Bogleheads® Speaker Series

00:00:00.000 | Welcome to the second edition of the Boglehead speaker series.

00:00:03.520 | We're holding these virtual events online

00:00:07.120 | obviously because of COVID, and it's the goal to get back to

00:00:10.320 | in-person conferences by 2022.

00:00:13.440 | In just a moment, I'm going to introduce Dan Ariely, who

00:00:17.360 | is the behavioral economist I think has done far

00:00:20.600 | more than anyone else in actually changing people's behavior.

00:00:24.240 | But first I have to go through a few housekeeping items.

00:00:28.200 | I'm Alan Roth. I'm a board member of the John C. Bogle

00:00:31.400 | Center for Financial Literacy. We are a 501(c)(3)

00:00:35.640 | not-for-profit with the mission

00:00:38.680 | of expanding John Bogle's legacy by promoting

00:00:41.880 | the principles of successful investing and financial

00:00:45.160 | well-being through education and community.

00:00:47.880 | Our website is boglecenter.net, and

00:00:51.640 | since I'm also treasurer of the organization, I would

00:00:54.760 | be remiss if I didn't say you can make

00:00:57.560 | donations at the boglecenter.net, and

00:01:01.320 | they are not only appreciated, but tax-deductible.

00:01:04.360 | I want to thank the entire board for all of their work. I

00:01:08.360 | want to single out Mike Nolan, who, as most of you

00:01:11.560 | probably know, was Jack Bogle's chief

00:01:14.680 | operating officer, helped millions of people, and has done the

00:01:17.720 | heavy lifting for these events, these speaker series

00:01:20.840 | events. I want to thank Vanguard for giving us the resources

00:01:24.840 | to host these conferences, and of course for

00:01:28.360 | helping millions of us move towards financial independence.

00:01:32.440 | And finally, all of you in the Bogleheads community, thank you for

00:01:35.480 | the questions you submitted, and especially for all you

00:01:38.680 | do online to help millions of people also

00:01:42.280 | without any profit motive.

00:01:43.960 | Now the main event, Dan Ariely.

00:01:47.080 | I'm not going to read his incredibly impressive bio

00:01:51.640 | because you can Google that. I want to try to tell you a couple

00:01:54.760 | of things you may not know about him.

00:01:56.440 | First of all, the first book that I read of his was

00:02:00.520 | predictably irrational. I had never met Dan, had

00:02:03.880 | any contact with Dan, but I felt like he'd been studying

00:02:07.400 | my behavior for the last three decades.

00:02:09.720 | Brilliant.

00:02:11.080 | Next, I want to tell you what I think Dan Ariely and

00:02:15.640 | John Bogle have in common.

00:02:18.280 | First of all, we all know that Jack Bogle taught us about the dangers

00:02:22.440 | of expenses. Dan Ariely taught me the dangers

00:02:25.720 | of emotions, which can be just as destructive.

00:02:28.920 | I'm just going to be very candid. I've had three

00:02:32.040 | longtime Bogleheads come to me

00:02:35.160 | who had once had brilliantly low cost diversified

00:02:39.960 | portfolios, who did the predictably irrational

00:02:43.160 | thing and sold in March when stocks were down

00:02:46.520 | by 30-35%.

00:02:49.240 | Now, we all know that Jack Bogle worked tirelessly

00:02:52.120 | to help people improve their well-being, and I

00:02:56.360 | can tell you that Dan Ariely does the same thing. Nights,

00:03:00.280 | weekends, around the clock. I think they both have figured out

00:03:03.560 | how not to sleep.

00:03:04.600 | And Dan not only helps people here in the US and

00:03:08.280 | developed countries and developing countries as well,

00:03:11.880 | where learning to save can make the difference between taking a child

00:03:15.800 | to the doctor or not. And then finally,

00:03:19.720 | Jack was an incredibly nice, kind, giving person.

00:03:23.400 | I felt very fortunate to know. And Dan Ariely

00:03:26.440 | is the exact same way. I feel very fortunate

00:03:29.480 | to know you, Dan. And now, Dan, the main

00:03:32.600 | event, take it over. Talk for about 40-45

00:03:35.720 | minutes or so, and then I will ask a few

00:03:38.760 | of the questions that came in from the Bogleheads.

00:03:41.640 | Wonderful. So first of all, thanks a lot for this introduction.

00:03:45.800 | It's an honor to be here and to be part

00:03:49.000 | of this. And maybe before I start

00:03:52.120 | talking about behavioral economics, money and investing,

00:03:55.080 | I'll mention that why

00:03:59.160 | I have half a beard. And it's not because I

00:04:02.360 | lost a bet. Many years ago, I was badly burned.

00:04:05.480 | Most of my body is covered with scars, about 70 percent,

00:04:09.480 | and including the right side of my face. So

00:04:12.600 | I just don't have hair on this side, and that's the reason for

00:04:15.400 | the half beard. And I'm

00:04:18.440 | mentioning up front because somebody told me that unless I clear it up,

00:04:21.800 | they keep on wondering for the whole time, like, "What's the point of this

00:04:24.680 | half a beard?" So now you know there's no point.

00:04:27.320 | That's just the random luck of the accident.

00:04:29.640 | Okay. So behavioral economics.

00:04:34.040 | Behavioral economics is a field that, in general,

00:04:37.320 | doesn't assume that people are rational.

00:04:40.440 | In fact, we put people in different situations, and we

00:04:44.360 | see what happens. And in most cases,

00:04:47.720 | we find that people are acting irrationally

00:04:50.840 | in predictable ways. So people deviate from rationality.

00:04:54.280 | That's one of the main reasons that derail us from

00:04:59.000 | being rational, but it's not the only one.

00:05:02.360 | So we basically question humans' ability

00:05:06.920 | to make good decisions. And we question it in all kinds of ways.

00:05:10.200 | We question our ability to sleep enough

00:05:13.240 | and to exercise and to take our medication

00:05:16.280 | and to eat well and to take care of the planet and so on and so forth.

00:05:19.400 | But we also do it in the domain of money.

00:05:22.440 | And today we'll focus not on the total

00:05:26.120 | influence of behavioral economics, but how do we think

00:05:29.800 | about money?

00:05:31.320 | So first of all, before we talk about what

00:05:35.560 | people actually do, let's mention a little bit what

00:05:38.600 | they should be doing, what we should be doing. Imagine we were perfectly

00:05:41.960 | rational. And let's ask something

00:05:44.840 | about the nature of money. What is money all about?

00:05:47.880 | And money is an amazing invention, as

00:05:52.360 | important as the wheel. In a world without

00:05:55.640 | money, think about how tough it will be to manage.

00:05:58.280 | Maybe you would raise broccoli and I

00:06:02.440 | would raise chickens, and then we would have to meet and we'll have to decide

00:06:05.640 | about what's the exchange rate between broccoli and

00:06:08.760 | chickens. And maybe you didn't want a whole chicken, you

00:06:11.640 | would use us half and everything would be really complex.

00:06:14.520 | So we created money, an amazing invention,

00:06:18.680 | because everything in society can be mapped into money

00:06:21.880 | and we don't have to trade things directly.

00:06:24.440 | And money is also divisible and we can store it in office

00:06:28.280 | and all kinds of things can happen. So I'm a university

00:06:31.240 | professor. Imagine I had to barter for my services.

00:06:33.880 | Who would pay and how would it work out? Not to mention I'll waste

00:06:38.200 | a lot of time on doing this, but

00:06:41.000 | nobody would invest in long-term things that

00:06:44.040 | we would all want just to get things that we need at the moment.

00:06:47.800 | So money allows us to basically exchange

00:06:51.960 | and save and think about the future. Plus, it also

00:06:55.720 | allows us to invest, which is a really interesting thing.

00:06:58.120 | Now, so that's money and the way we should

00:07:02.040 | think about money is about opportunity cost.

