post because it brings up a nuanced topic: personality categorization. When the media invokes the term “Generation X,” they’re referring to a certain age group in which everyone has enough in common with everyone else to justify generalizations.

According to Wikipedia’s entry on Generation X, this particular group of individuals invoke the descriptions of “apathetic, cynical, disaffected, streetwise loners and slackers.” The entry goes on: “Generation X was generally marked early on by its lack of optimism for the future, nihilism, cynicism, skepticism, alienation and distrust in traditional values and institutions.” The outlook doesn’t seem very positive.

The Charles Schwab study doesn’t attempt to group all of Generation X into one category. They managed to find six separate groups pertaining to attitudes towards life and money. Here’s what they found. I left out some of supporting statistics, but they are interesting

Money Mindset One: Paycheck to Paychecks. By far the largest group representing 25 percent of Gen Xers, members of this predominately female group are extremely stressed about their personal and professional lives. They are less confident than any other group about having a bright future, and are twice as likely to be unsettled and pessimistic about their financial situations.

Money Mindset Two: Spend Now, Pay Laters. Seventeen percent of Gen Xers fall into this category of predominately city dwellers that tend to be optimistic, yet somewhat unrealistic about their futures. Overwhelmingly male (77 percent), this group is incurring significant debt, and believes that Social Security will be there for them when they retire.

Money Mindset Three: Confident and Risk-Tolerants. Representing 15 percent of the overall Gen X population, members of this group have high incomes, active lifestyles and high levels of engagement in their financial future. They are more likely to be married, and believe that by taking risks they can reach lofty financial and lifestyle goals.

Money Mindset Four: No Money, No Worries. This group represents 15 percent of the Gen X population. They are at the bottom of the earnings spectrum yet are very optimistic about life. They are more likely to be single, consider investing risky, and have the fewest number of credit cards. This group also has very little trust in financial firms or advisors.

Money Mindset Five: Cautious Savers. Approximately 14 percent of the Gen X population, this group tends to be financially conservative and concerned about money, highly educated and financially secure, yet is late to adopt new products. They are also more likely focused on home and family than they are on having active social lives.

Money Mindset Six: Overwhelmed but Optimistics. Predominately female, these Gen Xers have significant debt, adjustable rate mortgages, and high rates of financially-induced irritability or anxiety. Despite this, they manage to stay positive about their futures. This group represents 13 percent of the Gen X population.

Six categories are better than one. I think they’ve managed to capture all attitudes, but it would be more interesting to compare the findings with categorizations of different age groups. Is Generation Y different?

Image credit: aaronmerrell
Supremely Confident to Super Stressed: Landmark Gen X Study From Schwab Uncovers Six Distinct Financial Mindsets [Charles Schwab]

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Financial Attitudes: Charles Schwab’s Categorizations of Generation X

If you earn more than $100,000 a year, you are more likely to apologize for your own errors than you would be if you earn less. According to Fortune Magazine’s report of a Zogby survey:

More than nine out of ten (92%) of $100,000+ earners apologize when they believe they’re to blame, compared to 89% of people earning between $75,000 and $100,000, 84% of those who make $50,000 to $75,000, 72% of those earning between $35,000 and $50,000, and 76% of people earning between $25,000 and $35,000. Among survey respondents who make $25,000 or less, just 52% say they usually apologize when they know they’re at fault.

Should you practice apologizing if your goal is to earn a six-figure income? Well, correlation doesn’t imply causation, but some of the reasons one might be more willing to apologize may be the same reasons one is inclined towards a higher salary.

Why do you think those with higher income apologize more than others? I think the ability to admit fault is a strong management and interpersonal relationship trait, one that helps lead an individual to a position of responsibility in the workplace. Perhaps there are other reasons as well.

By the way, those earning over $100,000 are also more likely to say they’re sorry even when they know they are not at fault, as well.

