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Psychology


An estimated 9.1% of the population in the United States have symptoms of depression, according to the Centers for Disease Control (CDC) Morbidity and Mortality Weekly Report.

Depressive illnesses are more than just being sad occasionally. Among people with depression, there is a measurable chemical imbalance in their brands, and this prevents signals from being transmitted from neuron to neuron correctly. So depression changes how people think. And any obstacle to rational decision-making has significant long-term effects on an individual’s quality of life. As a family’s financial situation is one of the primary concerns of this blog and a primary factor in the quality of one’s life, it stands that depression can cause difficulties with money worth a discussion here.

Although depression is often chronic, it can be triggered by external events, or at least correlated to life factors. One of these factors is state of employment; the longer someone is out of work and looking for a job, there is a higher probability of that person showing symptoms of depression. To be certain, the CDC study shows 21.5% of unemployed persons in the United States have depression, compared to 6.6% of the employed population. Of those unable to work 39.3% have depression.

A cycle exists that makes depression particularly dangerous, even when putting aside the increased risk for self-harm, suicide, or violent behavior. Frequent or consistent financial problems, stemming from the loss of a job, a divorce, a bankruptcy, health problems, or a variety of other reasons, can lead to depression’s chemical imbalances. Those imbalance can prevent what others might consider “clear thinking,” the type of cognitive abilities that might, in other situations, be able to help people improve their finances. And that frustrating mental condition can lead to more financial trouble, keeping the depression persistent.

In some cases, people have the ability to adjust their thinking on their own, and change their circumstances — or at least, change the way they perceive their circumstances. There was an example of this recently in a story on CNN Money:

When Ray Camp lost his job at a Dell supplier at the height of the recession, it took a toll on his soul and his family. After nearly four years of looking, all he found was 16 hours of work every other week at a company fours away from his home in Nashville, Tenn.

He was crushingly depressed and felt worthless. His sour mood made him difficult to be around, putting a strain on his family. His story is a familiar one among the 3.1 million Americans who have been unemployed for more than six months…

In February, Camp finally decided he was no longer a failed job applicant but a new retiree. After four years, he had embraced retirement and started collecting social security since he had also turned 62. “Once I finally got into the mindset that I’d never have to face rejection again, I started to feel 100%,” said Camp, who now spends the hours he lost on job searches playing with his grandchildren and mowing his lawn.

For some people with depression, the mindset change is only possible with therapy or medication. In fact, the CDC distinguishes between “major depression” and “other depression,” and it is this “major depression” that is less likely to be overcome through nothing more than a decision to look on the bright side of life.

The Suicide Awareness Voices of Education group explains the differences between a healthy brain and a brain with depression:

A person living with depression does not always have the same thoughts as a healthy person. This chemical imbalance can lead to the person not understanding the options available to help them relieve their suffering. Many people who suffer from depression report feeling as though they’ve lost the ability to imagine a happy future, or remember a happy past. Often they don’t realize they’re suffering from a treatable illness, and seeking help may not even enter their mind. Emotions and even physical pain can become unbearable.

It should thus be no surprise that depression can become an obstacle not only to financial independence but to basic financial stability.

Depression affects your performance at your job. Motivation is a casualty of depression, so this affects how you work, if you do happen to have a job. Motivation is crucial for performing as you’re expected to perform at your job. As depression goes untreated, it may be difficult to hold onto that job.

Depression affects your spending. With depression, people may seek behaviors that heighten their sense of pleasure to counteract the general depressive moods. One method of self-therapy involves spending money. Buying things and experience can create a high feeling that masks emotional pain, at least temporarily. “Retail therapy” is a common type of self-medication, so to speak. And the temporary feeling of satisfaction gained from buying a present is more powerful than the reasoning and logic behind the idea of spending only what you can afford.

Depression can increase debt. From spending more than you earn in order to feel good to the lack of an expectation of feeling good when paying off debt, depression can lead to a larger portion of one’s life spent in debt or accruing new debt. Debt severely limits your options in life, and when in combination with unemployment, it can leave you with nothing over the long-term.

Treating depression can be expensive. Stories like the one in CNN Money about someone overcoming depression on his own are not the norm. Dealing with major depression requires professional help. And doctors are not cheap. Health insurance comes in handy when paying for psychologist visits or medication, but many with depression are not working. Until the Affordable Care Act, citizens in the United States have typically relied on employer assistance to subsidize the expense of health care, but the Act may be ushering in a new era in which individuals manage their own health care insurance, with the potential for subsidies from other taxpayers. Regardless, treatment is expensive, and those needing the treatment may not be in the best position to afford the help they need. Thus, they don’t get the help, and depression and its financial effects continue.