00:07:04.920 | What does it mean that we should think about money's opportunity cost? Every

00:07:08.680 | time we go to buy a cup of coffee, we should

00:07:12.040 | ask ourself, is this the best use for money or is

00:07:15.400 | there somewhere some other use that I could find for this

00:07:18.520 | money that would be different, would be better?

00:07:20.440 | Now, it sounds strange and if you think to yourself, like

00:07:25.320 | ask yourself, when was the last time you thought about it this way? When was the

00:07:28.520 | last time you thought about buying something and you say,

00:07:30.760 | could I could I do something better with my money?

00:07:34.200 | And the reality is that even if you do it from time to time,

00:07:38.120 | we certainly don't do it a lot.

00:07:39.640 | And we don't do it for small purchases, but we also don't do it for large

00:07:43.800 | purposes, large purchases. And I'll give you an example.

00:07:47.080 | A few years ago, I went to a Toyota dealership and these were people who

00:07:51.880 | already talked to the dealer. They already got the price. They knew their

00:07:55.320 | monthly price. They knew the total price. And they were still debating whether to

00:07:58.360 | get the car or not and whether to add some features to it or not.

00:08:01.720 | And I caught them at that moment. And I said,

00:08:05.560 | if you are going to go ahead and buy this car today,

00:08:08.600 | what would you not be able to do? What are you giving up?

00:08:13.320 | And you would expect that everybody would have an answer.

00:08:17.240 | Making a big decision, putting money into one thing, what will they not be able to do?

00:08:22.120 | Nobody had an answer. Why? Because they haven't thought about it.

00:08:27.240 | So then I pushed them and I said, look, if you go ahead and buy this car today,

00:08:31.800 | something will have to give. What would it be?

00:08:35.000 | You know what was the most common answer I got?

00:08:37.000 | If I buy this Toyota, I can't buy a Honda.

00:08:40.840 | Now, of course, that's true, but it's irrelevant. That's not what I was really asking.

00:08:45.720 | What I was asking was, what is the intertemporal trade-off across multiple products?

00:08:52.760 | What I expected people to say, what I would want people to say is,

00:08:57.480 | I'm giving up a thousand lattes and 17 books and three weeks of vacation,

00:09:03.240 | one week over the next each of three years.

00:09:06.280 | These are the trade-offs we're really making.

00:09:08.120 | But the reality is that we can't think about this.

00:09:11.720 | And, you know, we said that money is beautiful and wonderful and its value

00:09:17.480 | is that we can map it to almost everything in life, right?

00:09:21.480 | We can buy coffee and books and vacation and all kinds of other things.

00:09:24.920 | But that's also the source of its trouble.

00:09:30.360 | In English, there's an expression when we think about a tough decision,

00:09:33.640 | we say it's like comparing apples to oranges.

00:09:35.720 | Turns out comparing apples to oranges is very easy.

00:09:39.080 | You don't see anybody baffled by the fruit plate saying,

00:09:42.040 | oh my goodness, I have no idea, apple or an orange.

00:09:44.280 | The challenge comes when it comes to valuing those things.

00:09:48.920 | So apple and orange, you know, each of you know right now which one you would prefer.

00:09:53.400 | If it's a beautiful orange, it will be different.

00:09:55.880 | But if I showed you an apple and orange, you would know.

00:09:58.760 | But if I asked you, is an apple worth 50 cents, 75 cents?

00:10:04.200 | What about $1.25?

00:10:05.640 | Now you have to admit that it's not that clear.

00:10:09.000 | You see an apple and orange, each have an adonic impression.

00:10:13.320 | We get the feeling of the value, the pleasure we will get from the apple,

00:10:17.320 | the pleasure we would get from the orange.

00:10:19.160 | And we can compare which one of those things would be more pleasurable.

00:10:22.200 | When I tell you $1.25, you don't have a representation

00:10:28.040 | of what's the best thing I could do with $1.25 now and later.

00:10:31.880 | And let me see if that pleasure across all kinds of things

00:10:35.480 | is bigger than the pleasure of an apple.

00:10:37.720 | The reality is that what makes money so wonderful,

00:10:41.400 | the fact that we can buy lots of things with it,

00:10:44.520 | that it's divisible, storable, and so on,

00:10:47.720 | it's also what makes it so complex to deal with.

00:10:51.160 | And money, we have to admit, is just a very complex entity.

00:10:55.640 | Very hard to figure out what is the true value of something.

00:10:59.720 | By the way, there's something that we have the illusion

00:11:02.600 | that we know what the value is.

00:11:05.240 | If I tell you how much would you pay for a can of Budweiser beer,

00:11:10.120 | you have a sense of what it will be.

00:11:12.680 | Let's say $2.

00:11:13.640 | But the reality is it's not because that's the real value,

00:11:18.200 | it's because you got used to paying that amount.

00:11:21.160 | And now you think of it as the real value.

00:11:23.400 | But if you thought of it in terms of pleasure,

00:11:25.960 | it would be a different story.

00:11:28.280 | So money is wonderful, money is difficult.

00:11:32.040 | And the reality is that modern technology

00:11:36.120 | is making things not better, but worse.

00:11:38.920 | Why is it worse?

00:11:41.320 | Imagine that we lived in a world that there was only cash.

00:11:45.320 | There was money, but only cash.

00:11:47.320 | And I gave you every morning, I would give you $50.

00:11:51.240 | So here's $50, spend it today on anything you want.

00:11:54.440 | Very quickly, you would realize the opportunity cost.

00:11:58.040 | You would say, if I buy a big breakfast,

00:12:00.520 | I don't have time for money for lunch.

00:12:02.120 | If I buy a big lunch, I don't have money for medication, and so on.

00:12:05.480 | What if I gave you $350 in the beginning of the week for all seven days?

00:12:12.520 | Well, what would happen is that Monday, you would say, I'm rich.

00:12:15.560 | There's no opportunity cost.

00:12:17.480 | By Thursday, you would realize you're out.

00:12:20.840 | What would happen if I gave you the money monthly?

00:12:23.160 | What would happen if I also gave you a mortgage,

00:12:26.840 | and car payments, and credit cards?

00:12:30.520 | Now you can see how life is actually becoming very complex,

00:12:34.600 | and we're not set to understand the trade-offs that we're making.

00:12:38.680 | So in a world in which I would give you $50 every day,

00:12:42.520 | and I said, what if you bought something for $40,

00:12:44.680 | you would understand the consequences.

00:12:48.920 | But if you ask me today, what will happen if I bought a new bicycle?

00:12:52.040 | I actually really want a new bicycle.

00:12:53.560 | But what would happen if I bought this new bicycle?

00:12:57.320 | I can't tell you where the money would come from.

00:12:59.080 | I really can't.

00:13:00.440 | A little bit less inheritance for my kids.

00:13:03.000 | Is it coming from something else?

00:13:05.080 | So unclear, because I'm paying it on a credit card,

00:13:08.200 | and so many things are happening.

00:13:09.640 | Very, very hard to figure out opportunity costs.

00:13:12.360 | So money relies on the idea that we will have opportunity costs,

00:13:17.160 | that we have a kind of intuitive notion of opportunity costs, but we don't.

00:13:22.360 | And modern technology, things like mortgages, and loans, and credit cards,

00:13:27.240 | are making it much more diffused and much more complex.

00:13:33.000 | So money is amazing.

00:13:34.840 | It's about opportunity costs, but we can't figure it the right way.

00:13:39.880 | So what do we do?

00:13:40.680 | We think about money the wrong way.

00:13:44.600 | And it turns out there's lots of wrong ways to think about money.

00:13:48.200 | I'll just give you a couple of examples.

00:13:50.040 | One example is relativity.

00:13:55.080 | So this is an example from Tversky and Kahneman, a little adjusted for the times.

00:14:02.600 | But imagine that you go to a store.

00:14:05.880 | You go to a store to buy a pen.

