[00:00:06.4] ANNOUNCER: Welcome to The Science of Success introducing your host, Matt Bodnar.
[0:00:11.8] MB: Welcome to the Science of Success; the number one evidence-based growth podcast on the internet with more than a million downloads and listeners in over a hundred countries.
In this episode, we discuss how money messes with your head. We look into the obvious trap you fall into when we think about money, examine how cultural influences shape our financial choices, and explore the key biases that underpin the most common and dangerous financial mistakes that you are most likely to make in your life, with our guest Jeff Kreisler.
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In our previous episode, we discussed how to build a rock star brain. We went into the neuro-chemical compositions that create moods from happiness to depression. We looked at how you can change the building blocks of those neuro-chemicals by changing your diet and your daily habits.
In a world where people are more stressed than ever, sleeping less and trying to do more, we look at the causes of brain drain and what we can do to have physically happier brains with Dr. Michael Dow. If you want to think with crystal clarity, listen to that episode.
[0:02:28.1] MB: Today, we have another exciting guest on the show, Jeff Kreisler. Jeff is the bestselling author and winner of the Bill Hicks Spirit Award for Thought Provoking Comedy. He is most recently the co-author of a new book Dollars and Sense: How We Misthink Money and How to Spend Smarter with Dan Ariely, who was a previous guest on the show. Jeff is a regular contributor to CNN, Fox News, MSNBC and much more. Jeff, welcome to the Science of Success.
[0:02:54.1] JK: Thank you for having me.
[0:02:55.6] MB: Well, we’re excited to have you on here today. To get started, I love to talk a little bit about a previous book that you wrote and there is a Ted Talk around this as well, just called Get Rich Cheating. Tell me a little bit about what inspired you to give that talk and what underpins that.
[0:03:13.2] JK: Sure. I can give you the short-ish version, which is that I was spent many years doing political comedy. One of the things that drove me into that was pointing out the hypocrisies that’s obvious in politics. Through that, I ended up getting up to and to work for Jim Cramer’s thestreet.com writing a humor column about finance.
Then through that, I got an opportunity to pitch a book idea to a publisher and I pitch this idea of get rich cheating. It was basically looking at these get rich quick books. Typically it’s how to flip real estate is almost all of what their suggestions are. Looking to that, combined with this study of hypocrisy, I guess you could say I had both in the world of finance and politics and sports and people showing up their pre-package advice, all of which sort of had the same theme.
It felt like it was a great way to use a vehicle of satire to make a commentary about our obsession with money and really what our system of gaining money was really about. Whether it was the restriction in this real mobility that we talked about, or just the fact that we became so obsessed with getting money and getting rich that we often could justify cutting corners and being unethical.
The book became a combination of really digging to the research of the Enron’s and Bernie Madoffs and the steroid scandal, and even the lesser known things. I mean, I’m sure many of your listeners remember world com. There were plenty of smaller scandals where people got rich, but didn’t get in trouble. Or the trouble they got in was a small fine. One of the over-arching themes of the book, which is what then fed this lecture and talk and show was everyone’s doing it, no one is getting caught, why not?
It was a cost-benefit analysis. There’s no cost. One guy get caught, Bernie Madoff, no one else got in trouble. The benefits are gigantic. This message resonated in a weird way. Like I spoke at business school sometimes doing a satirical thing and I wouldn’t say it was a joke. It was obviously funny, but just interesting ideas and people would say, “Yeah, that makes sense.” Because it eliminated the idea of ethics. Obviously, ethics and morality are important for society function. If you’re strictly an economic actor, just cost-benefit, you’ll latch onto it.
I went a little far from the question being, like how was it inspired? It was inspired as a unique vehicle to expose some of the hypocrisies and challenges in our system. It was a lot of fun to do. I did it. Theaters and business schools and comedy clubs and all over the place.
[0:05:51.4] MB: Well, we’re definitely going to include your Ted Talk in the show notes so the listeners can get a taste of that. I just found it really fascinating, because the show – The Science of Success is all about evidence-based growth, and we really try to focus on science, the data, the evidence. I found your speech to be a really great amalgamation of a lot of the tropes within the self-help industry that totally the opposite of evidence-based. People hawking their own personal systems and these kinds of things. I just through it was a great expose in many ways of a lot of those methods and behavior for lack of a better term.