Want a Higher Paycheck? Say You’re Sorry [Fortune Magazine]

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Apologies Given: More Common Among High Earners

The California Institute of Technology is undertaking a study in neuroeconomics, and it has to be one of the most interesting things I’ve come across in the realm of finance in the past few years.

The researchers are undertaking experiments in which they measure reactions in the brains of individuals [WSJ] who must decide to distribute food to starving children equally, or allow some children to receive more food for the benefit of the entire community.

Of course, no children are actually affected by these experiments, but the subjects don’t know that.

To trigger the brain behavior, the 26 volunteers had to believe their decisions really would affect orphans being denied their seat at a groaning board of plenty where others feasted. So, the experimenters made them all study a 10-page brochure with pictures of 60 orphans. In 36 rounds of testing, each subject had 10 seconds to choose the lesser of two evils: Allow some children to keep more than their fair share of meals or take away their food to eliminate inequity.

I never really looked into the field of neuroeconomics before, but I’ve been finding it fascinating.

In the New York Times last year, an article focused on research to determine why investors do what they do. These researchers discovered that people are more likely to take a foolish financial risk when their brains are in a “positive arousal state.”

But when people think about costs, they use different brain modules and become more anxious. They play it too safe, at least in the laboratory. Furthermore, people are especially afraid of ambiguous risks with unknown odds. This may help explain why so many investors are reluctant to seek out foreign stock markets, even when they could diversify their portfolios at low cost.

Marketers must already understand this to an extent. People are more likely to buy a product when they are thinking about the potential benefits of the purchase and when their minds are immersend in positive thought. The costs, like fees, are in the fine print or otherwise hidden for view, and the hooks are set in large type and are shouted from the front of the seminar floor.

If you like research, here are several of the studies taking place at The Center for the Study of Neuroeconomics at George Mason University:

Call Auction Experiments. In a call auction participants indicate their willingness to buy or sell units of a good by placing an order to buy or sell some number of units at their buying or selling price…

How People Trade. We take the view that the ability to trade is an evolutionary adaptation to social environments. Using language, theory of mind, and reciprocity, people succeed in forming trading partners with little institutional support.

At the Stanford Neuroeconomics Lab:

* Neural basis of financial decision making
* Reward dynamics
* Neural basis of experienced reward
* Neuroeconomics of giving

For another interesting take on neuroeconomics, read Mind Games, an article from The New Yorker.

Image credit: Gaetan Lee

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Fairness and The Brain (and Other Neuroeconomic Studies)

Yesterday, I received a question from a reader, Lindsey. I’m not much of a fan of giving advice; there are professionals out there whose job is to provide sound financial advice. All I can offer is my opinion. Here is Lindsey’s question.

What should you do if you and your partner decide to combine finances (checking accounts, credit cards, leases, etc.), but you, in the past, have had very different personal finance personalities? I meticulously keep track of all my expenditures and income in a budget spreadsheet, I save all my receipts to check against my statements, at any given moment I can probably tell you how much money is in my different accounts and how much money I have left to spend in a certain area each month (or for the year for more irregular expenditures). I have an emergency savings fund, a Roth IRA, and a 401(k) through my employer. He basically lives paycheck to paycheck, has no savings, does not keep track of where his money is going, and has very little credit (which can be worse than bad credit!).

What do you recommend? Is there a way to responsibly consolidate, or perhaps a happy medium?

First of all, I don’t think it has to be a problem for two people in a committed relationship to have two opposing personalities when it comes to money management. What’s really important is the goal. If two people agree on some basic principles, there is room for differences in habits. In a partnership, there are ways each individual keeps the other in check and offers compromises.

In fact, when it comes to money management, a relationship in which one is meticulous about record keeping and the other has differing interests can be just as strong as a relationship in which both individuals think exactly alike; in fact, the varied relationship can prove to be more interesting. You’ve obviously decided that this is the right relationship for you despite some disagreements about money, but finances can still be successfully combined.