I think the best thing that those of us without depression can do is to learn to be somewhat empathetic towards those who do. We, who are often too smart for our own good, expect people to be able to make rational decisions about their lives, and I’ve seen many people get frustrated when people in their lives do not act in responsible ways with their finances. We want to believe in personal responsibility and accountability, where good results come about from hard work and good decision-making, and where people have the capability of improving their lives. We want people to be able to take action. We want people to control the way they react to certain situations.

We want people to “choose happy.”

But depression is one of many things that prevent people from seeing these “truths” that we want so much to share with the world.

It took me a long time, but I now live under the philosophy that happiness isn’t something that needs to be sought, it’s just a choice. I can always choose how I react to any situation in which I find myself. But every once in a while, I still have to remind myself that this is not a choice everyone is free to make at every moment. The ability to make a choice rests on the brain’s ability to make neurological connections, and that ability can be impaired.

Read the latest CDC report on depression.

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I grew up in competition. It was a part of my life, all over the place. And sometimes competition moved me to push my self far, motivating me to be excellent, and in other cases, competition broke down my will to excel. An individual reacts to competition different depending on the psychological factors, the situation, and how past competitions have played out. Because competition is everywhere in the world, particularly in a career or a quest for financial independence — not to mention just meeting personal goals one might set for oneself — look for ways to make competition work towards a positive outcome.

I wrote recently about one particular competitive experience. When I first began learning to play a musical instrument in school, we were seated by our perceived abilities. I was last in the row, worst clarinetist in the class. And I didn’t enjoy playing music for school, even though I had been musical at home. The following year, my family moved to a new location and a new school, and at this new school, I had a head start because my classmates were just beginning to pick up their instruments. Suddenly I was at the head of the class. And just as suddenly, I loved playing music again.

Year after year through high school, I continued playing, and continued working hard to stay the best. I was the “first chair,” and constantly faced challenges from friends who wanted to take my seat. To keep my position, I had to practice hard and stay focused on being the best. I eventually decided to study music education in college. Had I stayed in my first elementary school, it’s unlikely I’d ever pursue music as a career.

Competition was a main theme for me in high school. Another example happens to be related to music as well; our marching band competed with other similar marching bands from other schools throughout the northeast. Not every teacher agrees that competition of this type is useful in an educational setting. But competition exists in the real world, and learning how to deal with competition as a teenager might be a good way to prepare. We compete for jobs, we compete for money, we compete for recognition, and as is coming more clear to me with social media like Facebook, we compete to have admirable lives among our friends.

In the marching band world, competition was tightly controlled. One group competed against another only if they were similar in terms of size. Today, there are even more guidelines for appropriate competition — not only is size a factor, but so is funding, so a hundred-member band with twenty staff members available to focus on separate aspects of the performance doesn’t compete directly with a hundred-member band making do with only two teachers who have to do everything on their own.

Competition presents some challenges, in work and in life.

But when we compare ourselves to other people, we are often unaware of advantages, whether they are our own or of others. I can’t think of a time when I competed directly with a coworker for a promotion, but this happens all the time. And when faced with competition like this, some people shut down and give up, others rise to the occasion. If you tend to get motivated by competition in work situations, are you also using competition in social situations to motivate you?

Facebook recently conducted a social experiment on its users (without their knowledge but with the consent that comes in the form of agreeing to a contract when you sign up for an account). The news feed showed mostly positive status updates to some users and mostly negative updates to some users, and saw that users’ own moods (as measured by additional status updates) were affected by the tone of the updates they saw. On top of this, Facebook is a chance for people to market themselves to their friends and to feel good about themselves. Thus, people tend to share personal good news more often than bad news. People are more likely to use Facebook to tell the world “I got the promotion!” or “I got engaged!” when appropriate, but when a situation would call for announcing “She turned me down for a date!” or “I failed the bar!” chances are you won’t see it.

All of this makes it difficult to live up to the implied social competition. Even without Facebook, it looks like everyone’s life is better than yours. That’s only because you primarily about the good things that happens in someone’s life, while you still experience bad things even if you don’t share them with your extended group of friends.