[0:06:29.0] JK: Yeah. One thing I do when I created the show and when I took it off the book page was I looked at the Tony Robbins. I actually think Tony Robbins has some value to add, but he is a great avatar for these self-help people. Remember Tom Cruise’s character in Magnolia for those that might know that relatively obscure reference.
It was just about, like as you said, it wasn’t evidence-based that I was presenting, even though I was using facts about people that did it. It was just these things that resonated with people emotionally. I think I had a whole setup, whereas like you’ve got to visualize your dreams and I would talk about getting rich and being so rich, you could afford [inaudible 0:07:03.9] egg omelets and you can bite your half.
To visualize your dream, then you confront obstacles to your dreams and it’s stuff like ethics and it’s stuff like society and your board of directors. Then you bust through those obstacles to achieve your dreams and stuff about how you cheat on your 10B5 forms, or whatever it is, or how do you take steroids, or who do you use to back you up and all the different ways that people cheated.
It was all in this very emotion-triggering format of visualizing dreams and being a real man and like, “Let’s go get it.” That is what a lot of self-help tends to be is it goes for that emotional response, not the factual one, not the intellectual one and that is what we fall into. In a way, we’ll get in this later. That’s sort of what that my latest book about money is about is about how – when you make financial decisions based upon emotion and often unconsciously based upon emotion. We’re led away from the best scientific rationale intellectual choice. Certainly when it comes to cheating and it comes to get super rich at any cost, the emotion is in there. Our eyes get big and we get excited for all the things we can do and stuff we can buy with money.
[0:08:18.4] MB: Let’s dig into that a little bit. Tell me about your book Dollars and Sense and how – let’s start really simply, how do you define money? What is money?
[0:08:27.3] JK: Sure. Money is essentially supposed to represent the value of other things. Money is a great development and despite a lot of my work criticizing sort of what money has done to us, it has allowed society to become what it is. If not, we’d be constantly bartering, constantly struggling just to survive.
Money allows us to specialize to pursue arts and sciences, to save, money is divisible, money is storeable, it’s fundable and exchangeable. It’s a wonderful thing, because money represents other stuff. Money really represents opportunity costs. Many of your listeners may have heard the concept opportunity cost. They know what it is. An opportunity costs is basically like what are the other things you could do with money besides what it is you’re about to spend on.
If you’re going to buy coffee and buying coffee is the common financial example, so I’ll just stick with that for now. Think you will spend $5 on a latte, what else could you do with the money? Now there is tons of stuff. You could save it, you could buy five lottery tickets, you could buy whatever 500 penny candies.
There’s a world of opportunities both now and in the future and that is what’s great about money. But it’s also what is the challenge about money, because that’s a lot to think about. It’s a lot to conceive of all the possible things you can do with money. It’s impossible for humans to do that. Strictly scientific economic basis, that’s what we should do is we should think about that opportunity cost.
What ends up happening is that because it is so difficult, because it’s so difficult to really evaluate all the options for this $5, we’d end up taking shortcuts. That’s okay, but oftentimes taking those shortcuts, it goes to such extreme lengths that we lose sight of even any other options.
My co-author Dan Ariely who some of your listeners may know from his book Predictably Irrational and other books. He didn’t experiment where he and some colleagues went to a Toyota dealership. They asked people at the Toyota dealership, “Hey, you’re about to spend let’s say $25,000 on a car. What else could you with that $25,000?”
They couldn’t think of anything. They just couldn’t like even get out of the idea of spending it on a car when pressed further. They said, “Well, if I don’t buy a Toyota, I could buy a Honda.” Even there, they thought of an alternative, but it was still within the same category. It was still about buying a car, when really $25,000 is five vacations for five years. It’s a quarter of a year less work in your life. It can be so many different things.
Money is about opportunity costs, which is great, but is also tremendously challenging and it’s why we have such difficulty thinking about money and evaluating what we should do and why, because of that difficulty we end up taking shortcuts that are often not the best decisions.
[0:11:19.4] MB: I feel like it’s really challenging. I mean, someone who comes out of the financial world, I used to work on Wall Street and I’m still an investor by trade. The infinite possibilities of the opportunity cost of money, how do we start to wrap our heads around that?