Don’t go into the fusing of your finances with the intent on changing his philosophy. It’s true that he will have to be willing to compromise on some issues, but most likely, you will be leading the charge. In compromising, you may also have to be willing to loosen your grip, but just a little bit.

He’s living paycheck to paycheck, and you’re not. In his situation, will he be contributing to your combined accounts? As you merge your finances, if you also combine your bills, you might find that the two of you are able to contribute more evenly to savings or bill payments. However, you should consider contributing only as your means allow rather than aiming for equity. For a simplified example, rather than both of you contributing $500 to the mortgage each month, contribute 10% of your respective salaries towards that bill.

You partner may find that the ease on his financial obligations will allow him to contribute to savings and a 401(k). From what you mentioned about his philosophy about money, you may have to inspire him to find an interest in long-term saving.

His bad credit is another issue. You may find it difficult to purchase a house together, if that is one of your plans for the future. You will have to decide, assuming this is an option for you, if you want to save money by keeping a mortgage solely in your name. The other option is to share ownership but possibly qualify only for a higher-interest mortgage due to this credit. You’ll have to run the numbers — as the financially astute half of the couple, this will be your job — and once you’ve run the numbers, you’ll have to decide whether the decision should be based solely on those numbers or if there are other variables that come into play.

The broad answer is that consolidating your finances can be accomplished, but varying philosophies and major differences in income can make the transition difficult. The two of you have already decided to combine finances, so at least you are on the same page in that respect. Whether to combine your finances or not is not the issue; you are past that point. Here are some thoughts.

What are your goals? Are you looking towards retirement with each other? If so, then saving for retirement must be a priority for both of you. Do you plan on having children? The two of you may not be able to contribute equally towards these goals. Your investment actions, including asset allocation and risk tolerance, should support your goals.

Which accounts should be combined? Any accounts you pay bills from can be combined, with each contributing the amount or percentage of their income that you decide is fair together. Any savings accounts for future couple-related goals, like purchasing a house, can be combined. Do you want to keep separate accounts for some fun money? Some couples do this and use their fun money to “surprise” the other with gifts or spend on singular indulgences.

Who will manage the money? This seems pretty obvious in your case, as you are the one with the interest and the skill in money management. I’ve heard that it’s best when only one individual in the couple tends to the details, so this is one aspect where your differing philosophies may work in your favor. The money manager should keep the other periodically (and briefly) informed of the financial state of the union. Even with one money manager, major financial decisions should be discussed together.

Be prepared for sacrifices and compromises. That probably goes without saying, as any relationship requires this. Money tends to amplify the issue. How will you handle disagreements?

What are your obligations? Mortgages or rent, phone bills, cable, and insurance are only the start. Will you be expected to take care of an aging relative? Does your partner have outstanding student loan debt, or will you be supporting him through medical school?

Personally, the most combining I’ve done is a combined savings account with my girlfriend that hardly receives contributions and is used to pay for vacations or other experiences we share. For example, when we sold our old college textbooks on Amazon.com, all the proceeds went to this joint account. We used several hundred dollars from the account to pay for our recent vacation to Boston. This is the limit of my personal experience.

Readers: do you have any suggestions for Lindsey? She and her partner have already decided to combine their finances. How can they do so with the difference in situations and philosophies?

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Shared Money: Combining Finances With Your Partner

Marshall Goldsmith is an executive coach who works mainly with entrepreneurs. He has identified five annoying habits that the best entrepreneurs share. The same personality that helps individual succeed also hinders the same individuals in certain social situations.

I’m not a fan of broad generalizations, so I wouldn’t say that all entrepreneurs act a certain way. Also, I wouldn’t say that these traits are only exhibited by successful entrepreneurs. Goldsmith made these observations, and maybe you know someone who fits some of these characteristics.

