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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

Emotion can be the enemy

Apparently, movies are the next to go in airlines’ attempts to make up for rising fuel prices. US Airways will be removing movie service on its flights November 1, and expects to save some $10,000,000 a year by doing so. They have also decided to start charging for beverages. And, of course, they were among the first–though not the only–to institute charges for checked luggage.

My husband and I just got back from a trip from Toledo to Seattle. On the way back, we discussed the merits of driving instead. His family lives in Toledo, mine in Seattle, and the distance is about 2400 miles. Driving would take about three days. (It’s possible to do it in two, but only in good weather without much sleep.) It would be more comfortable and flexible, but more troublesome and expensive: three days’ travel instead of six hours, needing at least one of us to be alert for all that driving, paying for hotels and food and gas.

Until the recent announcements, we never seriously thought about driving instead of flying. But now we are. What changed? The ticket price and the smaller seats and the luggage charges, yes; but mainly, it’s the beverages. Currently, beverages aren’t allowed through security lines unless they’re less than 3 oz. Once drinks are no longer free, our options are to buy from the airport, to buy from the airplane, to go thirsty for five hours in the arid plane air, or finagle a drink–bring an empty bottle and fill it with tap water in the airport bathrooms, for example.

This is not a big grievance. So I have to carry a bottle with me, or pony up two dollars for a drink. Is that really worth the enormous hassle of spending three days in the car, paying for two hotel stays and some 75 gallons of gas each way?

Logically, no. But logic and money don’t necessarily have a lot to do with each other. Here, what’s pushing us to think about avoiding the airlines is resentment: that we’re losing privileges we had before, through no fault of our own, and paying the same amount (or more) money for the experience. We feel cheated. We feel annoyed. We don’t want to deal with the entity that’s depriving us of what we had. But financially speaking, putting up with the loss of privileges is worth it. Two round-trip plane tickets cost about $800; driving the same distance costs about $600 each way. Plus there’s the matter of those extra two days of traveling. Four days and $400 is worth the hassle once we stopped to work it out; but the cost of going with our emotions wasn’t readily apparent until we did.

This balance–between money and emotion, logic and comfort–is present in most financial decisions you make. It’s less evident in most, but your emotions color most of what you do. Emotions were evolved as mechanisms for enhancing our survival, but evolution hasn’t caught up to Wall Street yet. Emotion is a continual opponent in our struggle to do our best for ourselves financially. There’s no real cure for it; all you can do is be aware that your emotional self is not necessarily your best self to consult on money matters. This is not to say that happiness and comfort aren’t worth paying for; they are. Sometimes. The key is in deciding how much they’re worth in each situation and acknowledging that that’s exactly what you’re paying for.

Fairness is emotionally rewarding, a study finds

Fairness is emotionally rewarding, a study finds – Los Angeles Times

Linked above is an article on another interesting study on how we are neurologically wired about money issues. The research was done at UCLA’s Semel Institute for Neuroscience and Human Behavior to measure how our brains react to financial situations that would be considered “fair” or “unfair”. Side note: I was told many years ago the personal definition of “not fair” was not getting what you wanted. The research showed that getting a fair deal stimulated the same parts of the brain as do earning money and looking at attractive people.

I found the method and results of the study very interesting. Students were offered a split of found money, $10. Those who were offered $5 registered a fair reaction in their brain activity and took their split. Of those who were offered a $2 share 50% registered neural activity signalling disgust and refused the money. The other 50% took the money but did not show “fairness” brain activity. I find it interesting so many refused free money because they believed the deal to be unfair.

So how does that affect us? It appears that fairness in a financial transaction affect us as strongly as the actual financial figures. I sold cars and trucks for several years and it was well known by salespeople that the happiest buyers were usually the ones the salesperson made the most profit and commission on. Buyers who felt they were getting a too high or an unfair price usually were getting a very good deal, but little the salesperson or dealership could do would convince them of that. We all want to feel like we got a fair deal, but each person’s perception of fair is different and may be quite skewed from reality.

This study shows me that it is difficult for us to stay rational about big financial purchases, such as cars, homes or engagement rings. Some research before we go to make our purchases may give us a better framework where the fair price lies and allow us to make a rational purchase and feel we were treated fairly in the transaction.