00:14:07.320 | The pen is $15, and you pick the pen, and you go to the cashier,

00:14:13.080 | and the cashier said, look, you're a really kind, wonderful human being.

00:14:15.880 | You have a beautiful smile.

00:14:16.920 | I have to tell you something.

00:14:19.240 | We have a sister store four blocks down the street,

00:14:22.360 | and day to day are selling the same exact pen for $7 instead of $15.

00:14:26.920 | It's a beautiful day, only four blocks.

00:14:30.120 | If you feel like walking to the other store and buying it for $7 instead of $15,

00:14:34.520 | perfectly fine with me.

00:14:35.560 | What would you do?

00:14:37.240 | Would you go to that other store, or would you buy the same store for $15?

00:14:42.280 | Most people say they would go to the second store,

00:14:45.320 | and the people who would stay in that store don't feel good about

00:14:47.880 | spending the $15 on a pen.

00:14:50.440 | Case number two.

00:14:52.520 | You're buying an Armani suit.

00:14:55.000 | It's $1,015.

00:14:57.160 | As you check out, the cashier says, look, you're a really nice person with a very nice smile.

00:15:02.840 | I have to tell you, we have a sister store four blocks down the street selling the same exact suit

00:15:09.000 | for $1,007, $8 less.

00:15:13.320 | It's a beautiful day.

00:15:14.120 | It's only four blocks down.

00:15:15.160 | If you want to go, go ahead and go to that other store.

00:15:18.280 | How many of us would walk in the second case?

00:15:21.800 | Some people still walk in the second case, but they feel bad about it.

00:15:26.280 | They feel that they are extra stingy about it.

00:15:28.760 | But the majority of people walk in the first store and don't walk in the second store.

00:15:33.560 | Now, both cases, it's a question of trade-off.

00:15:38.440 | It is four minutes walking, four blocks walking in a nice weather worth $8 savings or not.

00:15:44.200 | And your bank account doesn't know where the money is coming from.

00:15:47.880 | The bank account doesn't know if it came from saving on an Armani suit,

00:15:51.240 | or it came on saving on a pen.

00:15:52.760 | But we think about money in relative terms.

00:15:56.840 | And when we buy something big, no problem.

00:16:00.120 | Let's spend more.

00:16:00.840 | When we buy something small, we're very, very sensitive to deviations.

00:16:03.960 | Here's another example.

00:16:07.320 | I'm sure many of you have renovated an apartment or a house at some point.

00:16:11.240 | And probably a version of the following thing happened to you.

00:16:14.840 | The contractor came to you and said, for only $2,000 more, and they use the term only,

00:16:22.840 | you can buy something Italian.

00:16:25.880 | You can upgrade to something Italian.

00:16:27.480 | It's a faucet.

00:16:28.360 | It's a tile.

00:16:30.280 | It's something Italian.

00:16:31.240 | And you say to yourself, it's only $2,000.

00:16:33.800 | Of course, let's go for it.

00:16:37.080 | And then you go to the grocery store, and you stand by the tomatoes.

00:16:40.200 | And you think to yourself, should you buy the cheap tomatoes or the expensive tomatoes?

00:16:43.320 | And your whole life of making decisions about tomatoes will not amount to $2,000.

00:16:48.520 | But tomatoes are relatively cheap.

00:16:51.960 | And every small difference looks big.

00:16:53.880 | But if you're spending so much money on renovating your house, $2,000 look, relatively speaking,

00:16:59.880 | so small that you don't pay as much attention to.

00:17:04.840 | And that's the thing about relativity.

00:17:06.520 | Money is absolute.

00:17:08.760 | It's not relative.

00:17:10.920 | But we think about money in relative terms.

00:17:14.440 | And that gets us into all kinds of trouble.

00:17:16.200 | That's why when we buy big things, we're likely to be tempted and spend way too much.

00:17:22.200 | And when we buy small things, we might focus too much on small differences and eventually

00:17:29.720 | not get the things that give us more happiness.

00:17:34.040 | So that's mistake number one.

00:17:35.720 | We think about money in relative terms, not in absolute terms.

00:17:40.600 | Ellen and I had lots of discussions about asset undermanagement.

00:17:46.760 | And is it reasonable to pay a percentage of asset undermanagement?

00:17:51.320 | That's a relative argument.

00:17:56.440 | And a lot of people think it's perfectly fine because they think it's a percentage,

00:18:00.440 | a small percentage.

00:18:02.280 | And we don't think about the absolute number of it.

00:18:05.080 | OK, mistake number two.

00:18:08.120 | Spending has to do with the timing of the spending and the modality of the spending.

00:18:19.960 | So imagine that you're going to a restaurant.

00:18:22.840 | Let's say it's over COVID.

00:18:25.800 | You're going to a restaurant.

00:18:26.600 | It's a wonderful restaurant.

00:18:28.680 | It's an expensive dinner.

00:18:30.360 | It's, let's say, $200.

00:18:32.120 | And at the end of the meal, you can pay either with cash or with credit cards.

00:18:35.800 | And now I want to ask you, which one would feel worse, the cash or the credit?

00:18:42.120 | And almost everybody agrees the cash is much worse.

00:18:46.120 | Now, why is it much worse?

00:18:48.200 | What does it mean that it's much worse?

00:18:49.880 | You know, restaurants have their prices printed on the menu.

00:18:53.320 | You know what it's going to be.

00:18:54.360 | It's not a big surprise.

00:18:55.560 | Why is paying cash so much worse?

00:18:58.760 | And it turns out it has to do with the timing of consumption and eating.

00:19:02.760 | And to prove it, let me take you through a thought exercise.

00:19:07.800 | And let's make things worse.

00:19:09.080 | Imagine I own the restaurant.

00:19:11.320 | And I discover that people eat 50 bites and pay $50.

00:19:15.720 | And I told you that because you're a wonderful, caring human being, I will charge you half price.

00:19:22.200 | Instead of a dollar per bite on average, I'll charge you 50 cents per bite.

00:19:27.400 | And not only that, I'll only charge you for the bite you eat.

00:19:29.960 | The bites you don't eat, you don't need to pay.

00:19:32.760 | So I'll serve you your dish.

00:19:34.840 | I'll sit back and I'll take my notepad.

00:19:36.600 | And every time you take a bite, I'll mark a little V on my notepad.

00:19:39.480 | At the end of the meal, I'll charge you 50 cents per bite you eat.

00:19:43.400 | The bites you don't eat, you don't need to pay for.

00:19:45.080 | How much fun will that meal be?

00:19:48.360 | The answer is not that much.

00:19:53.160 | When I teach my students here at Duke, when I teach them the psychology of money, I bring pizza

00:19:58.120 | and I charge them 25 cents per bite.

00:20:02.680 | What do you think happens?

00:20:03.560 | Huge bites.

00:20:05.800 | And it takes such huge bites, they don't enjoy the whole process.

00:20:09.640 | And you would think they would learn after one bite.

00:20:12.360 | No, you sit there with the pizza and it's so tempting to push it a bit more in

00:20:17.480 | and get more value for money.

00:20:19.560 | And at the end of the day, they don't enjoy the whole process.

00:20:22.360 | They pay very little, but they lose all the enjoyment.

00:20:25.480 | So what's the point of it?

00:20:27.560 | The point of it is that if you think about a timeline, when payment and consumption coexist,

00:20:33.880 | we enjoy it less.

00:20:35.800 | When you pay per bite, you enjoy it less.

00:20:40.040 | When we separate those things in time, the pain of paying goes away.

00:20:47.000 | So if we pay in advance, it's less.

00:20:49.880 | If we pay at the end, it's less.

00:20:51.800 | When we pay per consumption, it's much, much worse.

00:20:55.480 | You probably remember the day with taxis before Uber.

00:21:00.120 | How many of you remember days in which you were in the cab and you were like

00:21:05.800 | two blocks from your hotel and the traffic was stopped and you saw the meter running

00:21:11.240 | and you said to the taxi, "You know what?