Make competition work for you in your career.

You compete for a new job, you compete for recognition with your work, and you compete when you own a business. Without good experiences with competition in the past, there is a good chance that taking the easy way out is safer emotionally.

Steal a technique from video games. When you play a video game that’s based on progressing through a series of levels, you start out easy. You’re able to overcome initial obstacles, and as your abilities improve, you are able to face tougher challenges. The game takes you through a series of levels, training as you go to handle difficulties. You don’t get thrown to the wolves on your initial attempt.

In real life, you may not be able to choose your competition. But you can set your expectations so they match your abilities. I wouldn’t think I’d be able to compete for a first-chair position at the New York Philharmonic without first being the best clarinetist at my university (and I wasn’t). I wouldn’t think I’d be able to compete for a job in charge of a non-profit with someone who has been leading non-profits for thirty years — but I could take a different approach and start my own.

It also helps to keep a larger goal — or a mission — in mind. You may not always be recognized for your hard work, whether the recognition comes in the form of a promotion, a salary increase, an award, or even just getting a job. But if you’re doing what you need to be doing, you’re improving yourself whether other people see it or not. It can be demotivating when you constantly perform competitively and others seem to refuse to recognize how well you are doing. There are many reasons why people are rewarded for their actions, and sometimes it has nothing to do with your particular performance.

Don’t take other people’s achievements personally.

The competition to have the best life is one you can never win. If you’re feeling pressure from other people’s successes you read about on Facebook, and it’s affecting your emotions negatively, either stop reading Facebook or keep in mind that everyone who shares anything personal is automatically biased. Everyone wants to project a favorable appearance.

Not everything has to be a competition. You don’t have to be the first person among your friends to reach an important life milestone. You don’t have to show off everything that you’re happy about. People live their lives at different speeds and have different goals. You shouldn’t live your life based on anyone else’s personal achievements.

Stop comparing yourself and your life to others, and I guarantee you’ll be happier and better able to focus on achieving your own goals, whether in your career or in your life. If you’re focusing more on yourself, you’ll be able to see competition for what it is: something healthy that can spur you to move forward.

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Whether you’re making a decision that has apparent, immediate consequences that could affect the rest of your life, like deciding to quit your job and open a business, or making a purchasing decision big or small, it is worthwhile to gather information and think about the future. When you gather information, you have to be careful, because people, businesses, and even statistics that provide that information might contain inherent biases.

Survivorship bias is often hidden in plain sight, but recognizing the bias when it exists could be the difference between building wealth over the long term and going broke. If a logical argument neglects to recognize that failure is a possible outcome, the argument may be subject to survivorship bias. If a statistic reflects the outcome of only the successful set, ignoring the set of those who fail, survivorship bias is at play, and can give someone a false understanding of the data.

David McRaney, the author of You Are Not So Smart explains survivorship bias:

Survivorship bias [...] flash-freezes your brain into a state of ignorance from which you believe success is more common than it truly is and therefore you leap to the conclusion that it also must be easier to obtain. You develop a completely inaccurate assessment of reality thanks to a prejudice that grants the tiny number of survivors the privilege of representing the much larger group to which they originally belonged.

It’s probably easier to illustrate survivorship bias than to explain.

Survivorship bias in the stock market.

Mutual fund managers rely on survivorship bias for selling their products. Overall, and over the long term, actively managed mutual funds cannot beat the relevant market benchmark. Considering actively managed mutual funds are more expensive to own than their index counterparts, index-based, non-managed mutual funds are better choices. But mutual fund managers continue to attract investors because they’re able to advertise higher returns.

Money managers can advertise these higher returns overall because poor-performing actively-managed mutual funds are eliminated or merged into other mutual funds. This hides poor performance. As a mutual fund manager, kill the low performers, and when you report performance results for the funds that survive, your track record looks better than it is.

The danger in ignoring survivorship bias in the stock market. Well, it’s all about making the best decisions with your investments. If you are taken in by promises of big financial returns, you may not be putting your future self in the best position possible. When an investment manager says 90 percent of his or her funds beat the market, he or she isn’t including those that no longer exist. And your money could end up in an investment that, someday in the future, will no longer exist.

Survivorship bias in stock recommendation scams.

Step one: build a sufficiently large mailing list. Ten thousand names will do, if the recipients are already inclined towards buying.