[0:11:37.1] JK: Well, one thing you can do and one thing that drove us to write this book is to start being cognizant of the biases that we have, or the value queues, the shortcuts essentially that I’m talking about that we take when we can’t evaluate a financial choice. Once you’re aware of those, then we don’t want you to face every decision and then spin in your head, but you can start setting up systems to help yourself perform better.
For instance, we know that we don’t save enough money. We know that we burn through our discretionary spending at a rate that we probably shouldn’t. If you’re aware of that, then you can setup a system, one idea that we put forward that’s improving the work is if you have a separate account, like a checking account and then you have a savings account and you get some money put in your savings account, some in your checking account.
Because most of us think about how much money we have to spend based upon what’s on our checking account, what’s on that balance when we take out money from the ATM, we can trick ourselves into thinking we have less money, that even if we stop to think about we know, we have 50% of our paycheck went over to this other account. But what we see is how we decide what to spend. We can trick ourselves to end up spending less. That’s one simple suggestion.
Ultimately, the biases and value queues and shortcuts that we talk about in the book and then others talk about elsewhere, being aware of those is the first and the biggest step towards then developing a personal system, or a system within your family, or a system within your company, or even your community to make better financial decisions.
It feels a little woo woo, but it is very true like just awareness is a huge difference maker. If you just think about how in this country we don’t really talk about money that much. I mean, it’s ironic. In a way, we “talk about it,” because we obsess about it. Our sports heroes make their money like who’s making this much and like we’re always thinking about money, but we never think about how we think about it.
In particular, we never think – excuse me, we never really talk about savings. Spending is very obvious. When people are spending, it’s easy to compete. Your neighbor has a new addition on their house, or a new car, or paints their house. Or your friend gets a new flat screen TV. It’s easy to compete on consumption, but you never are aware what people are saving.
Really that’s one of the most important things you can do with money is to save it, or to invest it for college for your kids to go to college, for you to retire. We never talk about that. I doubt very highly that any of your listeners or many of your listeners know what their friends are saving.
Actually there was a study that men are more willing to admit whether or not they used Viagra than how much they’ve saved in their 401K. I mean, like you think the thing about just how dysfunctional and tiny your savings is will be more impactful and more personal and private than Viagra use, but it’s not. It’s something that I hope that as a culture we can start to break through that wall and be a little more comfortable talking about money. It’s understandable that we aren’t. I come from a family that never really talked about those things either, at least not about savings, but just that awareness that it’s an issue, I think will help us grow and develop better habits. If we can compete on the good aspects of money, as well as the bad ones, I think we’d be better off.
[0:15:03.2] MB: I think that’s a really good point. The whole idea of how money in many ways is a central focus of our society with things – you talk about The Kardashians and lifestyles of the rich and famous and all these things, but at the same time it’s only one facet of money. Really the most important facets, things like saving, investing, etc., really aren’t on the forefront. I think in many ways, one of the things that I look at is it feels like our education system in many ways is going to fail to educate us about – in most cases even basic financial literacy.
[0:15:36.0] JK: Right. Absolutely. We could talk for several more hours or days about our education system has failed us on, but that’s certainly true that we don’t have a system that really gives us useful tools to be more financially literate. Part of the issue is that they’ve done studies that show that financial literacy lessons that are very distinctly, like you should do this, like [inaudible 0:16:00.2] and you should put 10% of this check into this. Those things fade. You get that lesson and it disappears from your memory eventually.
Again, our hope with the book is that it’s more like if you – instead of getting that this is what you should do, we present this is why you’re doing what you’re doing, these are the forces at play, then hopefully that will create within yourself an ability to develop your own system, because what limited financial literacy there is and as you’re correct to point out there isn’t much of it, it doesn’t really stick with people, because it’s presented almost like a fact.
Like who remembers the capital of South Dakota? I think it’s Boysie, right? No, it’s Idaho. See, even I don’t know and I’m sitting here, I got a computer, I could look it up. The point is people don’t remember those hard fact rules, but if you give them other tools that help you become emotionally connected to the things that we do, the decisions that we make, you’re more likely to help them make better decisions in the future. That’s not how we teach when we do teach finance. It’s not what we do.