00:21:12.680 | Stop here.

00:21:13.240 | I'll get out."

00:21:13.880 | We don't do it with Uber.

00:21:16.200 | Not because it doesn't continue.

00:21:18.440 | We just don't see the meter running.

00:21:20.360 | But looking at the meter running, even though it's a small amount, is so annoying that we

00:21:26.600 | get out earlier.

00:21:28.040 | Or some of you might remember the days before phone calls were buffet-style, right?

00:21:35.800 | Right now we're paying one payment.

00:21:39.000 | But you would call your mother and you would see the minutes running and we didn't call

00:21:45.720 | as much and it was less pleasant because we were thinking about the amount.

00:21:49.800 | And even if it's 10 cents per minute, the fact that it's increasing is worse.

00:21:54.600 | So we said when things coincide, we see the meter running, we pay attention, we feel worse

00:22:00.760 | about it.

00:22:01.240 | When we separate them and we pay less attention, we feel less bad about spending and therefore

00:22:07.240 | we spend more.

00:22:08.200 | By the way, that's, of course, how credit cards work.

00:22:11.240 | But credit cards work by doing two things.

00:22:14.200 | The first, they make it such that we have a big amount rather than a small amount.

00:22:20.200 | We talked about relativity.

00:22:21.640 | If you put another $200 on your credit card, instead of $2000 it will be $2200.

00:22:27.960 | Not such a big deal.

00:22:29.960 | You take a big number, you just add to it, doesn't feel as bad.

00:22:33.000 | And the second is you don't think that you're paying right now.

00:22:36.680 | It's the opposite of seeing the meter running.

00:22:38.600 | It's the opposite of paying in cash.

00:22:41.080 | Now, sometimes we don't want pain of paying.

00:22:47.080 | Sometimes we do.

00:22:49.320 | So you know what happens when people get their electricity bill and they move it to be paid

00:22:57.160 | automatically from their checking account?

00:22:59.000 | Consumption increases by about 4%.

00:23:03.560 | Not immediately, but over time.

00:23:06.760 | Why?

00:23:08.380 | If you get the bill and you sit there and you write the check, at those moments when you

00:23:14.760 | write the check, you're pissed off and you terrorize your family members.

00:23:19.560 | You say, close the light and why are you doing this and do this?

00:23:22.520 | And it's not a big deal.

00:23:23.560 | It doesn't last for very long.

00:23:25.000 | But there's a little bit of terrorizing going on as you write the check.

00:23:28.440 | What happens when it comes automatically from our bank account?

00:23:33.000 | We don't pay the same amount of attention to it.

00:23:36.120 | What happens?

00:23:37.800 | We don't get upset as much.

00:23:39.400 | We don't terrorize our family members.

00:23:41.160 | And slowly, the amount increases.

00:23:43.480 | Now, here you can ask yourself, is terrorizing the family worth or not worth 4%

00:23:49.320 | of increased consumption of electricity?

00:23:53.240 | You decide for it.

00:23:55.240 | But here's another example.

00:23:57.000 | Imagine you're going to a cruise.

00:23:59.320 | Cruise to Alaska.

00:24:01.160 | Amazing cruise.

00:24:01.960 | $5,000.

00:24:03.560 | Two weeks.

00:24:05.320 | Amazing.

00:24:05.820 | And you can do one of two things.

00:24:07.960 | You can pay for the cruise six months in advance.

00:24:11.080 | Or you can pay the moment you get off the boat.

00:24:14.600 | Which one of those is better?

00:24:17.560 | Now, when we think about financially better,

00:24:19.560 | what would you say?

00:24:21.800 | You would say, of course, let's create the last day of the cruise.

00:24:24.440 | I get to keep the money.

00:24:25.560 | Maybe I get some interest, and so on.

00:24:27.240 | But how would you feel on the cruise?

00:24:30.520 | And especially, how would you feel on the last day of the cruise

00:24:34.280 | if you know that tomorrow you have to pay $5,000?

00:24:37.960 | You would probably spend the whole day in the buffet trying to amortize your investment.

00:24:44.280 | Right?

00:24:44.780 | So when you think about these things, sometimes we want more pain of pain.

00:24:50.120 | Sometimes we might say, I don't want to feel very good about consuming electricity.

00:24:56.520 | I want it actually to be more painful.

00:24:58.120 | Or cigarettes.

00:24:59.560 | But there are some things we want less pain of pain.

00:25:03.080 | Because we want to increase consumption.

00:25:06.200 | For example, in health care, I never understood it.

00:25:09.240 | I don't understand why they have a co-pay for colonoscopies.

00:25:13.320 | Like, who exactly is going to have two of those if it was free?

00:25:17.720 | But I understand it for massages, pedicures.

00:25:20.200 | But colonoscopy, come on.

00:25:21.960 | Mine is due in April.

00:25:24.680 | That's a top of mind.

00:25:27.080 | So the point is that money is not just money.

00:25:32.360 | It's how much attention are we paying it.

00:25:36.120 | And when we pay attention to money, we spend less.

00:25:39.640 | We think a bit more about the opportunity cost.

00:25:42.680 | We're more aware of our spending.

00:25:43.960 | And we spend less.

00:25:44.760 | And when we don't pay attention, we do it less.

00:25:48.600 | A couple of other examples to think about.

00:25:52.040 | Imagine that you walk down the street.

00:25:56.840 | And you walk down the street.

00:26:00.280 | And you look at the store.

00:26:01.240 | And you see a beautiful hat.

00:26:02.360 | And you're not a hat person.

00:26:04.520 | And you never had a hat.

00:26:05.480 | But you're really curious.

00:26:06.680 | And you go into the store.

00:26:08.280 | And you try the hat.

00:26:09.080 | It's beautiful.

00:26:09.640 | Right color.

00:26:11.160 | The right size.

00:26:11.880 | You really like this hat.

00:26:12.840 | But you look at the price tag.

00:26:14.840 | And you say, I can't possibly justify buying a hat for this amount of money.

00:26:19.160 | I'm not a hat person.

00:26:20.120 | And you leave it alone.

00:26:22.440 | And you walk home.

00:26:23.160 | You walk home.

00:26:24.840 | And you get home.

00:26:25.400 | And you discover that your significant other bought you that exact same hat

00:26:30.040 | from your joint check income.

00:26:31.320 | How do you feel?

00:26:33.640 | You say, honey, thank you very much for thinking about me.

00:26:37.000 | I love this hat.

00:26:37.800 | But I looked at it already.

00:26:38.920 | And I decided it was not worth the money.

00:26:40.760 | Please go back.

00:26:41.640 | Put it back in the store.

00:26:42.760 | And return the money to our joint check income.

00:26:45.560 | Of course not.

00:26:47.320 | Why?

00:26:48.380 | Because what that other person did was to take away the pain of paying.

00:26:53.240 | You wanted the hat.

00:26:55.800 | You just didn't want the guilt connected to it.

00:26:58.840 | And by giving you it as a gift, that person took away the guilt.

00:27:02.200 | By the way, that's what good gifts are about.

00:27:04.040 | If you think about, you know, we're kind of in a gift-giving season.

00:27:07.400 | If you think about what good gifts are,

00:27:10.360 | good gifts are not a transfer of money.

00:27:12.440 | Good gifts are buying things to people that have a high guilt component of spending.

00:27:18.600 | That people would not spend for themselves.

00:27:22.040 | Okay, one final example.

00:27:25.800 | Imagine you have employees.

00:27:28.440 | Or imagine you all work for me.

00:27:30.040 | Imagine you all work for me.

00:27:31.240 | And I'm going to give you a pay raise.

00:27:34.040 | And I'm asking you, do you prefer $1,000 a month pay raise?

00:27:38.920 | Or do you prefer a $12,000 a year bonus?

00:27:42.760 | Not bonus, but the end of the year payment.

00:27:45.480 | So it's fixed.