Step two: Pick a stock, and send a letter to half the recipients on the list predicting the stock price will go up in the next week. Send a letter to the second half predicting the opposite.

Step three: In the following week, determine which half received letters that correctly predicted the stock’s performance. Delete the other names from the list of recipients.

Repeat steps two and three, each time eliminating the half of the mailing list that saw an incorrect prediction. After a few weeks, a couple thousand people will consider you a stock market prognosticating genius, and each week, you have a better chance of selling something to those who were lucky enough to be on the winning side of each prediction.

This approach isn’t limited to bottom-feeding stock scams. Hedge funds catering to the wealthy often employ a similar strategy by initiating many funds, waiting for performance results, and marketing and reporting to indexes only the successful hedge funds.

The danger in ignoring survivorship bias in stock scams. This should be apparent. If something sounds too good to be true, it is. Don’t invest in stocks recommended to you by a stranger. Or by a friend who thinks he or she has insider information. Or in individual stocks at all unless you are Warren Buffett, can negotiate for a discount, have a say in management decisions, or are conducting an investment experiment.

Survivorship bias in entrepreneurship.

Do you ever wonder why all business owners seem to be successful? In the classic book, The Millionaire Next Door, the authors point out that entrepreneurship is the path to success. This message permeates, and many people believe that owning a business is the best way to grow wealth. While investing as much as possible in broad stock-based index mutual funds can get you to financial independence over a long period of time, barring bad timing as many people who were in retirement during the latest recession might have realized, owning a business is said to be the key to speeding up wealth accumulation.

Of course business owners are better off financially than equivalent employees. If they weren’t successful, they would — and do — stop their pursuit of owning a business. In other words, those who don’t succeed drop out of the statistics.

The danger in ignoring survivorship bias in entrepreneurship. It’s easy to be seduced by the promise of riches that being a business owner seems to hold. Encouraging books and gurus often ignore the risk of leaving a job with a salary and benefits behind in favor of getting a project off the ground. At the same time, they emphasize the risk of staying in a job, subject to random layoffs and other stresses of answering to a boss. According to Bloomberg, eight out of ten new businesses fail within the first 18 months.

The remaining two become part of the statistics that show how worthwhile owning your own business could be, but chances are more likely any new business owner will eventually give up and no longer be counted among the “entrepreneur class.”

Survivorship bias in other aspects of life.

I go the gym three times a week to work out with a personal trainer. And after going this for about a year, not including time away for travel, I’ve made some progress. But I still look around the gym and see that I’m not nearly as in shape as just about everyone else. That’s to be expected, but not because of survivorship bias. Unless you work out constantly, every time you go to the gym, most of the people will be in better shape. The reason is that any person you see is a statistical representation of someone who is most likely to be at the gym at any particular time. And the people most likely to be at the gym at any particular time are the people who go to the gym the most often.

But survivorship bias manifests within fitness philosophies. An intense program can report high success rates for two reasons. First, the people who are most likely to fail don’t start in the first place. Second, people who being the plan but are destined to fail leave, and they are no longer included in the group of followers of the fitness plan.

Diets follow the same pattern. This phenomenon could also be considered selection bias, but selection bias is also important to marketers. If they can stop the “wrong” customer — someone not likely to succeed — from buying their self-help products initially, the seller can continue to report good success ratios with a clear conscience.

The key is to always ask questions.

I tend to be more skeptical than people I know. I don’t trust statistics immediately. I look to the source of information, and I try to think about logical holes, fallacies, and biases before making decisions. I may not always be perfect and may not always be the smartest person in the room, but recognizing biases has helped me make better decisions with my life.

If you’re only looking at successes for modeling your behavior, you’re missing an important piece of information. It’s quite possible that those who failed employed the same strategies as those who succeed. It’s also possible that failures vastly outnumber the successes, and are just not reported as such. So if you want to avoid failure, pay attention to potential survivorship bias.

Photo: Universitat Stuttgart (a tardigrade, Earth’s survivor)

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Last Thursday, I drove to the place that was my home for four formative years of my life, my undergraduate university. I’ve written before about how the degree and overall course of study during college isn’t directly related to what I do today. Nevertheless, I still feel strongly about the importance of music and arts education.

I’ve been distracted away from this passion for many years; some bad experiences in my career in the non-profit and educational worlds led me to explore a different vocation. And then, as Consumerism Commentary began to grow as my “side job,” I pushed some other passions aside. At the same time, I haven’t maintained many connections with friends and professors from my time at the university. I was to be more involved, and today, I’m in a position to do so.

