Welcome to the second edition of the Boglehead speaker series. We're holding these virtual events online obviously because of COVID, and it's the goal to get back to in-person conferences by 2022. In just a moment, I'm going to introduce Dan Ariely, who is the behavioral economist I think has done far more than anyone else in actually changing people's behavior.

But first I have to go through a few housekeeping items. I'm Alan Roth. I'm a board member of the John C. Bogle Center for Financial Literacy. We are a 501(c)(3) not-for-profit with the mission of expanding John Bogle's legacy by promoting the principles of successful investing and financial well-being through education and community.

Our website is boglecenter.net, and since I'm also treasurer of the organization, I would be remiss if I didn't say you can make donations at the boglecenter.net, and they are not only appreciated, but tax-deductible. I want to thank the entire board for all of their work. I want to single out Mike Nolan, who, as most of you probably know, was Jack Bogle's chief operating officer, helped millions of people, and has done the heavy lifting for these events, these speaker series events.

I want to thank Vanguard for giving us the resources to host these conferences, and of course for helping millions of us move towards financial independence. And finally, all of you in the Bogleheads community, thank you for the questions you submitted, and especially for all you do online to help millions of people also without any profit motive.

Now the main event, Dan Ariely. I'm not going to read his incredibly impressive bio because you can Google that. I want to try to tell you a couple of things you may not know about him. First of all, the first book that I read of his was predictably irrational.

I had never met Dan, had any contact with Dan, but I felt like he'd been studying my behavior for the last three decades. Brilliant. Next, I want to tell you what I think Dan Ariely and John Bogle have in common. First of all, we all know that Jack Bogle taught us about the dangers of expenses.

Dan Ariely taught me the dangers of emotions, which can be just as destructive. I'm just going to be very candid. I've had three longtime Bogleheads come to me who had once had brilliantly low cost diversified portfolios, who did the predictably irrational thing and sold in March when stocks were down by 30-35%.

Now, we all know that Jack Bogle worked tirelessly to help people improve their well-being, and I can tell you that Dan Ariely does the same thing. Nights, weekends, around the clock. I think they both have figured out how not to sleep. And Dan not only helps people here in the US and developed countries and developing countries as well, where learning to save can make the difference between taking a child to the doctor or not.

And then finally, Jack was an incredibly nice, kind, giving person. I felt very fortunate to know. And Dan Ariely is the exact same way. I feel very fortunate to know you, Dan. And now, Dan, the main event, take it over. Talk for about 40-45 minutes or so, and then I will ask a few of the questions that came in from the Bogleheads.

Wonderful. So first of all, thanks a lot for this introduction. It's an honor to be here and to be part of this. And maybe before I start talking about behavioral economics, money and investing, I'll mention that why I have half a beard. And it's not because I lost a bet.

Many years ago, I was badly burned. Most of my body is covered with scars, about 70 percent, and including the right side of my face. So I just don't have hair on this side, and that's the reason for the half beard. And I'm mentioning up front because somebody told me that unless I clear it up, they keep on wondering for the whole time, like, "What's the point of this half a beard?" So now you know there's no point.

That's just the random luck of the accident. Okay. So behavioral economics. Behavioral economics is a field that, in general, doesn't assume that people are rational. In fact, we put people in different situations, and we see what happens. And in most cases, we find that people are acting irrationally in predictable ways.

So people deviate from rationality. That's one of the main reasons that derail us from being rational, but it's not the only one. So we basically question humans' ability to make good decisions. And we question it in all kinds of ways. We question our ability to sleep enough and to exercise and to take our medication and to eat well and to take care of the planet and so on and so forth.

But we also do it in the domain of money. And today we'll focus not on the total influence of behavioral economics, but how do we think about money? So first of all, before we talk about what people actually do, let's mention a little bit what they should be doing, what we should be doing.

Imagine we were perfectly rational. And let's ask something about the nature of money. What is money all about? And money is an amazing invention, as important as the wheel. In a world without money, think about how tough it will be to manage. Maybe you would raise broccoli and I would raise chickens, and then we would have to meet and we'll have to decide about what's the exchange rate between broccoli and chickens.

And maybe you didn't want a whole chicken, you would use us half and everything would be really complex. So we created money, an amazing invention, because everything in society can be mapped into money and we don't have to trade things directly. And money is also divisible and we can store it in office and all kinds of things can happen.

So I'm a university professor. Imagine I had to barter for my services. Who would pay and how would it work out? Not to mention I'll waste a lot of time on doing this, but nobody would invest in long-term things that we would all want just to get things that we need at the moment.

So money allows us to basically exchange and save and think about the future. Plus, it also allows us to invest, which is a really interesting thing. Now, so that's money and the way we should think about money is about opportunity cost. What does it mean that we should think about money's opportunity cost?

