Behavioral economics

All of us have said, ‘but it’s different this time’ ….’This Time This Expert is Right for Sure’……’I’m due’…..

As I write this Cyber Monday is in full swing. We all rationalize that because everyone is buying today we should as well. We say we can save a lot of money by not waiting and buying now. Many people are buying things they don’t need and in many cases they don’t really want what they are buying.

A necessary lie is a rationalization to justify self-destructive behavior. Some additional examples:

I will start my diet tomorrow…..
So I will pig out today.
I’ll just gamble until I get even…..
So I will let it ride.
I will buy today and pay for it tomorrow. Because I really want this…
This time I really do know what the market is going to do….
so it’s all right to speculate with my money.

Remember if you do not know two numbers you are speculating with your money. They are expected return and expected volatility (risk).

We all watch the news and hear the latest predictions. These predictions are nothing more than guesses by ‘experts’ who have no clue what will really happen. In most cases their predictions are really a sales pitch for their product/solution.

The equity markets are random and unpredictable. You will hear many ‘experts’ say that when this happens this will happen.
What they don’t tell you or don’t know themselves is that thousands of variables will have to perfectly align in order for their prediction to come true. This proves to be nearly impossible.

There are two groups of people when it comes to equites or interest rates for that matter. Those who don’t what will happen next and those that don’t know they don’t what will happen next.

Stop lying to yourself that this time is different. Predicting the future is very difficult. Those that appear to accomplish predicting something are relying on luck and not skill.

To succeed long term in reaching your financial goals you must own equities….globally diversify….rebalance.

There is a saying about retirement plans and portfolios in general…’Your portfolio is like a bar of soap the more you touch it the smaller it gets.’ When a 401(k) offers a more pension fund like plan their employees will benefit from less anxiety and better results.

Nearly a quarter of 401(k) savers allowed to take loans do so at any given time, according to one recent study— and over a seven-year period that rate increases to 50%. “It’s clear that in the conflict between the present and the future, the present tends to win,” Kahnemansays. “The ease with which the 401(k) savings can be withdrawn when a financial emergency arises is clearly disastrous for people. Given the choice between cashing out your 401(k) and borrowing from relatives, most feel an obligation to go with the 401(k).”As a general rule, investors would be better off with their hands tied and eyes close, he says. “With respect to my own investment policy, I have a very simple rule: don’t look,” he says. “I don’t look how well my investments are doing so I am not tempted to make quick decisions about it.” Freedom, he contends, can be overrated.

Kahneman’s work in behavioral economics highlighted our tendency to stumble when numbers are involved. The interplay between our automatic thinking and our more reflective analysis, causes us to stumble on statistics and all too often make the wrong call.

Our aversion to loss is a far more powerful force in decision making than the desire to gain, Kahneman stresses. So when decisions do need to be made, they shouldn’t be made quickly. “When it’s important, slow down. Take as much time as possible, pre-commit to a plan and stick with it.”

via blogs.smartmoney.com

This is really the main reason Americans do not save enough. When you add a risk adjusted globally diversified portfolio you have an unbeatable combination.

Please comment or call to discuss how your company plan can be designed to improve results for all.