00:27:46.200 | A thousand a month or another $12,000 at the end of the year.

00:27:51.240 | Of course, the rational thing to do is to say, give me the money every month.

00:27:55.000 | But when you ask people, how would you use the money?

00:27:58.840 | And in which of those cases would you feel more free to spend it in a way

00:28:03.640 | that would maximize your happiness?

00:28:05.320 | People prefer the bonus.

00:28:08.680 | Why?

00:28:09.180 | Because people say if the money comes at the same cadence on the monthly level,

00:28:14.680 | I will feel the need to use it on monthly expenses.

00:28:18.840 | I will use it on utilities and rent and grocery shopping and so on.

00:28:24.840 | But if the money comes in a different cadence once a year, I would feel more free,

00:28:31.880 | more liberated to buy a bicycle and go on vacation or do other things.

00:28:37.240 | And all of this is to say that the way that the money comes into our accounts

00:28:41.080 | also helps us more free or less free about how we want to spend it.

00:28:45.320 | When it comes to investing, what is our fund for fun?

00:28:53.800 | Should we separate that from a regular amount and basically say,

00:28:57.960 | with this amount, I'm willing to have a fund?

00:29:01.080 | There was a couple that was retiring when I talked to them.

00:29:07.560 | And they said that they just retired, like it was six months after they retired.

00:29:10.920 | And they said that they're perfectly fine financially.

00:29:14.680 | But they said they feel so bad about spending money.

00:29:18.120 | So what I agreed with them, I said, take an amount of money that you want to spend every year,

00:29:23.640 | taking out of your investment, put it into your checking account.

00:29:29.000 | I know it's not rational, but put it all in your checking account for the year.

00:29:31.960 | And I said, if anything is left over, give it to charity.

00:29:36.280 | So the agreement is, this is your money to spend.

00:29:39.960 | Don't feel stingy, because at the end of the day, by the way, we want people to save,

00:29:46.360 | but we also want people to live and enjoy their money.

00:29:48.520 | Life is not about dying with the most amount of money.

00:29:51.880 | Money is about getting the most amount of happiness

00:29:56.200 | that we can from money, and not necessarily always, always saving.

00:30:01.480 | It's about spending the right way.

00:30:03.080 | OK, so we said that money is amazing.

00:30:10.200 | It's about opportunity cost, hard to think about.

00:30:12.680 | So we come up with all kinds of shortcuts.

00:30:15.240 | And some of those shortcuts, like the pain of paying, like relativity,

00:30:20.040 | get us to make some mistakes.

00:30:24.280 | And now the question is, can we do better?

00:30:26.280 | But what can we do to improve how we function?

00:30:29.960 | So I'll give you a couple of examples.

00:30:33.480 | Example one, you ask people, what is your discretionary spending for this month?

00:30:43.160 | How much do you want to spend on restaurants and bars and transportation and food

00:30:50.360 | and all the discretionary spending?

00:30:51.960 | People say, let's say $2,000.

00:30:53.400 | And you say, here's a credit card, spend.

00:30:56.760 | And people way overshoot, and they spend $3,000.

00:31:00.280 | And then you say, you know what?

00:31:03.800 | Maybe don't use a credit card.

00:31:06.200 | Let's use a prepaid debit.

00:31:07.560 | We'll load $2,000 on a prepaid debit.

00:31:10.840 | You can always load more, but that's what we start.

00:31:13.240 | Now people get closer.

00:31:15.640 | Do they get to $2,000?

00:31:16.760 | No, but they get closer.

00:31:18.760 | Because with a credit card, the number is going up and up and up.

00:31:21.000 | With a debit card, it goes down.

00:31:22.280 | And you see the zero.

00:31:23.240 | But the problem is that people spend way too much in the beginning.

00:31:27.960 | You get to $2,000 in the beginning of the month.

00:31:31.080 | You say, I'm rich.

00:31:31.720 | And you overspend.

00:31:33.480 | So we said, what if we broke it into four parts?

00:31:36.920 | Weak.

00:31:38.140 | Turns out people do better.

00:31:40.520 | Turns out if you give $500 a week, people do better.

00:31:43.960 | Because you can see the consequences, the opportunity cost.

00:31:48.360 | And then the last thing we did was we said, what would it be better?

00:31:52.360 | To preload the money on Monday or Friday?

00:31:55.640 | Which one do you think?

00:31:58.280 | Turns out Monday is better.

00:32:02.200 | Why?

00:32:02.700 | Because if you load the money on Friday, the weekend happens.

00:32:05.560 | And then people overspend.

00:32:08.920 | On the other hand, if you load it on Monday, people look forward to the weekend.

00:32:12.600 | They savor to have more money for the weekend.

00:32:15.640 | And then if people miss, the weekend is the easiest place to scale up and down if needed.

00:32:20.600 | So we can create better tools.

00:32:23.400 | Like a prepaid debit card that loads every week and every Monday rather than giving people

00:32:30.040 | credit cards.

00:32:30.680 | And there are lots of solutions like that.

00:32:32.440 | That's one direction.

00:32:35.640 | Another direction.

00:32:37.560 | And I'll give you the short version of this.

00:32:42.280 | But the short version is that I was in a-- Soweto is a big town in South Africa and has

00:32:50.440 | a very, very big slum.

00:32:51.640 | And one day I'm in this place that sells funeral insurance.

00:32:56.760 | And I don't know if you know this, but in South Africa, funerals are people's biggest

00:33:03.880 | celebration of their lifetimes.

00:33:05.400 | In the US, people celebrate weddings.

00:33:08.360 | In South Africa, they celebrate funerals.

00:33:10.600 | Weddings are very modest.

00:33:12.360 | Funerals, that's the people's biggest celebration of their lifetime.

00:33:15.320 | And of course, by the way, it's much more rational to celebrate funerals because with

00:33:21.480 | funerals, you know for sure you'll only have one.

00:33:23.560 | So anyway, I'm sitting in this place that sells funeral insurance.

00:33:29.480 | And this father comes in with his son who is 12 years old.

00:33:33.240 | And he buys funeral insurance for a week.

00:33:38.120 | Just to be clear what it means, it means it would pay 90% of his funeral expenses only

00:33:44.440 | if he dies in the next seven days.

00:33:45.960 | Remember, these are very poor people.

00:33:48.280 | They buy a small amount of soap and a small amount of milk and a small amount of insurance.

00:33:52.840 | They don't have a lot of money.

00:33:53.880 | And this insurance place only sells policy for a week or for a month.

00:33:57.560 | They don't have anything longer.

00:33:58.760 | Nobody would buy those.

00:33:59.800 | And he gets the paper certificate.

00:34:03.000 | In a very ceremonious way, he gives it to his son.

00:34:07.720 | And, you know, it's a kind of an odd thing to do.

00:34:09.640 | And I start thinking about why the ceremony?

00:34:12.440 | Now, think about a poor father, very low income individual, who just happened to make some

00:34:19.960 | money today.

00:34:20.520 | And now he's directing it towards funeral insurance or savings.

00:34:27.240 | What will the family see tonight?

00:34:30.520 | The answer is that they will see less.

00:34:35.640 | But at that level of poverty, there'll be something less on the table, less water, less

00:34:40.920 | food, less kerosene, less something tonight.

00:34:43.160 | And what his father was doing was to show his son there's another economic activity

00:34:49.720 | happening.

00:34:50.220 | It's as if the father said, you know, there's going to be less food on the table, but I'm

00:34:55.960 | taking care of you in this other way.

00:34:57.640 | Now, we started by talking about the nature of money.

00:35:02.440 | We said about what the technology do to the nature of money.

00:35:05.400 | Technology also made lots of very important things invisible.

00:35:10.840 | So 2000 years ago, before money, how did people save?

00:35:16.200 | Basically, with goats, chickens.

00:35:19.240 | And the nice thing about saving with goats and chickens is you can come home from the

00:35:24.760 | office and you can see how many goats and chicken your neighbor has.