Every time we go to buy a cup of coffee, we should ask ourself, is this the best use for money or is there somewhere some other use that I could find for this money that would be different, would be better? Now, it sounds strange and if you think to yourself, like ask yourself, when was the last time you thought about it this way?

When was the last time you thought about buying something and you say, could I could I do something better with my money? And the reality is that even if you do it from time to time, we certainly don't do it a lot. And we don't do it for small purchases, but we also don't do it for large purposes, large purchases.

And I'll give you an example. A few years ago, I went to a Toyota dealership and these were people who already talked to the dealer. They already got the price. They knew their monthly price. They knew the total price. And they were still debating whether to get the car or not and whether to add some features to it or not.

And I caught them at that moment. And I said, if you are going to go ahead and buy this car today, what would you not be able to do? What are you giving up? And you would expect that everybody would have an answer. Making a big decision, putting money into one thing, what will they not be able to do?

Nobody had an answer. Why? Because they haven't thought about it. So then I pushed them and I said, look, if you go ahead and buy this car today, something will have to give. What would it be? You know what was the most common answer I got? If I buy this Toyota, I can't buy a Honda.

Now, of course, that's true, but it's irrelevant. That's not what I was really asking. What I was asking was, what is the intertemporal trade-off across multiple products? What I expected people to say, what I would want people to say is, I'm giving up a thousand lattes and 17 books and three weeks of vacation, one week over the next each of three years.

These are the trade-offs we're really making. But the reality is that we can't think about this. And, you know, we said that money is beautiful and wonderful and its value is that we can map it to almost everything in life, right? We can buy coffee and books and vacation and all kinds of other things.

But that's also the source of its trouble. In English, there's an expression when we think about a tough decision, we say it's like comparing apples to oranges. Turns out comparing apples to oranges is very easy. You don't see anybody baffled by the fruit plate saying, oh my goodness, I have no idea, apple or an orange.

The challenge comes when it comes to valuing those things. So apple and orange, you know, each of you know right now which one you would prefer. If it's a beautiful orange, it will be different. But if I showed you an apple and orange, you would know. But if I asked you, is an apple worth 50 cents, 75 cents?

What about $1.25? Now you have to admit that it's not that clear. You see an apple and orange, each have an adonic impression. We get the feeling of the value, the pleasure we will get from the apple, the pleasure we would get from the orange. And we can compare which one of those things would be more pleasurable.

When I tell you $1.25, you don't have a representation of what's the best thing I could do with $1.25 now and later. And let me see if that pleasure across all kinds of things is bigger than the pleasure of an apple. The reality is that what makes money so wonderful, the fact that we can buy lots of things with it, that it's divisible, storable, and so on, it's also what makes it so complex to deal with.

And money, we have to admit, is just a very complex entity. Very hard to figure out what is the true value of something. By the way, there's something that we have the illusion that we know what the value is. If I tell you how much would you pay for a can of Budweiser beer, you have a sense of what it will be.

Let's say $2. But the reality is it's not because that's the real value, it's because you got used to paying that amount. And now you think of it as the real value. But if you thought of it in terms of pleasure, it would be a different story. So money is wonderful, money is difficult.

And the reality is that modern technology is making things not better, but worse. Why is it worse? Imagine that we lived in a world that there was only cash. There was money, but only cash. And I gave you every morning, I would give you $50. So here's $50, spend it today on anything you want.

Very quickly, you would realize the opportunity cost. You would say, if I buy a big breakfast, I don't have time for money for lunch. If I buy a big lunch, I don't have money for medication, and so on. What if I gave you $350 in the beginning of the week for all seven days?

Well, what would happen is that Monday, you would say, I'm rich. There's no opportunity cost. By Thursday, you would realize you're out. What would happen if I gave you the money monthly? What would happen if I also gave you a mortgage, and car payments, and credit cards? Now you can see how life is actually becoming very complex, and we're not set to understand the trade-offs that we're making.

So in a world in which I would give you $50 every day, and I said, what if you bought something for $40, you would understand the consequences. But if you ask me today, what will happen if I bought a new bicycle? I actually really want a new bicycle. But what would happen if I bought this new bicycle?

I can't tell you where the money would come from. I really can't. A little bit less inheritance for my kids. Is it coming from something else? So unclear, because I'm paying it on a credit card, and so many things are happening. Very, very hard to figure out opportunity costs.

So money relies on the idea that we will have opportunity costs, that we have a kind of intuitive notion of opportunity costs, but we don't. And modern technology, things like mortgages, and loans, and credit cards, are making it much more diffused and much more complex. So money is amazing.

It's about opportunity costs, but we can't figure it the right way. So what do we do? We think about money the wrong way. And it turns out there's lots of wrong ways to think about money. I'll just give you a couple of examples. One example is relativity. So this is an example from Tversky and Kahneman, a little adjusted for the times.

