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Quick Survey: What Drives Your Trading Decisions?

by Flexo on November 3, 2009

in People

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:

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.
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.
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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Investor Psychology: Why We Fail to Make Good Financial Decisions

by Flexo on October 21, 2009

in People

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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Thinking is Not Enough

by Frank Curmudgeon on June 2, 2009

in Economics

This is a guest article by Frank Curmudgeon, author of the Bad Money Advice blog. For updates from Frank, subscribe to the Bad Money Advice RSS feed.

We often see the struggle to get control of our spending as being the conflict between our emotional and logical selves. Emotion wants to go out to that new restaurant tonight, logic says cook at home.

We say to ourselves “If only I could stop and think about all my spending decisions, I’d soon be rich.” That’s not wrong, exactly, but it makes at least one big faulty assumption, that it is easy for us to be logical around money when we want to be. The truth is that just thinking about it is not always enough.

There is an entire field of economics, behavioral economics, which studies the differences between what logic would have people do with their money and what they really do. The academics in this area have collected many such “anomalies.”

One that illustrates well the illogic of our thinking selves is anchoring, the tendency for people to be influenced by even the most ridiculous estimates of a number. The classic example is that if you ask people if the Mississippi is more than 6000 miles long and then ask them to guess its exact length, they will give much higher guesses than if you had just asked them to estimate its length. (It is 2340 miles long, by the way.)

Dan Ariely, a professor at MIT/Sloan, conducted a striking demonstration of this effect. He asked a group of MBA students to write down the last two digits of their social security number. Then he asked them if they would be willing to pay that amount of dollars for a bottle of fine wine he was holding. Finally he had them submit actual bids for the wine, which he really sold to the winner.

Sure enough, the students tended to bid higher if they had social security numbers that ended in higher digits. So the anchoring effect was there even though the participants were fully aware that the suggested value was completely random, even though they were sophisticated and thoughtful (have I mentioned I got my MBA at Sloan?) and even though it was their own real money at stake. This was not an impulse decision in which consumers let emotion get the better of them. These were would-be shrewd businessmen who undoubtedly assumed that Prof. Ariely was up to something sneaky.

And anchoring explains a few oddities in our everyday lives. It is why houses, cars, and jewelry often have high “asking” or “sticker” prices. The seller does not really expect to get this price and the buyer does not expect to pay it. So why bother? Because by attaching a tag on a watch that reads “$500″ the jeweler can more easily talk you into paying $425, even if you know full well that the $500 price was just for show.

And anchoring also helps explain some stock price movements, specifically the phenomenon called price momentum. That is the tendency for stocks that have been going up over the past few months to continue to do so.

Imagine that there is an exciting growth company that announces some positive news when its stock trades at $50. There is a large group of investors who love this company, are excited by the news, and would, in principle, pay $100 a share. However, because of anchoring, they just cannot bring themselves to pay more than $10 above what the stock was trading at in the past month. It just seems expensive. When the stock goes above that level these buyers back off, temporarily. After a few weeks, the current price does not seem so unreasonable, because they get used to it, and they resume buying. The result is that even though in a more logical environment the stock would have gone to $100 immediately, what actually happens is that it climbs steadily at about $10 per month over five months.

It’s important to understand that anchoring doesn’t happen because you are stupid, or too emotional, or overly influenced by advertising. It happens because you are human. It is the way your brain is wired up. You can’t stop yourself from doing it, although being aware of it is a great help.

The point is that merely resolving to think about how you spend is not enough. Spending logically is harder than it looks.

Photo credit: Don3rdSE

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The Greatest Loss of This Recession

by Flexo on April 16, 2009

in People

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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A Home of My Own: Why We Buy

by Flexo on April 13, 2009

in People

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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The Battle Royale: You Versus Yourself

by Flexo on November 24, 2008

in Consumer

About the author: Matt Wallaert is 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. Twenty six and addicted to buying suits at Goodwill and geeking out on psychology, he lives in New York City’s Chinatown and pretends he is back in Hong Kong.

There are days when being a behavioral psychologist is utterly depressing. You think you’re smart, you think you’ve got it figured out, then you fall into the same traps that you warn other people about. Take, for example, my recent candy incident.

Our CEO really loves a particular type of gum, and in order to get him a batch, I went online to a candy warehouse. They had free shipping above $50, so naturally, I loaded up my cart with enough processed sugar to satisfy an army of third-graders and checked out.

The problem is that, since I study the tricks that marketers use to get you to buy more, I already know exactly how that $50 limit works. Shipping goes into a different mental bucket than the rest of the purchase, so getting it for free means paying one “cost” instead of two. Hence my loading up the cart.