1. The competitive drive. Entrepreneurs constantly need to prove they are better than their competitors. Successful entrepreneurs are able to “toot their own horn without blowing it.” Competition is healty when it is a source of motivation, but there are some situations when it’s not socially acceptable.

Say you’ve had a hard day at work; you come home and your partner says, “I had a hard day today.” You say, “You had a hard day! You had a hard day! You wouldn’t believe the kind of day I had.” They’re so competitive that they have to prove they’re more miserable than the person they live with.

2. Shutting down others’ thoughts. Goldsmith explains this by describing how entrepreneurs will start sentences with “but,” “no,” or “however.” This basically is communicating, “You’re wrong and what I have to say is correct.”

“No,” “but,” or “however” means disregard everything that came before this word. Basically what you’re telling the person is shut up.

3. Adding too much value. An entrepreneur in a management position knows her business well — so well, that when suggestions are brought to this entrepreneur, she will improve it, making it her own. This has some consequences. From Goldsmith’s point of view:

The quality of the idea may go up 5 percent, but my commitment to its execution may go down 50 percent, because now it’s your idea, not mine. It’s hard for an entrepreneur to realize that the effectiveness of execution is a function of the quality of the idea times this human being’s commitment to make it work.

4. Playing favorites. This sounds like an overgeneralization, but Goldsmith says that entrepreneurs claim they don’t like suck-ups, yet they unknowingly or knowingly favor those who fit that description, and this allows the sucking-up to continue.

To avoid playing favorites, ask yourself four questions. First, how much do your employees actually like you? You don’t know how much they like you – it doesn’t matter. It’s how much you think they like you. Second, ask how much are they like me? Owners who are engineers are often guilty of this. They’ll say, “The employee may be a jerk, but that’s okay, because he’s one of us, he’s an engineer. “How much do they remind me of that ever so wonderful me? Third, how much do they contribute to our company, and fourth, how much personal recognition do I give them?

5. Obsession with goals. Goal setting, mapping out a path, and getting things done to achieve that goal is exactly what makes successful entrepreneurs successful. You pay for that obsession in personal relationships.

I worked with a guy on Wall Street who was clocking 80 hours a week, and he said he was doing it because he needed to make a lot of money. When I asked him why, he said that he’d been married three times, and “Do you know how much alimony I pay?” Then I asked, “Why have you been married three times?” He replied, “None of my wives understood how hard I had to work…” Entrepreneurs kill themselves, literally. They work themselves to death, they don’t get physical exams, their health goes straight to hell. For what? You have to find balance.

Looking back to You Call the Shots, by Cameron Johnson [my review], I see these traits in this example of a successful entrepreneur. I can see these traits in other successful individuals, regardless of whether they are entrepreneurs. There is social feedback at play.

Are there other traits that might be helpful to those wishing to succeed as entrepreneurs but detrimental when exhibited in social situations?

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5 Annoying Habits of Entrepreneurs

A recent study entitled The Psychological Consequences of Money shows that people with money on their mind are less likely to help others. Here’s the abstract:

Money has been said to change people’s motivation (mainly for the better) and their behavior toward others (mainly for the worse). The results of nine experiments suggest that money brings about a self-sufficient orientation in which people prefer to be free of dependency and dependents. Reminders of money, relative to nonmoney reminders, led to reduced requests for help and reduced helpfulness toward others. Relative to participants primed with neutral concepts, participants primed with money preferred to play alone, work alone, and put more physical distance between themselves and a new acquaintance.

An article on MSN Money describes how the study was performed at the University of Minnesota, Florida State University and the University of British Columbia.

Students and non-students involved in the study were split into two groups. The control group received neutral preconditioning while the experimental group participated in money-related activities. The two groups then participated in scenarios and the experimenters monitored their behavior.

In the final three experiments, money-prime participants placed more physical distance between themselves and a participant partner, preferred solitary to group leisure activities and more frequently chose to work alone rather than with a peer compared to the control participants.