But imagine that you go to a store. You go to a store to buy a pen. The pen is $15, and you pick the pen, and you go to the cashier, and the cashier said, look, you're a really kind, wonderful human being. You have a beautiful smile. I have to tell you something.

We have a sister store four blocks down the street, and day to day are selling the same exact pen for $7 instead of $15. It's a beautiful day, only four blocks. If you feel like walking to the other store and buying it for $7 instead of $15, perfectly fine with me.

What would you do? Would you go to that other store, or would you buy the same store for $15? Most people say they would go to the second store, and the people who would stay in that store don't feel good about spending the $15 on a pen. Case number two.

You're buying an Armani suit. It's $1,015. As you check out, the cashier says, look, you're a really nice person with a very nice smile. I have to tell you, we have a sister store four blocks down the street selling the same exact suit for $1,007, $8 less. It's a beautiful day.

It's only four blocks down. If you want to go, go ahead and go to that other store. How many of us would walk in the second case? Some people still walk in the second case, but they feel bad about it. They feel that they are extra stingy about it.

But the majority of people walk in the first store and don't walk in the second store. Now, both cases, it's a question of trade-off. It is four minutes walking, four blocks walking in a nice weather worth $8 savings or not. And your bank account doesn't know where the money is coming from.

The bank account doesn't know if it came from saving on an Armani suit, or it came on saving on a pen. But we think about money in relative terms. And when we buy something big, no problem. Let's spend more. When we buy something small, we're very, very sensitive to deviations.

Here's another example. I'm sure many of you have renovated an apartment or a house at some point. And probably a version of the following thing happened to you. The contractor came to you and said, for only $2,000 more, and they use the term only, you can buy something Italian.

You can upgrade to something Italian. It's a faucet. It's a tile. It's something Italian. And you say to yourself, it's only $2,000. Of course, let's go for it. And then you go to the grocery store, and you stand by the tomatoes. And you think to yourself, should you buy the cheap tomatoes or the expensive tomatoes?

And your whole life of making decisions about tomatoes will not amount to $2,000. But tomatoes are relatively cheap. And every small difference looks big. But if you're spending so much money on renovating your house, $2,000 look, relatively speaking, so small that you don't pay as much attention to. And that's the thing about relativity.

Money is absolute. It's not relative. But we think about money in relative terms. And that gets us into all kinds of trouble. That's why when we buy big things, we're likely to be tempted and spend way too much. And when we buy small things, we might focus too much on small differences and eventually not get the things that give us more happiness.

So that's mistake number one. We think about money in relative terms, not in absolute terms. Ellen and I had lots of discussions about asset undermanagement. And is it reasonable to pay a percentage of asset undermanagement? That's a relative argument. And a lot of people think it's perfectly fine because they think it's a percentage, a small percentage.

And we don't think about the absolute number of it. OK, mistake number two. Spending has to do with the timing of the spending and the modality of the spending. So imagine that you're going to a restaurant. Let's say it's over COVID. You're going to a restaurant. It's a wonderful restaurant.

It's an expensive dinner. It's, let's say, $200. And at the end of the meal, you can pay either with cash or with credit cards. And now I want to ask you, which one would feel worse, the cash or the credit? And almost everybody agrees the cash is much worse.

Now, why is it much worse? What does it mean that it's much worse? You know, restaurants have their prices printed on the menu. You know what it's going to be. It's not a big surprise. Why is paying cash so much worse? And it turns out it has to do with the timing of consumption and eating.

And to prove it, let me take you through a thought exercise. And let's make things worse. Imagine I own the restaurant. And I discover that people eat 50 bites and pay $50. And I told you that because you're a wonderful, caring human being, I will charge you half price.

Instead of a dollar per bite on average, I'll charge you 50 cents per bite. And not only that, I'll only charge you for the bite you eat. The bites you don't eat, you don't need to pay. So I'll serve you your dish. I'll sit back and I'll take my notepad.

And every time you take a bite, I'll mark a little V on my notepad. At the end of the meal, I'll charge you 50 cents per bite you eat. The bites you don't eat, you don't need to pay for. How much fun will that meal be? The answer is not that much.

When I teach my students here at Duke, when I teach them the psychology of money, I bring pizza and I charge them 25 cents per bite. What do you think happens? Huge bites. And it takes such huge bites, they don't enjoy the whole process. And you would think they would learn after one bite.

No, you sit there with the pizza and it's so tempting to push it a bit more in and get more value for money. And at the end of the day, they don't enjoy the whole process. They pay very little, but they lose all the enjoyment. So what's the point of it?

The point of it is that if you think about a timeline, when payment and consumption coexist, we enjoy it less. When you pay per bite, you enjoy it less. When we separate those things in time, the pain of paying goes away. So if we pay in advance, it's less.