[0:17:01.4] MB: Let’s dig in concretely into some of these biases, as we call them biases, value queues and shortcuts. I want to talk about a couple specific one. To start out, in the work that you did with Dan, what were some of the most obvious traps that people fall into or biases that people fall prey to?
[0:17:19.5] JK: The one that I’ve often used to introduce what the book is about and it’s pretty obvious is this concept of relativity, which is that we often measure something based upon comparing it to something else. The easy example why this doesn’t work and this is the holiday season, is sales. You go and you go to a store and you’re more likely to buy a sweater that used to be a $100, but it’s marked down to $60, than you are to buy a sweater that’s just listed at $60.
It’s because you think there is more value, because you’re “saving $40.” It used to be a $100, and I compare it to a $100, $60 is a great deal. Whereas, just $60 on its own, there’s nothing to compare it to so you don’t know how to evaluate that. It is a simple trap and it’s a simple solution. You shouldn’t ever think about what your “not spending.” You should think about what you are spending and besides is that worth it? Now maybe it’s worth it to buy a $60 sweater, so be it. Go for it. Maybe you would’ve paid a $100, so in a way like you do feel like you’re getting value.
Don’t just look at that number that at what it used to be. That is something that retailers and so many commercial interest do is they put a price out there and then that price is slashed, because that helps us compare the two.
One real-world example I like to give people, what’s an easier question to answer? What do you want for dinner tonight, or would you like chicken or fish for dinner? The first, it’s a whole world of possibility. The second, you have something to compare it to, do I like chicken or fish better? That’s an easy choice, or it’s an easy process to decide yes or no. Whereas, if it’s wide open, you can’t.
The same is if you’re looking at a sweater and it’s $60 and you’re trying to decide, “Is this worth it? I don’t know if it’s worth it to spend this money if I valued that highly or not.” That’s more difficult than would you like a $60 sweater, or a $100 dollar? Of course, I like the $60 sweater. That’s what that choice becomes. It doesn’t become, “Do you want a $60 sweater, or do you want to spend money on a sweater becomes you want $60 or a $100.” That’s really obvious trap that I think we all fall into frequently is getting suckered by sales, by stuff being marked off.
Another one that really has stuck with me and I think I’m seeing it more and more is something called the pain of paying. That is the concept and the idea that when we pay for something, it stimulates the same region of our brain as when we feel pain, physical pain. That’s important. Feeling pain has an evolutionary purpose. You put your hand on a stove and that burn teaches you not to touch the stove anymore.
We should learn from pain, but often what happens in the financial world is instead of healing that pain and being conscious of what we’re doing and learning not to do it, we just numb the pain. You stop feeling it. Financially, the way that the pain hits us is twofold; one is just being aware of the spending. When you pull a $20 bill out of your wallet and you hand it over to someone, you’re aware that you’re spending that $20.
When you use Apple Pay and just swipe it at something really briefly, you’re much less aware how much you’re spending. There are studies showing when people use credit cards as the classic example of less awareness of paying, they spend more, they tip more and they’re more likely to forget how much they spend.
I ask people all the time, “Do you use credit card?” “Yes.” How many people know at the end of the month exactly what their credit card bill will be? Almost nobody knows that. We forget how much we spend and just adds up.
An amazing thing to me, a study that I found that just floored me was that a fact, they call the credit card premium, it takes place even when you don’t actually use the credit card. If you just put out paraphernalia for a credit card, like a credit card swipe machine, a little MasterCard sticker, just putting that at the place of payment makes people spend more and more likely to forget how much you’re spending.
It’s less than using the credit card, but it still impacts. We’ve become so in-tuned with that shortcut, with that value queue, that bias that it’s just a trigger to us. It’s Pavlovian. Not being aware of that pain of paying. Not feeling that pain makes us do things that maybe we wouldn’t if we just stop to think, “Is it worth it?”
Many of your listeners I imagine, are a point in their lives when they’re probably starting to save like 401Ks, like starting to save for retirement, starting to invest more. You think about funds where you invest in like an index fund and there’s a management fee. For ease of numbers, let’s say there’s a management fee of 1% and you’ve got a million dollar portfolio, in which case you should buy both of my books, not just one.