If you’re reading this website, chances are you have money on the mind. Perhaps you think about money-related issues more than most people, especially if you are interested of taking control of your personal finances, like I am. If the study is accurate, that means you are less likely to work with other people, less likely to ask for help when needed, and less likely to help others in need when performing activities.

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Study: Money Makes People Mean

Here are four more smart year-end money moves, according to Money Magazine. I only conditionally agreed with the first four, so let’s see how the magazine did with the remaining tips.

5. Set your sights clearly. They suggest deciding well in advance the destiny of any year-end bonuses. This will prevent splurging to some extent. In my company, we don’t receive our bonuses until February or March. The delay prevents me from using the money for holiday gifts. In the past, my bonus has gone to pay for regular expenses at my regular income’s shortcoming, but that probably won’t be the case this year.

6. Make some adjustments. Consult an accountant who can help you speed up or slow down tax payments or self employment income, or adjust your withholding for next year so you won’t have to later. Speaking of adjustments, it might also be a good time to take a look at your investment asset allocation. If one part of your investments performed very well or poorly, your allocation may be out of whack with your goals.

7. Play catch-up. The maximum 401(k) contribution for most people in 2007 is $15,500. I won’t hit that mark without a significant raise, but for people like us, Money suggests increasing contributions by a percentage point. I plan to hold my contribution steady at 12% of my income.

8. Have the talk. “In your life, there’s probably a difficult financial conversation that you’ve been meaning to have with a family member but haven’t gotten around to. Maybe it’s talking with your parents about their retirement finances or discussing long-term financial goals with your spouse.” Money believes the holidays are a good time to have this talk. I talked with my mom about her retirement over Thanksgiving, and that’s a topic for another day.

In general, these are good reminders from Money Magazine. A few tweaks here and there would help the set of tips apply to my life.

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Money Magazine: 8 Smart Year-End Moves, Part 2

Before reading on, if you haven’t participated in this week’s giveaway, open up this article in a new window or tab and add your comments about asset allocation. You can win two interesting books just by leaving a comment.

Thanks to everyone who contributed to the discussion about who is to blame for poor money management skills that lead individuals, especially younger people, into debt and other financial problems. Do we blame the individual solely? The parents, school system, or government? Or does the fault reside with the “evil” credit card companies who use clever marketing?

Here are some of the thoughts presented by commenters. Broadway says:

I believe that any blame must be assigned equally to all parties. Attempting to point a finger at one entity and assigning all or most of the blame to it is what is wrong with society. There are no quick fixes or easy solutions. Society is complex… One solution that I believe will attack the cause(s) is to teach critical thinking skills early (and often) in our educational system.

S/100/30 says:

There’s a lot of discussion about how parents don’t teach their children “about money,” but I think the problem goes far beyond whether parents fail to explicitly discuss compounding interest with their children — the astounding number of parents who actively encourage their children to spend money foolishly on image.

MillionDollarCountdown takes responsibility:

From my point of view its personal responsibility. No one forces me to buy anything. Yes, I know there are advertisements and the peer pressure. But all said and done its me who pulled out the credit card.

Others say:

* “There is ONLY ONE THING TO BLAME (if you must call it that) and it is GREED!”
* “Maybe there really is nobody to blame. CC companies operate within the law… I think it’s the responsibility of parents and our educational system to do a better job of teaching people how to manage their finances.”
* “Yes, the CC companies are taking advantage of people that simply are not educated on the issue of personal finance. But is it really their responsibility to ensure that their customers do not abuse the credit they have?… I attended a top notch private college preparatory school… it is inexcusable that they never touched on the issue of personal finance. I think it should be mandatory.”
* “[U]nless we do something to change the sort of thinking that says new clothes are more important than a $0 balance, the debtors are going to outweigh the rest of us.”

Finally, here are my thoughts.

