Receive regular updates via email

Problem 3: Not Looking at All Sides of a Problem

This problem is usually having a point of view on an investment situation where you may have taken someone else’s word on it or never really given the question serious thought. One common financial example of this the use of a financial advisor to assist you in buying and selling stocks, mutual funds, or other investments. Whenever I consider that advice from this kind of source, I ask several questions about the source of the advice. Some basic ones may include the following:

– Does this advisor have anything to gain or lose by my decision?

– Is this advice based on the advisors own expertise or on someone else’s?

– Is this person following their on advice on that issue?

– Is the advice based on a fair analysis or a biased analysis?

– Is it to my advantage to even consider taking this advice?

– If the advisor makes any performance claim, can the claim be backed up?

– Does the advice make sense?

– After further investigation and research on my part, does the advice still make sense?

– Does not following the advice make better sense?

The current rash of mortgage problems in the US, issues like short sales because of underwater mortgages and foreclosures, is one example of this kind of decision problem in action. Many people got into this situation because they didn’t think about the consequences of taking out a home equity loan to buy expensive toys, or the possible negative consequences of an adjustable rate loan.

There are many more questions that one can ask, but the basic point is that every decision can be looked at in more than one way. It is to your advantage to ask a few questions and do at least a little work to understand what may be behind a piece of advice.

Next Lesson: Being Overconfident In Your Predictions

Bargains and behavior

A recent post on Get Rich Slowly is ostensibly about how J.D. and his wife cleaned up his mom’s house and found that she was a packrat; but it’s really about how buying and hoarding “bargains” can be a trap. The house contained many unopened bulk packages of food that were long past their best-by date, newspapers from ten years ago, presents bought for five-year-old grandchildren who are now nine. As J.D. pointed out, a bargain isn’t a bargain if what you buy is wasted.

This post strikes home with me because my husband and I are working on the same issue. “My favorite chips are on sale!” I’ll say. “Let’s buy four!” We do, and instead of stockpiling them as I meant to, they’re gone within three weeks because I like those chips so much. “The bigger bag of ham is cheaper per ounce, let’s get that,” my husband says, but then half the bag goes bad before he eats it. We’re dealing with slightly different aspects of the same problem: we’re buying more than we normally would in the expectation that our future behavior will justify the purchase, but we don’t adjust our behavior accordingly. If there’s a tasty snack around, I’m inclined to eat it, not save it, even when I know I’ve had some recently. If my husband isn’t reminded that there’s food in the fridge, he tends to forget about it and eats other things that are more visible.

The key here is that it’s not our purchasing behavior that’s bad; it’s our behavior after the purchase that’s the problem. There are two solutions here: don’t buy the “bargains” when we know they won’t, in the end, be true bargains; or adjust our behavior to take full advantage of our purchases. I could put extra snacks in the rear of the pantry that’s harder to get to, to remind me that they’re meant to be rationed. My husband could freeze half his bags of lunchmeat, or I could remind him that he still has ham left. Behavior can be hard to change; whether or not a bargain at the store is worth it depends entirely on the person faced with the purchase. Is it worth it for you?