Let’s say you got a million dollar portfolio and there’s 1% management fee. What happens is that 1%, you never see that 1% leave, right? You just get your statements at the end of the year. Somewhere there is a line that says that they took their 1% off of everything. But what of instead of it just being buried in a statement, at the end of every year, you have to write your broker a check for $10,000? You’d feel that pain and you would at least stop and say, “Oh, is it worth it to pay $10,000 for what this broker is doing or not?”
We don’t feel that pain and therefore, because we’re not aware of it and therefore, we don’t have that hand on the still burning moment of saying, “Oh, should I change or not?” That’s this pain of paying are really the way that our culture has evolved to numb that pain of paying is a huge, huge thing that we fall into and it’s something that concerns me as I look at the way technology has really advanced. I mentioned Apple Pay.
Many of these FinTech developments are “make paying easier.” Yeah, it’s easier but it’s makes paying easier. It doesn’t mean it makes your choices better. It just makes it easier for that money to flow out of your pocket. That isn’t necessarily a good thing. Again, we don’t want people to become freaks and think about every spending decision and you have decided to have your coffee every day for 5 bucks. Great, just spend it.
When you’re not aware of decisions at all and it just flows out when you’ve got Amazon technology everywhere with one-click spending and you never think about what you’re doing, that’s not financially healthy. I think what ends up happening is it’s like – it’s almost like we have an obesity crisis in finance, but no one is aware that they’re obese.
We have a spending crisis, but no one is really aware they’re doing it because we don’t feel that pain of paying. The relativity and the pain of paying are two of the early ones we talked about in the book. There’s tons of them, but those are two that I always feel like everybody deals with that and gets what we’re saying when we explain it.
[0:23:50.7] MB: I think those are both great examples. The relativity bias makes me think of a joke. My father-in-law always says, which is when his wife comes home from shopping he goes, “How much did I save today?” Instead of he say this like, “How much was everything on sale?” I’m curious, is there a component of anchoring bias embedded within that bias?
[0:24:10.3] JK: Absolutely. Everything isn’t totally clean. It’s just one force impacting another. Anchoring is very much at play when it comes to sales. Anchoring is the idea that you see the first figure that you see about a product will determine what you think it’s worth. Especially when it’s something you can’t assess.
One example is where they came out with the iPhone. Steve Jobs said this iPhone is on sale for $600. When you come out with the iPhone, how did you evaluate what an iPhone is worth? You’ve had cellphones, but all of a sudden you can do all these other things, have this functionality. You can look at pictures, you can go online, you can do amazing things, but how do you evaluate what’s the worth? We said, $600.
Then a few weeks later the price was lowered to $400. Suddenly, oh my gosh, that’s a great deal. Then the factors at play both that relativity, like it seems like a relative great deal, and the fact that we had heard $600. We think, “That’s the number associated with it.” We are drawn to. I mean, it’s called anchoring, because it’s like an anchor that you just can’t get too far from it.
When I was looking at the research here, one of the amazing things about anchoring is not just how often it comes into play, but that it is so powerful that the numbers don’t have to necessarily relate to the product you’re buying. There is a thing called arbitrary coherence. Arbitrary is the keyword here that they didn’t experiment with.
I have people write down the last two digits of their social security number completely random. Like what the numbers could do. Then they would have them bid on items that they really couldn’t assess the true value, like obscure wines or random chocolates, or new technology thing. Stuff that you didn’t know what it was worth at all.
They found that those people that had written down high two numbers like their social security ending in 89 or 94, they would bid higher on all the other products that were random, than those that had low social security numbers, like 24 or 12. It was just because they had had these high numbers primed into their head.
Now by all rights, the social security number has nothing to do with the price of a bottle of wine. But because we are creatures that seek consistency, that seek to make logic, that look for value queues, we will grasp on to whatever number, whatever anchor we can find in order to give ourselves some stability.
It’s something that you should be aware of as consumers. You walk by a store and they have a $1,000 item, a pair of sneakers for a $1,000 in the window. No one is going to buy a $1,000 sneakers. You go inside and suddenly there’s a $250 sneaker and subconsciously, you have that $1,000 crazy thing in the window that anchored you to this is a place to buy expensive sneakers and $250 doesn’t seem so bad.
Anchoring is something that works with relativity, that is everywhere. Go to buy a car and there is a car on the showroom floor that’s all suit up that’s $75,000. Suddenly spending $35, $40,000 doesn’t seem like that big a deal.