First of all, I loaded the discussion question by asking who is to blame, as if one entity could be the cause of everything that is wrong with society. Of course, that is not the case; there is a lot of stupidity out there. That’s a little harsh. Stupidity isn’t really the issue. Here is what I do see in my unscientific observations:

Step 1. Parents model behavior and attitudes towards materialism. Before kids are exposed to media and are able to comprehend messages from marketers, they watch their parents. They see their parents acquiring things before the children are old enough to understand the concept of money exchange. The message they learn: “Things make people happy, things are good.”

Step 2. Children develop the concept of desire based on what they see in their parents and in older siblings, playmates, etc. They see people having desire for things, and experiencing happiness when those things are received. They don’t always see that sometimes desire must go unfulfilled. Desire leads to acquiring things, which leads to pleasure.

Step 3. Thanks to the child’s environment, children attach the feeling of desire to the objects that appear to be the most desirable by others. Johnny has a T.M.X. Elmo, the toy is fun and Johnny is happy, therefore I want a T.M.X. Elmo so I can be happy (and attract the attention and envy of the social group and move up the ladder).

Step 4. Here’s Spongebob (and any children’s show designed to sell its own merchandise and sell ad space). Children, instead of playing with their friends, get pleasure from watching television. Most of television is designed to sell. Commercials depict kids expressing desire, receiving things, and being happy. Kids immediately relate to the characters in the commercials and know they will also be happy with the things being sold.

Interlude. At this stage, the parents can exert influence, if they choose to do so. It’s hard to compete with social groups and television, but if the parents model moderate materialism and delayed gratification, children may be more prone not to express frustration if they cannot have what they want. In the same vein, excessive spoling and catering to the children’s perceived desires may also damage the situation in the long run.

Let’s fast-forward a little bit.

Step 5. As children mature, they begin to understand the concept of earning and spending money. If they’re not taught by their parents, they will learn elsewhere. Any lack of knowledge creates a void that will be filled in by whoever manages their first exposure. This is why it might be a good idea for some children to get a job during high school. I wouldn’t say that’s a good idea for everyone, but some children may need this hands-on experience before tackling the ideas in a more conceptual manner. Working at a job, with monitoring by parents, can be better for financial education than a class in school, which brings me to the next point.

Step 6. Schools, especially those in the government-controlled public school system, will generally not teach money management classes. Why not? Schools are all ready under pressure to expand their offerings to include humanities, philosophy, arts, music, foreign languages, physical education, and extracurricular activites aside from the science, social studies, mathematics, history, and English core curriculum. There is too much competition for time, not enough teachers, and far too little money. Is money management more important than the other subjects above? Some may say yes, but that doesn’t mean it’s the job of the public school system.

Interlude. There’s the popular belief that the public school system exists to create good, loyal consumers, without much independent thinking. I wouldn’t say that’s the case everywhere, but if it is true, it runs counter to the idea that money management classes should be offered.

By the way, personal finance classes have been shown to do more harm than good for teenagers in at least one study.

Step 7. Before you know it, your children are off to get a full-time job or enroll in a public or private college. Money management courses are generally not found here, either. If the college student is like most, this is the first significant time away from the constant influence of parents. If you haven’t done a good job as a parent by this point, you may just have to pray that they are able to figure things out on their own. It starts with college orientation: these days, you’ll find booths and tables set up with representatives giving away free things (remeber “things” from the earlier stages above?) like t-shirts and Frisbees. The light goes on… all that’s needed for the pathway to endless instant gratification is to fill out an application. The kids are used to applications at this point, having applied to a bunch of schools: one or two they’d never get into, a few safe schools, and several realistic choices.

This is the moment of truth. Perhaps the student is prepared to handle a credit card wisely. However, remember that if there is a void of knowledge, the void will be filled by the first reasonable association. That might be a free t-shirt and the promise that anything can be bought — even necessary things, like food — without any supporting funds. Is it the credit card company’s fault that no one has fully educated some of these children? Of course not, but the credit card companies make a lot of money catering to the empty-headed students, and the companies do not put any effort into fully educating the prospective customers.