00:35:27.560 | And we could compete on who has more savings.

00:35:31.720 | But then we created money and then we created digital money and all of a sudden we took

00:35:35.880 | this amazingly important activities, saving, long term saving, paying debt, insurance,

00:35:41.480 | and we made it all invisible.

00:35:43.640 | And we took this other important activity called spending and we made it very visible.

00:35:49.400 | I think about the imbalance between those.

00:35:52.680 | How many of you know something about what your neighbors are saving?

00:35:59.720 | Probably not much.

00:36:00.840 | How much do you know about what your neighbors are spending?

00:36:03.960 | Quite a lot.

00:36:06.200 | So this imbalance is making it really, really tough.

00:36:10.360 | And one of our questions, so we talked a little bit about spending.

00:36:14.360 | We talked about how the methodology of spending and credit cards are difficult and so on.

00:36:19.000 | But another element that is really important to figure out is how do we get people to take

00:36:26.360 | more pride in savings, saving insurance, paying debt?

00:36:32.360 | Think about this.

00:36:33.720 | All of those things are invisible, invisible and therefore not very motivating.

00:36:38.040 | So we've done all kinds of experiments on this.

00:36:41.640 | I'll just describe to you one of them.

00:36:43.960 | Imagine that you go to a new workplace and you have 401k and you can sign up and you

00:36:52.520 | can save up to 10% of your salary.

00:36:56.440 | Now, every percent you save in salary means bringing home one less percent.

00:37:03.400 | At the end of the day, the people at your household will say thank you for the money

00:37:09.320 | you bring home now.

00:37:10.280 | In 30 years, they might say thank you for the money that you save for them.

00:37:15.560 | But right now, there's going to be no thank you for the money that you are saving.

00:37:20.040 | It's invisible.

00:37:23.640 | Now, imagine what would happen if when you got this form for the 401k, you were asked

00:37:28.680 | to call your significant other and you were given a sentence.

00:37:32.360 | Hi, honey, I'm in this new workplace.

00:37:34.440 | We can save money for 401k for our future, for the future of our family and save up to

00:37:39.800 | 10%.

00:37:40.440 | What do you want to do?

00:37:41.560 | What should we do?

00:37:42.920 | Now, the person making the call is getting brownie points for saving for the family.

00:37:50.440 | Now, would the spouse that got the call would remember this a year later?

00:37:54.520 | Of course not.

00:37:55.240 | But do they get the brownie points at the moment?

00:37:59.160 | Absolutely.

00:38:00.120 | And what happens?

00:38:00.920 | Saving rate goes up.

00:38:03.480 | Now, this is not an easy struggle.

00:38:06.680 | How do we make paying debt more motivating, more rewarding?

00:38:11.560 | How do we make buying insurance more motivating, more rewarding?

00:38:16.280 | How do we get savings to be more motivating and more rewarding?

00:38:20.600 | Not easy to do, but it's certainly something we need to do.

00:38:24.120 | We have to realize that this competition for saving is all the things that are visible

00:38:29.560 | and much more fun to do now.

00:38:31.000 | And we have to kind of counter those things.

00:38:35.480 | Maybe one last study.

00:38:37.400 | In this study, you take kids on the day that they are born and you randomly divide them

00:38:43.560 | into two groups.

00:38:45.000 | In one group, you do nothing.

00:38:46.440 | In one group, you give them $500 in a college savings account as a gift on the day that

00:38:51.720 | they're born.

00:38:52.220 | And you do nothing after that.

00:38:54.520 | And you go to visit those kids when they're four years old.

00:38:57.240 | And what do you find?

00:38:59.000 | You find that kids with college savings accounts have higher social cognitive performance.

00:39:04.360 | How can it be?

00:39:06.520 | Do these kids know that they have college savings accounts?

00:39:10.680 | Of course not.

00:39:11.320 | But the parents know.

00:39:13.800 | And from time to time, the parents get a statement that says, "This little kid already

00:39:17.880 | has a college savings account."

00:39:19.160 | And what do they do?

00:39:21.080 | They buy a few more books.

00:39:22.600 | They read a little bit more.

00:39:23.960 | Is it a lot?

00:39:24.680 | No.

00:39:24.920 | But is it over many years?

00:39:27.320 | Absolutely.

00:39:28.040 | And what that means is that when we think about money and we think about savings, we

00:39:34.440 | really have to think about people's mindsets.

00:39:36.760 | You know, this idea of taking $500 and putting it in a college savings account is not a

00:39:42.200 | financial thing.

00:39:43.880 | It's a mindset.

00:39:44.840 | By the way, with this data, I managed to convince me and other people.

00:39:48.840 | We managed to convince the Israeli government a few years ago to start a college savings

00:39:53.160 | account for each kid from the day they are born.

00:39:55.400 | But it's not just a financial tool.

00:39:58.840 | It's a mindset tool.

00:40:00.360 | And I think the same thing is also saving.

00:40:02.520 | I think we need to think about how do we make saving, paying debt, buying insurance more

00:40:08.200 | rewarding?

00:40:09.560 | How do we make it more visible to ourselves and to other people?

00:40:12.520 | How do we celebrate when we get to a special point?

00:40:15.880 | You know, a marathon has an end.

00:40:17.240 | Saving doesn't feel like it has an end.

00:40:19.960 | When do you feel like I made another step?

00:40:22.280 | Almost, almost never.

00:40:24.280 | And then the other thing is I think we need to work a lot on giving money accounts,

00:40:31.000 | different names.

00:40:31.720 | Like college savings accounts.

00:40:34.440 | Because these names are basically helping us overcome, basically increase our motivation.

00:40:40.760 | If you have an account that is called my future fishing hut, there'll be motivation that will

00:40:49.960 | be connected to it.

00:40:51.320 | And if it's just in your retirement account, it would, it would not be.

00:40:55.000 | So we need to think about the mindset of people.

00:40:57.400 | We need to think about the complexity of depriving ourselves at the moment for the long term.

00:41:03.480 | Not easy to do.

00:41:04.360 | And we have to help people.

00:41:05.480 | And the things, some of our tools are to basically give those things name and make it more rewarding.

00:41:12.120 | And I think I'll stop here.

00:41:14.360 | And Alan, I'm happy to answer any questions.

00:41:17.400 | That was fascinating, Dan.

00:41:21.400 | Thank you so much.

00:41:23.000 | Boy, could I relate to that credit card example.

00:41:27.640 | I get 2% cash back on my credit card.

00:41:30.600 | But I'm probably reducing the pain of paying.

00:41:33.320 | So it's probably costing me a whole lot more than that 2% I save.

00:41:38.040 | Yeah.

00:41:38.360 | By the way, with credit card, there's another complexity, of course, which is that eventually,

00:41:43.720 | you know, the credit card companies are not losing money.

00:41:45.960 | As you know, the retailers are subsidizing it.

00:41:50.760 | Right.

00:41:52.280 | And there's a really interesting question of what is our relationship with our retailers?

00:41:59.080 | And do we want to support them?

00:42:00.600 | Now, with COVID, it was very clear that there are lots of retailers that we want to stay

00:42:05.720 | in business, that we don't want them to go under.

00:42:08.520 | Right.

00:42:10.040 | And I think we moved a little bit from this feeling of competition to a feeling, I want

00:42:17.000 | my local coffee shop to stay open.

00:42:19.320 | I don't want in a half a year from now, when COVID is over, let's hope, I don't want this

00:42:23.640 | to be a desert.

00:42:25.160 | I still want them around because the value that they give me is much higher than the

00:42:30.760 | cost of the coffee that they gave me.

00:42:33.000 | And what we see is lots of people getting organized and helping local things.

00:42:37.800 | By the way, the same thing would be if you move from using credit card to debit, you're

00:42:42.840 | saving your retailer money.

00:42:44.840 | That's fascinating.