After a drive that brought back some memories, I found myself on campus, enjoying a tour arranged and led by a director of development. I’ve been a financial supporter of the university for several years, so I knew the purpose of this friendliness, including the opportunity to meet with the chair of the department and the dean of the College of Arts and Sciences, was primarily financial. More came out of it than I expected.

The director of development used the phrase: “time, treasure, and talent,” which although I had never heard this before, it seems to be a common way to describe charitable endeavors. For instance, I agreed to visit the campus again and speak to students in a new entrepreneur track at the university about my experiences.

It was on the drive home that I was struck with another idea about money systems. I passed an area on the interstate highway that I became closely familiar with over a decade ago. My new-to-me car, a grey 1986 Toyota Celica, broke down at that spot on the highway. I was working near campus after graduation, and it might have been when I was driving back to my parents’ home for vacation. And it might be misleading to say, “The car broke down.” It would be more accurate to say, “I broke the car.”

No one explained to me that in order to maintain a vehicle, you need to check and maintain the oil level. This is a basic rule of operating a car, and every driver should know this, but I didn’t. I could blame my dad for never telling me; maybe he did, and I didn’t remember. The 13-year-old car was a graduation gift, so I was just thankful to have something to drive. I didn’t ask the right questions, such as, “What is everything I need to know about owning and operating a car?”

A habit is a system, and asking questions until you understand everything is a habit.

Create a habit of asking questions.

I’m the kind of person who needs to know as much as possible about a topic that interests me. As a kid, I used to read the World Book Encyclopedia collection my parents had in our house. Today, if I read or hear something that leaves me with more questions, I search for more information online. If I read a word and I’m not confident about my understanding of the definition, I’ll look it up. When someone I respect sees success in an area I’d like to see success for myself, I ask for suggestions.

It’s not enough to just ask questions. Get in the habit of asking the right questions — questions that get to the core of the issue. Even if I had asked my father to tell me everything I needed to know to own and operate a car, it’s likely I’d not get all the information I needed right away. It would start a conversation that would lead to follow-up questions, and getting into these details would give me real confidence — not false confidence — that I’m in a much better position for succeeding in my desire to make the car last many years.

The strongest barrier to asking questions is the fear of sounding stupid. Believe me, when friends asked me how I could possibly not know that a car’s motor needs oil to run, I didn’t feel like the intelligent young adult I knew I was. But I got over it, and figured it’s better to ask questions and ensure the knowledge is there than to run into a problem later.

As a result of my lack of inquisition, I needed to come up with several thousand dollars to replace the car’s motor at a time when I was earning very little money and had a growing amount of debt from student loans and credit cards.

The known unknowns and the unknown unknowns.

A few years, ago Secretary of Defense Donald Rumsfeld was defending the administration’s choice to go to war with Iraq. Here is what he said about the evidence:

There are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don’t know. But there are also unknown unknowns -– there are things we do not know we don’t know.

Putting aside the circumstances that required such a statement, Rumsfeld was getting to the core of risk management. When you ask a question, it’s usually because there is a known unknown, some topic for which you are aware of needing more information. But ask you get into the habit of asking these questions, your increased knowledge can reveal other missing details for which you originally didn’t even know was a hole in your set of knowledge of a topic.

Healthy skepticism.

More classic a phrase than “time, treasure, and talent” is “trust but verify.” When I ask questions, I try to only ask those that the other person in the conversation is qualified to answer unless I’m looking for less-than-informed opinions. I don’t immediately take a response as truth. Depending on the question, the answer might stem from a personal bias.

If I had taken that unasked questions about my car to a mechanically-inclined friend as well as to my father, I might have received two different answers, had two different conversations, and ended up with some confirmed ideas and possibly even more questions.

Healthy skepticism assists your financial condition in more direct ways. When you’re visiting the same mechanic that offered you advice to fix your car, asking questions helps reduce the possibility of being charged for something you don’t need. Asking questions when negotiating a contract or a job can offer you opportunities to earn or save more money than you would have been able to had you remained silent.

The more you get into the habit of asking questions, the better chance you have of taking advantage of good financial opportunities, whether to save money, to earn more money, or just to prevent someone from taking advantage of your ignorance.

Have there been any situations where asking questions has helped you financially?

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