At this age, some children (yes, they are children in some ways, even at 18 years old) are not ready to handle the responsibility that is being dangled in front of them like a carrot, even after the best modeling and teaching by parents in earlier years. I’m not saying that there should be a required age before credit is issued, like a driver’s license, but different people develop mentally at different speeds, regardless of the effort parents put into modeling and teaching.

So no one’s fully to blame, but my observations lead me to believe most of the damage is done earlier rather than later, and the point at which parents can have the most influence is also earlier rather than later. The trick is that many kids don’t have the cognitive ability to understand the intricacies (or even the basics) of money management at the time they are most susceptible to their parents. This is what makes development so difficult and creates a “blank slate” that credit companies are eager to fill with nonsense.

On the other hand, parents cannot be quick to fully dismiss societal habits that allow children to move upwards in the social ladder. There is much more that goes into teaching kids how to function in society besides moderating materialistic intentions. Most of the times I speak to parents — I am not a parent myself — who have well-functioning older children, they attribute the situation to luck.

Feel free to share any comments, including your own experiences even (and especially) if they contradict anything I’ve written.

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The Blame Game: Poor Money Management, Part 2

There’s a discussion at StopBuyingCrap about credit card companies’ evil tacticts. In fact, Cap comes clean with this humble admission:

No body forced me to buy the mountains of Japanese comic books, computer hardware, and automotive parts. Sure, the credit card made it easier for me to spend money I didn’t have — but the reason why I spent frivolously was because I was a complete moron.

An anonymous commenter responded to Cap’s post:

Yes, personal responsibility is important. Many young people, however, have never been taught thing one about managing money. They simply don’t understand how it works. The companies take advantage of that. There are thousands of people who sit in their offices all day thinking up new ways to take advantage of that.

I tried to respond with my thoughts, but it was 3:45 am, so it didn’t come out completely the way I intended. So I’ll expand on this a bit.

This is an age-old debate. Whose fault is it that people go deeper into debt? Is it the young adult who lacks the basic math skills to understand the effects of compound interest? Perhaps it is the credit card companies whose marketing efforts, especially on college campuses, may be excessive? Can we turn to the primary and secondary school administrators who feel that money management cannot be shoved into an already-packed schedule? And then there are the parents, who perhaps fail to model appropriate behavior (implicit teaching) or explicitly teach their kids about handling money.

Obvisouly someone should be blamed when college students graduate with thousands of dollars in credit card debt, debt they have little to show for as it the money probably went to clothes that don’t last, food, entertainment, and status symbols that become old quickly.

I’ll pose this question to my readers before going any further. Who deserves all of the blame? If not all, who deserves most of it? Are the credit card companies and marketers evil when they prey on young “minds?” I touched this topic a while ago when I asked the question of the day, but now I want to know exactly what is wrong with society, where it fails, so we can fix the problem and move on.

Please share your opinion, and in a follow-up post, I’ll write a bit about what I believe, hopefully more coherently than how I commented on StopBuyingCrap.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

The Blame Game: Poor Money Management, Part 1

I linked to this article, but I wanted to focus on it when I had a chance. That chance is now. An article from Inc.com, a resource for entrepreneurs, says that drinking alcohol can help your career. Sounds too good to be true? Here’s how.

Regular drinkers make 10% to 14% more money than those who do not drink, according to the study… The study also concluded that men who drink socially — defined as visiting a bar at least once a month — earn an additional 7% more than those who do not.

Socialization and networking are the reasons why these data appear, not specifically due to the alcohol itself. Business often takes place outside the office. In a small company, socializing with the CEO is a good way to relax the constraints in the office that stop people from acting naturally. The atmosphere, and perhaps the alcohol, can help to break down a social wall.