00:42:48.840 | Speaking of pandemic, how do you think the pandemic has changed our views of saving money,

00:42:57.400 | especially investing, with interest rates close to zero, stocks being risky?

00:43:04.680 | Have people explained why they're at an all time high?

00:43:07.800 | Yeah, so one thing that we see is we see many more people have open rainy day accounts.

00:43:15.960 | So people are worried and rightly so.

00:43:19.080 | It's a very uncertain world and people have opened, we see a lot of increase in rainy

00:43:25.400 | day accounts.

00:43:26.040 | And one question is, will that sustain?

00:43:29.000 | Like if people open an account and they have a direct deposit, then it will most likely

00:43:34.600 | stay.

00:43:34.920 | If they don't have direct deposit, it will most likely go away.

00:43:40.040 | But in terms of the fluctuation of the market, so right now the market is all time high and

00:43:48.680 | we know about bubbles.

00:43:49.800 | We know that when things go up, people go in.

00:43:53.000 | And I think we see that.

00:43:56.280 | But it's not a good strategy.

00:43:59.880 | I mean, it's good to go in if you could only go in when things go up and not go out when

00:44:03.880 | things go down.

00:44:04.600 | But of course, we know that those things are connected.

00:44:06.920 | The people who are basically following the herd, there's a strategy, the same strategy

00:44:12.840 | goes on the upside and downside.

00:44:14.520 | So certainly more people are entering and putting money away.

00:44:23.000 | But I worry that also more people would get out when we have the inevitable down at some

00:44:31.880 | point.

00:44:35.000 | Basically, as you mentioned, loss aversion.

00:44:40.440 | Losses are very, very painful, just very, very painful.

00:44:45.240 | And when we do these risk surveys, how would you feel if your portfolio lost 20%?

00:44:50.280 | People say, oh, I would be fine.

00:44:53.000 | No, no, you wouldn't be fine.

00:44:54.120 | And what happens is people don't predict correctly how miserable they would be.

00:45:02.200 | And therefore, people get out way earlier than they thought they would.

00:45:07.960 | This is one of the biases we have to help people overcome, by the way.

00:45:12.840 | You know, in self-control, we have all this literature showing what is called Ulysses

00:45:19.800 | contracts.

00:45:20.360 | And Ulysses contract is a contract where you basically tie your hands so you can't make

00:45:26.760 | a bad decision later.

00:45:28.760 | If you remember the story of Ulysses, Ulysses knew that if the siren will sing, he will

00:45:34.040 | divert the boat and kill everybody.

00:45:36.120 | So he asked the sailors to tie him to the mast.

00:45:39.240 | And this way he was unable to control the boat.

00:45:42.760 | And he asked the sailors to put wax in their ears.

00:45:45.720 | And this way the sailors were unaware of the temptation.

00:45:49.800 | And I think we need something like that to help us with our emotional instincts.

00:45:57.800 | Like I would love to see a saving plan that you need a three-month warning to get money

00:46:03.800 | out.

00:46:04.360 | I think that this idea that we want liquidity and we want to be coming out every moment

00:46:09.080 | is actually unhealthy.

00:46:10.200 | That what we need is something that is a mechanism.

00:46:14.840 | So, you know, we have lots of mechanisms to overcome our physical inability.

00:46:21.720 | Like look at the chair I'm sitting.

00:46:23.320 | It has wheels.

00:46:24.520 | It has a cushion.

00:46:27.000 | We take our imperfections and we build technology around that.

00:46:30.920 | So this cushion, like people thought very carefully about my bum and what is the right

00:46:37.160 | cushion that I need and the wheels and the height and so on.

00:46:39.720 | What about the imperfection of getting our emotions to drive us rather than a long-term

00:46:46.520 | logic?

00:46:46.920 | Now we could say deal with it.

00:46:50.200 | But, you know, we don't tell people be cold resistant.

00:46:55.240 | We build heaters and clothes and air conditioning and so on and shelters.

00:46:59.480 | We don't expect us to be perfect.

00:47:02.920 | We build technologies that take our imperfection and get us to be better than we would without

00:47:08.920 | that technology.

00:47:09.800 | I think the same thing is we need tools for the mind.

00:47:14.040 | And this hypothetical example of a fund that you can't get money in less than three months

00:47:21.960 | is an example for that.

00:47:23.880 | Right?

00:47:24.200 | It's saying here's an imperfection that we have.

00:47:26.360 | Our emotions get activated, gets the best of us.

00:47:29.000 | Let's design something for that.

00:47:31.240 | I don't think it's like education.

00:47:33.080 | No, because the moment this emotion is ignited, people just take bad decisions and we need

00:47:41.080 | to make a mechanism that will make it impossible like Ulysses contract.

00:47:44.760 | Fascinating.

00:47:47.560 | Is there a way to help people imagine the pain that they're going to feel when their

00:47:51.480 | portfolio goes down by 50, 60 percent?

00:47:53.960 | So I don't.

00:47:57.560 | OK, we can have a long discussion.

00:47:59.960 | I hate these surveys.

00:48:02.200 | How would you feel like?

00:48:05.160 | And I'll tell you why I hate these surveys, because your goal as a financial advisor is

00:48:12.040 | to make people wealthy and not to minimize their pain.

00:48:17.320 | Like, imagine you go to a doctor and doctor said, Alan, how would how much do you hate

00:48:22.600 | pain?

00:48:22.920 | And you say, oh, I really hate pain.

00:48:25.400 | So let's not heal you.

00:48:27.480 | No, the doctor's job is to heal you.

00:48:29.960 | And if you have pain.

00:48:30.840 | Give you some narcotics in the meanwhile.

00:48:33.800 | Like if I come to you and I'm loss averse, you should tell me so you should be poor.

00:48:41.720 | You should say study yoga, take Xanax.

00:48:46.520 | You know why?

00:48:47.080 | You know, the idea that if somebody hates losing money, what they should do is be poor

00:48:52.680 | for life.

00:48:53.480 | I don't like that that direction.

00:48:55.000 | You could say, Dan, don't look at your portfolio.

00:48:59.400 | You could say, take Xanax, learn meditation.

00:49:01.560 | You could do all kinds of things.

00:49:02.680 | Why is the solution?

00:49:03.560 | Don't take any risk and don't make any money.

00:49:05.400 | I mean, it's kind of crazy if you think about it.

00:49:09.080 | So I think that the way we now talk about risk is kind of risk is a feeling.

00:49:16.200 | The reality is that people don't take risk with money.

00:49:20.520 | The reality is that people take risk with things.

00:49:23.640 | At the end of the day, we translate all to money.

00:49:26.920 | But at the end of the day, if I if I take risk, it's not how would I feel when I lose 20 percent.

00:49:32.040 | It's what is my vision of what home I want and where do I want to send my kids to college?

00:49:38.760 | And will I be able to pay my medical bills?

00:49:41.800 | It's all of those things.

00:49:42.920 | And you combine all of them into a risk version.

00:49:47.320 | But it's not how would I feel, because it's about all of those other things.

00:49:53.080 | Now, if we ask people about risk the right way, if you ask me, Dan, how important is

00:50:00.440 | it for you to send your kids to a good college?

00:50:03.480 | And how important is it for you to have at least a two bedroom apartment when you retire?

00:50:08.040 | And how important is it for you to have all of those things?

00:50:10.280 | And then you said, what does 20 percent mean?

00:50:14.280 | 20 percent means that you're not going to do this one and this one.

00:50:18.200 | Your kids will go to state school.

00:50:21.080 | Good or not good.

00:50:22.360 | That's what risk really means.

00:50:23.960 | But but we don't I think I think when we do these surveys, we're a little lazy.

00:50:29.320 | We I mean, the industry that asked this question.

00:50:33.080 | We kind of expect people to make the hard labor of saying, here's what I want across

00:50:39.080 | housing and education and charity.

00:50:41.640 | And I'll integrate it.

00:50:43.880 | I'll give you one number.