If we pay at the end, it's less. When we pay per consumption, it's much, much worse. You probably remember the day with taxis before Uber. How many of you remember days in which you were in the cab and you were like two blocks from your hotel and the traffic was stopped and you saw the meter running and you said to the taxi, "You know what?

Stop here. I'll get out." We don't do it with Uber. Not because it doesn't continue. We just don't see the meter running. But looking at the meter running, even though it's a small amount, is so annoying that we get out earlier. Or some of you might remember the days before phone calls were buffet-style, right?

Right now we're paying one payment. But you would call your mother and you would see the minutes running and we didn't call as much and it was less pleasant because we were thinking about the amount. And even if it's 10 cents per minute, the fact that it's increasing is worse.

So we said when things coincide, we see the meter running, we pay attention, we feel worse about it. When we separate them and we pay less attention, we feel less bad about spending and therefore we spend more. By the way, that's, of course, how credit cards work. But credit cards work by doing two things.

The first, they make it such that we have a big amount rather than a small amount. We talked about relativity. If you put another $200 on your credit card, instead of $2000 it will be $2200. Not such a big deal. You take a big number, you just add to it, doesn't feel as bad.

And the second is you don't think that you're paying right now. It's the opposite of seeing the meter running. It's the opposite of paying in cash. Now, sometimes we don't want pain of paying. Sometimes we do. So you know what happens when people get their electricity bill and they move it to be paid automatically from their checking account?

Consumption increases by about 4%. Not immediately, but over time. Why? If you get the bill and you sit there and you write the check, at those moments when you write the check, you're pissed off and you terrorize your family members. You say, close the light and why are you doing this and do this?

And it's not a big deal. It doesn't last for very long. But there's a little bit of terrorizing going on as you write the check. What happens when it comes automatically from our bank account? We don't pay the same amount of attention to it. What happens? We don't get upset as much.

We don't terrorize our family members. And slowly, the amount increases. Now, here you can ask yourself, is terrorizing the family worth or not worth 4% of increased consumption of electricity? You decide for it. But here's another example. Imagine you're going to a cruise. Cruise to Alaska. Amazing cruise. $5,000.

Two weeks. Amazing. And you can do one of two things. You can pay for the cruise six months in advance. Or you can pay the moment you get off the boat. Which one of those is better? Now, when we think about financially better, what would you say? You would say, of course, let's create the last day of the cruise.

I get to keep the money. Maybe I get some interest, and so on. But how would you feel on the cruise? And especially, how would you feel on the last day of the cruise if you know that tomorrow you have to pay $5,000? You would probably spend the whole day in the buffet trying to amortize your investment.

Right? So when you think about these things, sometimes we want more pain of pain. Sometimes we might say, I don't want to feel very good about consuming electricity. I want it actually to be more painful. Or cigarettes. But there are some things we want less pain of pain. Because we want to increase consumption.

For example, in health care, I never understood it. I don't understand why they have a co-pay for colonoscopies. Like, who exactly is going to have two of those if it was free? But I understand it for massages, pedicures. But colonoscopy, come on. Mine is due in April. That's a top of mind.

So the point is that money is not just money. It's how much attention are we paying it. And when we pay attention to money, we spend less. We think a bit more about the opportunity cost. We're more aware of our spending. And we spend less. And when we don't pay attention, we do it less.

A couple of other examples to think about. Imagine that you walk down the street. And you walk down the street. And you look at the store. And you see a beautiful hat. And you're not a hat person. And you never had a hat. But you're really curious. And you go into the store.

And you try the hat. It's beautiful. Right color. The right size. You really like this hat. But you look at the price tag. And you say, I can't possibly justify buying a hat for this amount of money. I'm not a hat person. And you leave it alone. And you walk home.

You walk home. And you get home. And you discover that your significant other bought you that exact same hat from your joint check income. How do you feel? You say, honey, thank you very much for thinking about me. I love this hat. But I looked at it already. And I decided it was not worth the money.

Please go back. Put it back in the store. And return the money to our joint check income. Of course not. Why? Because what that other person did was to take away the pain of paying. You wanted the hat. You just didn't want the guilt connected to it. And by giving you it as a gift, that person took away the guilt.

By the way, that's what good gifts are about. If you think about, you know, we're kind of in a gift-giving season. If you think about what good gifts are, good gifts are not a transfer of money. Good gifts are buying things to people that have a high guilt component of spending.

That people would not spend for themselves. Okay, one final example. Imagine you have employees. Or imagine you all work for me. Imagine you all work for me. And I'm going to give you a pay raise. And I'm asking you, do you prefer $1,000 a month pay raise? Or do you prefer a $12,000 a year bonus?

Not bonus, but the end of the year payment. So it's fixed. A thousand a month or another $12,000 at the end of the year. Of course, the rational thing to do is to say, give me the money every month. But when you ask people, how would you use the money?