At SmartPak, [a small company,] managers are encouraged to take their employees horseback riding, bowling, or out for the occasional happy hour.

Here’s a question for discussion: Is this unfair to non-drinkers? Also, does your company encourage socialization at locations where alcohol could be involved implicitly, explicitly, or not at all? How big is your company? Share some stories.

One commenter will be selected to receive a book unrelated to alcohol but related to investing and personal finance, The Big Money: Seven Steps to Picking Great Stocks and Finding Financial Security, by Fred Kobrick and Elliott Wave Principle: Key to Market Behavior, by A.J. Frost (both hardcovers).

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Enhance Your Career By Consuming Alcohol (With a Giveaway!)

The truth is people are selfish. A person makes decisions on what actions to take based on what they believe will benefit him or her. Is there such a thing as true selflessness? Even when someone helps another individual “out of the kindness of his heart,” isn’t she really acting in order to get that pleasing feeling of having done something “for” someone else?

Liz Pulliam Weston is asking whether you can trust your financial advisor or whether he is looking out for his own well being instead of yours, his customer.

She suggests looking at the advisor’s professional title. According to her chart, an attorney is looking out for your best interest, as is a certified public accountant. A financial planner, even a CFP, may be looking out for your best interest. Registered representatives and stock brokers are looking out for their own best interest.

The author provides three questions to ask your advisor to determine if your advisor is really on your side:

* Are you legally obligated to act in my best interests at all times? If so, are you willing to put that in writing?
* Will you disclose all potential conflicts of interest?
* In what ways are you compensated?

Perhaps I’m cynical or overly philosophical, but sometimes I feel there is only one motivator in anyone’s decision making process: What will be more beneficial for me? That may be selling products with high commissions for the short term monetary gain. That may be building trust through an advisor relationship in order to assure repeat and consistent business. That may be building a trustworthy reputation also to ensure future business.

Do people become [doctors|lawyers|advisors|psychologists|mentors|...] because they want to help people? Or do they because they want to feel good about their ability to help people?

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Can You Trust Your Financial Advisor? Or Anyone?

Jonathan Clements from the Wall Street Journal decided to don his psychologist hat and evaluate the muddled minds of investors. He discovered four mindsets that hinder people from investing intelligently.

Let’s face it, amassing a decent-size nest egg isn’t exactly rocket science. All we have to do is save regularly, buy a few low-cost mutual funds and patiently await our reward. Yet most of us scorn such humble simplicity. Instead, we are too confident and too clever.

* People buy the investments they wish they bought at some other time. As the price as an investment rises, investors should “grow leery” of the value. Instead, people jump on the bandwagon for last year’s hot stock or commodity. If it works out in the short term, the investor feels like a genius and gains confidence to make more unsafe moves.

* People want to get even. If Jack’s identically-housed neighbor sold her dwelling last year for $1 million, Jack will have a hard time settling for $800,000. “[This is] about avoiding regret. If we sell for less than we paid or less than the neighbors got, we have to admit we made a mistake, with all the associated pangs of regret.”

* People shy away from their falling investments. In some cases, falling prices represent deteriorating “underlying fundamentals.” Clements uses the example of Treasury Inflation-Protected Securities (TIPS), and he believes the lower prices make them a better investment, with no damage to the fundamentals.

* People have no self-control. With the negative savings rate in the United States, we would rather spend now than put away our money and invest for the future. We convince ourselves that everything will be okay in the end. Jonathan Clements believes this may be our biggest mistake.

I can only speak for myself and say I believe I’ll be fine in the end. I’m working hard, saving money, making money in places I never thought I would be if you asked me a few years ago, finishing a master’s degree and contemplating my next steps in career and education, and always learning about investing. If I were to live like I was in 1999, spending more money on the commute alone than I was making, I would not be able to say the same.

Thanks to Jim Mahar for sharing the link.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Four Mental Mistakes in Investing