00:50:44.840 | How would I feel like?

00:50:45.800 | It's a nonsense number.

00:50:48.600 | By the way, we have lots of experiments so that I can ask you the question differently

00:50:52.600 | and get different answers.

00:50:53.640 | And so so I think I think we to answer your question, A, I don't like these measures.

00:51:01.160 | B, I don't think we should minimize people's risk.

00:51:03.800 | Is a feeling I think we should talk about your buying power.

00:51:09.000 | And and what does it mean in terms of buying power?

00:51:11.480 | There's an objective thing to it.

00:51:13.080 | Like, how important is it for you to be able to sell your kids to Princeton?

00:51:18.120 | Or to go to a state school, if you say, oh, I I really want that risk, that's great.

00:51:24.200 | But I need to help people do it in in a consumption context.

00:51:30.360 | And I think if we did that, people would understand risk much better

00:51:33.960 | and be much able to report what is the right risk for them.

00:51:37.880 | That's fascinating.

00:51:40.520 | I don't think risk questionnaires are worthless.

00:51:44.120 | I don't think they're that good.

00:51:45.240 | I think they're dangerous because the way we felt about risk on February 19th, when stocks

00:51:50.920 | peaked was very different than we felt on March 23rd when they bought them.

00:51:55.880 | And then even more importantly, they don't measure our need to take risk.

00:51:59.720 | As you said, buying the richest person in the graveyard, not such a good goal.

00:52:04.600 | Yeah.

00:52:05.100 | So by the way, these these surveys are usually not asset dependent.

00:52:11.080 | If you say I need six million dollars to retire.

00:52:15.320 | And you reach six million, you should be have a very different risk attitude than if you're a two.

00:52:21.800 | But but the surveys don't take this into account.

00:52:25.320 | Anyway, it's a crazy thing that we're asking these things.

00:52:27.960 | I think it's just for regulation purposes and to feel like check a box.

00:52:32.120 | But nobody have given it sufficient thought of what what it really should be.

00:52:35.800 | Terrific.

00:52:37.980 | Jack Bogle, what has he taught you about investing?

00:52:43.080 | Anything that you'd care to share?

00:52:45.400 | So I would say three things.

00:52:50.760 | The first one, of course, was, you know.

00:52:52.920 | There's something that are unknown, like returns in the market.

00:52:56.600 | And there's something that are known, like fees.

00:52:59.000 | Deal with the things that you know.

00:53:01.800 | I think the notion of not trying to outsmart the market is very important.

00:53:08.840 | And I don't mean it's just important for investing.

00:53:12.760 | I think it's important for the outcome because so I think it's also important for peace of mind.

00:53:18.840 | I think that, you know, the people who are in the market need to be in the market.

00:53:24.200 | But people like me who are not in the market,

00:53:27.080 | there's a question of how much of our mental capacity should we dedicate to our retirement.

00:53:35.240 | And you can imagine it's something that can take lots of attention from people or very little.

00:53:40.920 | And for me, the notion of saying you can't beat the market to just invest in broad

00:53:48.440 | funds is basically saying I'm accepting that I don't know.

00:53:52.440 | I think there are people who don't know the market and think that they do.

00:53:57.240 | There are people who don't know the market and know that they don't know the market.

00:54:01.960 | And there's some people who know the market.

00:54:04.520 | There are very few of those people who truly understand the market.

00:54:07.160 | The vast, vast majority of people either don't know the market and realize it,

00:54:13.000 | or don't know the market and mistakenly think that they know it.

00:54:16.760 | But the realization that said, you know, this is not something I can out

00:54:21.720 | beat the market and all I can do, and this is really the important thing,

00:54:25.160 | all I can do is control how much money I put in.

00:54:28.200 | So what I should do is I control the input and not the output.

00:54:32.840 | I should think about how much money am I sending every month, cost based averaging.

00:54:38.440 | And rather than saying I'm concerned with the output of that random stochastic

00:54:44.920 | process, and that's a very, very calming, very calming perception.

00:54:51.160 | I think we have time for one last question.

00:54:53.960 | And this was a fascinating one by one of the Boglehead members.

00:54:58.680 | After reading your book, Predictably Irrational and seeing some of the cognitive biases we have,

00:55:05.720 | he's noted, or he or she has noted that some Bogleheads claim that they are bias free.

00:55:11.880 | They don't have any of these biases.

00:55:13.960 | What do you think of that?

00:55:14.920 | So I think that's a really interesting bias.

00:55:18.680 | So first of all, of course, maybe.

00:55:22.840 | I'm not saying that everybody has those intensities of biases in the same way.

00:55:29.720 | But we have a very hard time seeing our own biases.

00:55:34.840 | We do.

00:55:37.560 | And by the way, we should each go to our spouses and ask them if we are biased in any way.

00:55:42.200 | I think your spouse will be able to tell you all kinds of things that we don't see.

00:55:47.000 | So, yeah, you know, there are differences between people.

00:55:51.640 | It's not true that everybody has the same bias.

00:55:53.800 | But we are really not good in seeing our own biases.

00:55:57.480 | And one of those, one of those biases that we don't, I mean, there are many of them.

00:56:02.360 | But think about something very important, like our political opinions.

00:56:10.440 | We all think that our political opinions are basically logic driven.

00:56:15.480 | How could anybody else believe anything but whoever you voted in the last elections?

00:56:23.240 | But, you know, almost all of us are voting exactly as our parents did.

00:56:28.920 | Now, if it was pure logic, it wouldn't be hereditary.

00:56:34.280 | But it is largely hereditary.

00:56:38.520 | Now, you ask me, I know I inherited my values from my parents.

00:56:43.160 | But if you ask me the question of can I, can I, do I, do I give it all kinds of

00:56:48.920 | logical value and I can't see the logic in the other side, of course.

00:56:52.280 | But I don't think it's really genetic, right?

00:56:56.920 | And I do think it's an example of a bias that is very, very deeply ingrained,

00:57:03.240 | that is very, very tough, very tough to change.

00:57:07.080 | And I'll give you another example.

00:57:10.520 | Conflicts of interest.

00:57:12.440 | One of the best investments in the US is lobbying.

00:57:18.920 | And the reason lobbying is such a such a great investment, but I'm joking, right?

00:57:24.760 | I'm not really recommending lobbying.

00:57:26.120 | I think we should do something with it.

00:57:27.320 | But the reason lobbying is such a good investment is because people are cheap.

00:57:33.720 | Now, what happens is you meet somebody and you buy them a sandwich and a beer.

00:57:38.840 | And in two minutes, they see life from your perspective.

00:57:42.920 | And by the way, you know, a lot of these biases are really nice.

00:57:49.720 | Like, you know, it's really wonderful that you can have a meal with somebody

00:57:53.960 | and get to be their friends, right?

00:57:57.400 | You remember the meal you and I had in that ski resort, right?

00:58:01.240 | You basically share a meal with somebody and all of a sudden,

00:58:03.640 | it really elevates your understanding and caring and you see life through their perspective.

00:58:08.120 | But you marry this with lobbying or your physician or conflicts of interest

00:58:13.160 | and it has terrible effects.

00:58:16.280 | But we don't see those.

00:58:18.920 | So I would say maybe they don't have biases,

00:58:22.760 | but my money is that they're just a little bit not so good at seeing their own biases.

00:58:27.400 | My money is with you, Dan.

00:58:30.840 | Dan, this was fascinating.

00:58:32.520 | I can't thank you enough on behalf of all the Bogleheads.

00:58:37.960 | Thank you for educating us.

00:58:39.640 | My pleasure.

00:58:40.920 | Looking forward to it.

00:58:42.360 | I know you and I are going to chat in a couple of days.

00:58:44.360 | Looking forward to it.

00:58:45.640 | Me too.

00:58:46.140 | Very good.

00:58:47.800 | [BLANK_AUDIO]

Bogleheads® Speaker Series – Dan Ariely

Chapters