And in which of those cases would you feel more free to spend it in a way that would maximize your happiness? People prefer the bonus. Why? Because people say if the money comes at the same cadence on the monthly level, I will feel the need to use it on monthly expenses.

I will use it on utilities and rent and grocery shopping and so on. But if the money comes in a different cadence once a year, I would feel more free, more liberated to buy a bicycle and go on vacation or do other things. And all of this is to say that the way that the money comes into our accounts also helps us more free or less free about how we want to spend it.

When it comes to investing, what is our fund for fun? Should we separate that from a regular amount and basically say, with this amount, I'm willing to have a fund? There was a couple that was retiring when I talked to them. And they said that they just retired, like it was six months after they retired.

And they said that they're perfectly fine financially. But they said they feel so bad about spending money. So what I agreed with them, I said, take an amount of money that you want to spend every year, taking out of your investment, put it into your checking account. I know it's not rational, but put it all in your checking account for the year.

And I said, if anything is left over, give it to charity. So the agreement is, this is your money to spend. Don't feel stingy, because at the end of the day, by the way, we want people to save, but we also want people to live and enjoy their money.

Life is not about dying with the most amount of money. Money is about getting the most amount of happiness that we can from money, and not necessarily always, always saving. It's about spending the right way. OK, so we said that money is amazing. It's about opportunity cost, hard to think about.

So we come up with all kinds of shortcuts. And some of those shortcuts, like the pain of paying, like relativity, get us to make some mistakes. And now the question is, can we do better? But what can we do to improve how we function? So I'll give you a couple of examples.

Example one, you ask people, what is your discretionary spending for this month? How much do you want to spend on restaurants and bars and transportation and food and all the discretionary spending? People say, let's say $2,000. And you say, here's a credit card, spend. And people way overshoot, and they spend $3,000.

And then you say, you know what? Maybe don't use a credit card. Let's use a prepaid debit. We'll load $2,000 on a prepaid debit. You can always load more, but that's what we start. Now people get closer. Do they get to $2,000? No, but they get closer. Because with a credit card, the number is going up and up and up.

With a debit card, it goes down. And you see the zero. But the problem is that people spend way too much in the beginning. You get to $2,000 in the beginning of the month. You say, I'm rich. And you overspend. So we said, what if we broke it into four parts?

Weak. Turns out people do better. Turns out if you give $500 a week, people do better. Because you can see the consequences, the opportunity cost. And then the last thing we did was we said, what would it be better? To preload the money on Monday or Friday? Which one do you think?

Turns out Monday is better. Why? Because if you load the money on Friday, the weekend happens. And then people overspend. On the other hand, if you load it on Monday, people look forward to the weekend. They savor to have more money for the weekend. And then if people miss, the weekend is the easiest place to scale up and down if needed.

So we can create better tools. Like a prepaid debit card that loads every week and every Monday rather than giving people credit cards. And there are lots of solutions like that. That's one direction. Another direction. And I'll give you the short version of this. But the short version is that I was in a-- Soweto is a big town in South Africa and has a very, very big slum.

And one day I'm in this place that sells funeral insurance. And I don't know if you know this, but in South Africa, funerals are people's biggest celebration of their lifetimes. In the US, people celebrate weddings. In South Africa, they celebrate funerals. Weddings are very modest. Funerals, that's the people's biggest celebration of their lifetime.

And of course, by the way, it's much more rational to celebrate funerals because with funerals, you know for sure you'll only have one. So anyway, I'm sitting in this place that sells funeral insurance. And this father comes in with his son who is 12 years old. And he buys funeral insurance for a week.

Just to be clear what it means, it means it would pay 90% of his funeral expenses only if he dies in the next seven days. Remember, these are very poor people. They buy a small amount of soap and a small amount of milk and a small amount of insurance.

They don't have a lot of money. And this insurance place only sells policy for a week or for a month. They don't have anything longer. Nobody would buy those. And he gets the paper certificate. In a very ceremonious way, he gives it to his son. And, you know, it's a kind of an odd thing to do.

And I start thinking about why the ceremony? Now, think about a poor father, very low income individual, who just happened to make some money today. And now he's directing it towards funeral insurance or savings. What will the family see tonight? The answer is that they will see less. But at that level of poverty, there'll be something less on the table, less water, less food, less kerosene, less something tonight.

And what his father was doing was to show his son there's another economic activity happening. It's as if the father said, you know, there's going to be less food on the table, but I'm taking care of you in this other way. Now, we started by talking about the nature of money.

We said about what the technology do to the nature of money. Technology also made lots of very important things invisible. So 2000 years ago, before money, how did people save? Basically, with goats, chickens. And the nice thing about saving with goats and chickens is you can come home from the office and you can see how many goats and chicken your neighbor has.