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[0:30:07.2] MB: What are the other examples that when you’re talking about fees and the pain of paying, and if you look at your brokerage statement, one of the mental models that I think is one of the most powerful around finance, money, personal finance, etc., is the power of compounding and how incredibly impactful compound interest can be over time.
One of the most interesting ways to look at fees specifically is to think about the compounded value of fees, especially percentage fees over time. That 1% that you don’t see gets compounded essentially out of what you’re doing over time. If you run the numbers, even small differences in the management fee can make a huge, huge difference over like a 20-year time horizon and what the compounded end result is.
[0:30:56.6] JK: Yeah. That’s one way that you might better think about looking at the – a fee is like a – it’s like a negative compound interest. I’m not sureif that’s quite the right term. But yeah, you lose that $10,000 and it’s not just, “Oh, is it worth $10,000?” The question is is it worth $10,000 this year? Well, next year is actually $11,000, which the following year is $12,100. Again, two component for some off the top of my head.
Yeah, is that value worth it? I mean, it’s staggering and there are people that have developed charts to show what you lose. That’s not to say the choice is, “Okay, have something with no management fees, or the lowest management fees. Because that isn’t always the best choice. It’s just be aware. What often happens is that we obsess over these sorts of details for small financial decisions, but not large ones.
We go to a supermarket and we can’t decide if we should get the organic tomatoes that are 35 cents more than the regular tomatoes. We sit there and we weigh and we think about whether or not organic is really good for us. What is our health [inaudible 0:32:01.8] and all the stuff. Then we go and we buy a house, or we remodel a home for $200,000 and someone comes and says, “Hey, for an extra $5,000 you can have something Italian. You’re going to have some marble thing.”
You’re like, “Okay, whatever. It’s just $5,000. Who cares?” All the tomato saving in the world is not going to add up to that $5,000, but oftentimes it’s the little ones we obsess about, not the big ones. We would suggest that you obsess about the big decisions and let the little ones go. That we reversed the mindset.
I remember my own personal life example is I went on a family vacation. I can’t remember. It was a long time ago, but we went to Capri, the Island of Capri. Which is a super expensive island, and I’m sure it was a real expensive vacation. It was a special trip. I don’t know exactly what it cost, because I was along for the ride as a little kid back when this happened.
Let’s say the trip cost $15,000. I don’t know if that’s what we know. Say that that’s the figure. I can remember my parents arguing with a cab driver over like $2 of a tip. Spending 20 minutes arguing about this. I didn’t think about it at the time, but in retrospect it’s like, “We just rode off. Hey, let’s spend 10 grand, but we’re going waste our time arguing over $2.” I think there are deeper psychological reasons and I don’t want to get too much on the couch here and talk about my mother and my feelings towards my family. From a perspective of rationality and money and what’s the standard of scientifically-backed approach that wasn’t the wisest choice at which battle to pick.
[0:33:35.6] MB: For someone listening, how can they pick the bigger battles when they’re facing that decision?
[0:33:42.8] JK: I think it’s up to them to decide whether the less frequent to special spending times, and by special I mean you can just categorize it as large. Buying a house, buying a car, starting a new job and signing up for your benefits and your 401K withdrawals. Think about those things that really have a significant amount of money involved with it, because those are the ones, it’s almost like the compound interest deal. Those are the ones where the little decisions will mean a lot.
Don’t worry about that other stuff. Now that’s not to say you should never think, “Should I spend $5 on a latte?” Our advice would be, they’re spending that is infrequent and small. You go to buy a pack of gum once in a while. Don’t worry. Don’t jest about that.
Then they’re spending that is relatively small, but it’s frequent. That’s a habit. You decide to spend $5 on a coffee, or you just decide every night I’m going out to my favorite restaurant and bar and I’m spending a $150. Don’t think about that every time, but once in a while, once every year, once every six months, look back at all that spending and decide whether or not it’s worth it and how you might adjust that habit. Then it becomes a habit again, but do consider it once in a while.
Then there is the big spending things. For those, because you have so much of impact, because the result of that choice can impact your ability to do all those other smaller choices and have the money to have a $100 dinner every week, it’s worth taking some time and thinking about what are the real forces at play here and what really matters to me and ultimately, what are the opportunity cost as your listeners move forward in their lives and get to a point where I am, like I have two young kids and we have a nice house. It’s a small house and it’s like, “Oh, we could spend more to get a bigger house. But does that mean that we can’t take some cool real experience vacations that might enhance our lives more than just having more room?”