Yet for all my understanding, I still bought the candy. Knowing it was stupid, feeling foolish, I still did it. And this isn’t an experience that is unique to people who study these things. I suspect that many well-educated consumers that read blogs great blogs like Consumerism Commentary fall prey to exactly the same tricks, even if they “know” about them. We are literally struggling with our own natural tendencies, the same tendencies that marketers exploit to get us to buy their products.

The struggle, then, becomes about both knowing and doing. As you head into the holidays and particularly Black Friday, when every marketer in the country turns their brain on overdrive, it is worth thinking about bridging that gap by using the same tools they do to trick your brain.

Take loss leaders: products that stores sell at cost or at a loss in order to get you in the door. Black Friday is filled with 6am deals designed to do just that. They know that once you’re in the store, you’ll buy more than just the LCD TV; you’ll also buy movies and stands and cables and a plethora of other items that will jack up your credit card balances. They count on the fact that you’ll spend more on other items, which makes up for the loss they take on the TV.

But you can play hardball too, using what we know about behavioral psychology to change the playing field. If the store counts on you spending more than you plan to, what if you simply leave your wallet at home? Bring only enough cash to get the item that they so nicely advertised for you, displaying the price in advance. Figure out the tax, take it in cash, leave with what you want and nothing else.

With only just enough cash, you can’t possibly walk away with something more expensive without going out to the car and driving home. And studies suggest that once you break that cycle of buying, introduce the time for reflection and thought as you go off in search of your credit card, you’re more likely to stay home with your new TV than drive back for additional merchandise you don’t need.

Stores also use these loss leading ads to lure you in with limited quantities: once they are sold out, retailers pay nothing to get you in the door. And research suggests that since you came planning to buy a TV, you’ll probably walk away with one, even if it is a more expensive version. You don’t want to waste the trip, you’re in the buying mood, and you’ve already come to view the TV you plan to buy as “yours”. So when they don’t have it, you’re left with this void to fill. A TV-sized void, and one they’d be happy to fill with another TV that is marked up and helps them make a profit.

One way to avoid this upsell is to think of the item you’re buying as specific, not just “any TV”. You can do this by pre-committing to the item. Try writing the model number or name of the specific item on the cash you plan to use, so that the money becomes tied with that purchase and isn’t transferred to another, similar item. It may feel ridiculous, but the goal here is to fight psychology with psychology: if they’re going to make you feel like you already own an item they can’t sell you, why not refuse to buy anything but that item?

You can even make them work for the sale. Stores do their best to make you stop as often as possible in the store, because every time you stop, you are exposed to new products. That’s why the space between items is so narrow: not only can they pack in more products, but two people can’t walk down the aisle at the same time. So fight back, by finding a salesperson as soon as you get in the door and asking them to take you to the item you’re looking for. Salespeople are motivated to move fast, so they’ll walk you there briskly by the shortest route and you’ll be too busy following them to start browsing around the impulse buys.

You can actually do the same thing on the way back. Inspect the item, confirm that you want it, then ask the salesperson if they can check you out. They’ll usually tell you to meet them at a register and point, so you can walk right over with them and avoid the hazards of a return trip through the store. This is particularly important because stores like to put the sale items at the back, where you have to walk through the entire store to get to them.

The key to all this, as I alluded to in the beginning of the post, is actually doing it. It is easy to read these articles and think tips are great, but never actually put them into practice. Write it down, make a plan, and tell someone what it is: public commitments may us more likely to follow through and putting effort into something makes us more likely to deliver. And of course, we know that behaviors are habit forming. What feels unnatural at the beginning gets easier with time, until with practice it becomes second-nature.

Psychologists spent a great deal of time frustrated by the fact that we can show people what they need to do to get what they want, and they still don’t manage to do it. Imagine how frustrating it is when we make the same mistakes! So make this poor researcher’s holiday and actually do what you know: save money. Avoid the pitfalls. Fight back. After all, it is your brain.

Photo credits: rochelle, et. al., valderrama

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Emotions and Money: When to Keep Them Separated

by Flexo on October 20, 2008

in People

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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harm: I like Ben, but with his recent gig playing a tout for a credit bureau has almost destroyed his credibility for me. grrrrrr on Ben Stein Offers Four Lessons From the Recession

LeanLifeCoach: In the end how much will the IRS really get; 10% maybe 20% of all this money? And how much will we spend collectively in actual dollars and... on Enforcing Tax Laws Works. Go Figure.

jammer(six): I’d like to buy it and turn it into a huge paintball arena. :-) on Pontiac Silverdome Sold for Less Than a House

Tom Dziubek: Imagine the kind of party you could throw in there. on Pontiac Silverdome Sold for Less Than a House

Jim: Would better IRS enforcement make a big dent? No. Even if the IRS was perfect in enforcing law and collecting all debts it would probably not increase... on Enforcing Tax Laws Works. Go Figure.