And we could compete on who has more savings. But then we created money and then we created digital money and all of a sudden we took this amazingly important activities, saving, long term saving, paying debt, insurance, and we made it all invisible. And we took this other important activity called spending and we made it very visible.

I think about the imbalance between those. How many of you know something about what your neighbors are saving? Probably not much. How much do you know about what your neighbors are spending? Quite a lot. So this imbalance is making it really, really tough. And one of our questions, so we talked a little bit about spending.

We talked about how the methodology of spending and credit cards are difficult and so on. But another element that is really important to figure out is how do we get people to take more pride in savings, saving insurance, paying debt? Think about this. All of those things are invisible, invisible and therefore not very motivating.

So we've done all kinds of experiments on this. I'll just describe to you one of them. Imagine that you go to a new workplace and you have 401k and you can sign up and you can save up to 10% of your salary. Now, every percent you save in salary means bringing home one less percent.

At the end of the day, the people at your household will say thank you for the money you bring home now. In 30 years, they might say thank you for the money that you save for them. But right now, there's going to be no thank you for the money that you are saving.

It's invisible. Now, imagine what would happen if when you got this form for the 401k, you were asked to call your significant other and you were given a sentence. Hi, honey, I'm in this new workplace. We can save money for 401k for our future, for the future of our family and save up to 10%.

What do you want to do? What should we do? Now, the person making the call is getting brownie points for saving for the family. Now, would the spouse that got the call would remember this a year later? Of course not. But do they get the brownie points at the moment?

Absolutely. And what happens? Saving rate goes up. Now, this is not an easy struggle. How do we make paying debt more motivating, more rewarding? How do we make buying insurance more motivating, more rewarding? How do we get savings to be more motivating and more rewarding? Not easy to do, but it's certainly something we need to do.

We have to realize that this competition for saving is all the things that are visible and much more fun to do now. And we have to kind of counter those things. Maybe one last study. In this study, you take kids on the day that they are born and you randomly divide them into two groups.

In one group, you do nothing. In one group, you give them $500 in a college savings account as a gift on the day that they're born. And you do nothing after that. And you go to visit those kids when they're four years old. And what do you find? You find that kids with college savings accounts have higher social cognitive performance.

How can it be? Do these kids know that they have college savings accounts? Of course not. But the parents know. And from time to time, the parents get a statement that says, "This little kid already has a college savings account." And what do they do? They buy a few more books.

They read a little bit more. Is it a lot? No. But is it over many years? Absolutely. And what that means is that when we think about money and we think about savings, we really have to think about people's mindsets. You know, this idea of taking $500 and putting it in a college savings account is not a financial thing.

It's a mindset. By the way, with this data, I managed to convince me and other people. We managed to convince the Israeli government a few years ago to start a college savings account for each kid from the day they are born. But it's not just a financial tool. It's a mindset tool.

And I think the same thing is also saving. I think we need to think about how do we make saving, paying debt, buying insurance more rewarding? How do we make it more visible to ourselves and to other people? How do we celebrate when we get to a special point?

You know, a marathon has an end. Saving doesn't feel like it has an end. When do you feel like I made another step? Almost, almost never. And then the other thing is I think we need to work a lot on giving money accounts, different names. Like college savings accounts.

Because these names are basically helping us overcome, basically increase our motivation. If you have an account that is called my future fishing hut, there'll be motivation that will be connected to it. And if it's just in your retirement account, it would, it would not be. So we need to think about the mindset of people.

We need to think about the complexity of depriving ourselves at the moment for the long term. Not easy to do. And we have to help people. And the things, some of our tools are to basically give those things name and make it more rewarding. And I think I'll stop here.

And Alan, I'm happy to answer any questions. That was fascinating, Dan. Thank you so much. Boy, could I relate to that credit card example. I get 2% cash back on my credit card. But I'm probably reducing the pain of paying. So it's probably costing me a whole lot more than that 2% I save.

Yeah. By the way, with credit card, there's another complexity, of course, which is that eventually, you know, the credit card companies are not losing money. As you know, the retailers are subsidizing it. Right. And there's a really interesting question of what is our relationship with our retailers? And do we want to support them?

Now, with COVID, it was very clear that there are lots of retailers that we want to stay in business, that we don't want them to go under. Right. And I think we moved a little bit from this feeling of competition to a feeling, I want my local coffee shop to stay open.

I don't want in a half a year from now, when COVID is over, let's hope, I don't want this to be a desert. I still want them around because the value that they give me is much higher than the cost of the coffee that they gave me. And what we see is lots of people getting organized and helping local things.

By the way, the same thing would be if you move from using credit card to debit, you're saving your retailer money. That's fascinating. Speaking of pandemic, how do you think the pandemic has changed our views of saving money, especially investing, with interest rates close to zero, stocks being risky?

Have people explained why they're at an all time high? Yeah, so one thing that we see is we see many more people have open rainy day accounts. So people are worried and rightly so. It's a very uncertain world and people have opened, we see a lot of increase in rainy day accounts.

And one question is, will that sustain? Like if people open an account and they have a direct deposit, then it will most likely stay. If they don't have direct deposit, it will most likely go away. But in terms of the fluctuation of the market, so right now the market is all time high and we know about bubbles.

We know that when things go up, people go in. And I think we see that. But it's not a good strategy. I mean, it's good to go in if you could only go in when things go up and not go out when things go down. But of course, we know that those things are connected.

The people who are basically following the herd, there's a strategy, the same strategy goes on the upside and downside. So certainly more people are entering and putting money away. But I worry that also more people would get out when we have the inevitable down at some point. Basically, as you mentioned, loss aversion.

Losses are very, very painful, just very, very painful. And when we do these risk surveys, how would you feel if your portfolio lost 20%? People say, oh, I would be fine. No, no, you wouldn't be fine. And what happens is people don't predict correctly how miserable they would be.

And therefore, people get out way earlier than they thought they would. This is one of the biases we have to help people overcome, by the way. You know, in self-control, we have all this literature showing what is called Ulysses contracts. And Ulysses contract is a contract where you basically tie your hands so you can't make a bad decision later.

If you remember the story of Ulysses, Ulysses knew that if the siren will sing, he will divert the boat and kill everybody. So he asked the sailors to tie him to the mast. And this way he was unable to control the boat. And he asked the sailors to put wax in their ears.

And this way the sailors were unaware of the temptation. And I think we need something like that to help us with our emotional instincts. Like I would love to see a saving plan that you need a three-month warning to get money out. I think that this idea that we want liquidity and we want to be coming out every moment is actually unhealthy.

That what we need is something that is a mechanism. So, you know, we have lots of mechanisms to overcome our physical inability. Like look at the chair I'm sitting. It has wheels. It has a cushion. We take our imperfections and we build technology around that. So this cushion, like people thought very carefully about my bum and what is the right cushion that I need and the wheels and the height and so on.

What about the imperfection of getting our emotions to drive us rather than a long-term logic? Now we could say deal with it. But, you know, we don't tell people be cold resistant. We build heaters and clothes and air conditioning and so on and shelters. We don't expect us to be perfect.

We build technologies that take our imperfection and get us to be better than we would without that technology. I think the same thing is we need tools for the mind. And this hypothetical example of a fund that you can't get money in less than three months is an example for that.

Right? It's saying here's an imperfection that we have. Our emotions get activated, gets the best of us. Let's design something for that. I don't think it's like education. No, because the moment this emotion is ignited, people just take bad decisions and we need to make a mechanism that will make it impossible like Ulysses contract.

Fascinating. Is there a way to help people imagine the pain that they're going to feel when their portfolio goes down by 50, 60 percent? So I don't. OK, we can have a long discussion. I hate these surveys. How would you feel like? And I'll tell you why I hate these surveys, because your goal as a financial advisor is to make people wealthy and not to minimize their pain.

Like, imagine you go to a doctor and doctor said, Alan, how would how much do you hate pain? And you say, oh, I really hate pain. So let's not heal you. No, the doctor's job is to heal you. And if you have pain. Give you some narcotics in the meanwhile.

Like if I come to you and I'm loss averse, you should tell me so you should be poor. You should say study yoga, take Xanax. You know why? You know, the idea that if somebody hates losing money, what they should do is be poor for life. I don't like that that direction.

You could say, Dan, don't look at your portfolio. You could say, take Xanax, learn meditation. You could do all kinds of things. Why is the solution? Don't take any risk and don't make any money. I mean, it's kind of crazy if you think about it. So I think that the way we now talk about risk is kind of risk is a feeling.

The reality is that people don't take risk with money. The reality is that people take risk with things. At the end of the day, we translate all to money. 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.

It's what is my vision of what home I want and where do I want to send my kids to college? And will I be able to pay my medical bills? It's all of those things. And you combine all of them into a risk version. But it's not how would I feel, because it's about all of those other things.

Now, if we ask people about risk the right way, if you ask me, Dan, how important is it for you to send your kids to a good college? And how important is it for you to have at least a two bedroom apartment when you retire? And how important is it for you to have all of those things?

And then you said, what does 20 percent mean? 20 percent means that you're not going to do this one and this one. Your kids will go to state school. Good or not good. That's what risk really means. But but we don't I think I think when we do these surveys, we're a little lazy.

We I mean, the industry that asked this question. We kind of expect people to make the hard labor of saying, here's what I want across housing and education and charity. And I'll integrate it. I'll give you one number. How would I feel like? It's a nonsense number. By the way, we have lots of experiments so that I can ask you the question differently and get different answers.

And so so I think I think we to answer your question, A, I don't like these measures. B, I don't think we should minimize people's risk. Is a feeling I think we should talk about your buying power. And and what does it mean in terms of buying power? There's an objective thing to it.

Like, how important is it for you to be able to sell your kids to Princeton? Or to go to a state school, if you say, oh, I I really want that risk, that's great. But I need to help people do it in in a consumption context. And I think if we did that, people would understand risk much better and be much able to report what is the right risk for them.

That's fascinating. I don't think risk questionnaires are worthless. I don't think they're that good. I think they're dangerous because the way we felt about risk on February 19th, when stocks peaked was very different than we felt on March 23rd when they bought them. And then even more importantly, they don't measure our need to take risk.

As you said, buying the richest person in the graveyard, not such a good goal. Yeah. So by the way, these these surveys are usually not asset dependent. If you say I need six million dollars to retire. And you reach six million, you should be have a very different risk attitude than if you're a two.

But but the surveys don't take this into account. Anyway, it's a crazy thing that we're asking these things. I think it's just for regulation purposes and to feel like check a box. But nobody have given it sufficient thought of what what it really should be. Terrific. Jack Bogle, what has he taught you about investing?

Anything that you'd care to share? So I would say three things. The first one, of course, was, you know. There's something that are unknown, like returns in the market. And there's something that are known, like fees. Deal with the things that you know. I think the notion of not trying to outsmart the market is very important.

And I don't mean it's just important for investing. I think it's important for the outcome because so I think it's also important for peace of mind. I think that, you know, the people who are in the market need to be in the market. But people like me who are not in the market, there's a question of how much of our mental capacity should we dedicate to our retirement.

And you can imagine it's something that can take lots of attention from people or very little. And for me, the notion of saying you can't beat the market to just invest in broad funds is basically saying I'm accepting that I don't know. I think there are people who don't know the market and think that they do.

There are people who don't know the market and know that they don't know the market. And there's some people who know the market. There are very few of those people who truly understand the market. The vast, vast majority of people either don't know the market and realize it, or don't know the market and mistakenly think that they know it.

But the realization that said, you know, this is not something I can out beat the market and all I can do, and this is really the important thing, all I can do is control how much money I put in. So what I should do is I control the input and not the output.

I should think about how much money am I sending every month, cost based averaging. And rather than saying I'm concerned with the output of that random stochastic process, and that's a very, very calming, very calming perception. I think we have time for one last question. And this was a fascinating one by one of the Boglehead members.

After reading your book, Predictably Irrational and seeing some of the cognitive biases we have, he's noted, or he or she has noted that some Bogleheads claim that they are bias free. They don't have any of these biases. What do you think of that? So I think that's a really interesting bias.

So first of all, of course, maybe. I'm not saying that everybody has those intensities of biases in the same way. But we have a very hard time seeing our own biases. We do. And by the way, we should each go to our spouses and ask them if we are biased in any way.

I think your spouse will be able to tell you all kinds of things that we don't see. So, yeah, you know, there are differences between people. It's not true that everybody has the same bias. But we are really not good in seeing our own biases. And one of those, one of those biases that we don't, I mean, there are many of them.

But think about something very important, like our political opinions. We all think that our political opinions are basically logic driven. How could anybody else believe anything but whoever you voted in the last elections? But, you know, almost all of us are voting exactly as our parents did. Now, if it was pure logic, it wouldn't be hereditary.

But it is largely hereditary. Now, you ask me, I know I inherited my values from my parents. But if you ask me the question of can I, can I, do I, do I give it all kinds of logical value and I can't see the logic in the other side, of course.

But I don't think it's really genetic, right? And I do think it's an example of a bias that is very, very deeply ingrained, that is very, very tough, very tough to change. And I'll give you another example. Conflicts of interest. One of the best investments in the US is lobbying.

And the reason lobbying is such a such a great investment, but I'm joking, right? I'm not really recommending lobbying. I think we should do something with it. But the reason lobbying is such a good investment is because people are cheap. Now, what happens is you meet somebody and you buy them a sandwich and a beer.

And in two minutes, they see life from your perspective. And by the way, you know, a lot of these biases are really nice. Like, you know, it's really wonderful that you can have a meal with somebody and get to be their friends, right? You remember the meal you and I had in that ski resort, right?

You basically share a meal with somebody and all of a sudden, it really elevates your understanding and caring and you see life through their perspective. But you marry this with lobbying or your physician or conflicts of interest and it has terrible effects. But we don't see those. So I would say maybe they don't have biases, but my money is that they're just a little bit not so good at seeing their own biases.

My money is with you, Dan. Dan, this was fascinating. I can't thank you enough on behalf of all the Bogleheads. Thank you for educating us. My pleasure. Looking forward to it. I know you and I are going to chat in a couple of days. Looking forward to it. Me too.

Very good.