It’s a difficult choice, but it’s something to think about and it’s a way. Oftentimes, with that example people are just like, “Oh, I got to get the bigger house.” They don’t think about what they’re giving up. Our advice would be at those moments, that’s when you do think about it. Don’t worry about what you’re giving up when you’re buying that $1.50 piece of gum, but do one it’s a $150,000 more of a house or so.
[0:35:57.2] MB: I think this also comes out of being in the financial world, but it’s definitely not a perfect model, but the yardstick that I typically use to think about the opportunity cost of spending, and again more for big picture spending items, like you’re talking about. It’s to think about sort of, I just one alternative and that’s basically if I were to invest this at a – let’s say between a 6% and 8% compounded annual return for 20 years, what’s a better use of these funds? Just spend it on this, or is it just to invest it?
That’s definitely not a perfect proxy, but it’s a good enough proxy in many ways to just think about, “Okay, what’s a better use of this capital? Is it to spend it on a new sofa and renovating the kitchen? Or is it to spend it on investing this money, so that I can have savings and build some wealth over time?”
[0:36:45.7] JK: Right. It’s great that you’re able to think about that, because that’s a difficult way. It’s challenging for us to think about the future like that. We have a chapter on the book all about self-control and that itself could be a whole book. The real challenge of self-control particularly when it comes to savings and investing for retirement and while we have such retirement prices is that people have a hard time thinking about the future selves.
Even though it’s me when I’m 65, 75, I’m not connected to that emotionally as much as I am to me right now. To think about my needs later, it’s really hard to connect and to feel obliged. We always think of ourselves as being better in the future. I may not save now, but in a couple of years I’ll start saving. You keep making those promises to yourself.
Or you think everything will be fine. “I’ll be fine by the time I’m 70.” You don’t think about all the things you need and part of that is because we’re not emotionally connected, and when it comes to saving it’s also because it’s so hard to figure out. In retirement, you have to forget how long are you going to work? How much money will you have saved? How long are you going to live after you stop working? What’s your cost of living going to be? What are your health issues going to be? What are your kids going to be doing? All these things that are just totally unpredictable.
In some ways it’s easier to not think about all that hard stuff. At the end of the day, a lot of what we humans want to do is we want to go the path of least resistance. We want the easy solution, the quick solution. That’s understandable. That’s human nature. We don’t suggest you try to change human nature. You just are aware of it and every now and then you choose the hard path.
Also ever now and then, you create systems to let the easy path happen. Places that have speaking of retirement that have made it so that you start a job and the default option is that you are putting aside money for retirement, as opposed to you have to select that. You have to opt out instead of opting in, because you’re automatically in. That the savings right is skyrocket. I mean, it’s tremendously different, just because the easy way is just to let the default ride.
When that default is savings, people do it more. You can apply that to so many things. I mention having two different account, like you can go one time to your HR department and say, “You know what? Put $200 of every check combined into this separate account.” You put it in an account and it’s there and you never have to think about it again. You can set up default systems, so that you don’t have to think about it every time. That’s what we would advise you to try to do as much as possible when you recognize your own financial failing.
[0:39:16.6] MB: Let’s dig a little bit deeper into self-control since we started talking about that. What were some of the lessons that you saw from the work that you did around the book?
[0:39:24.9] JK: That self-control is really hard. That we looked at different situations and it ultimately is about emotion. I’ll take a mini-detour to say that when it comes to the world of finance and particularly, let’s be honest comes to men, I’m thinking about world of finance. We don’t think emotion plays in. We think it’s just a number game.
Really emotion does play in it. Emotions are things like being connected to the desire of now to falling for the temptation of now. To falling for like I want this motorcycle, I want this sound system, I want these things that I can feel now as opposed to that stuff that’s way in the distant future that you’re not emotionally connected to.
I mean, an easy study, or example is studies that show that in a state of arousal, people will do totally irrational, unethical, immoral things, because they are emotionally compromised. One lesson, or one sort of practical piece of advice is to try to insulate ourselves from those challenging emotions, to insulate ourselves from the difficulty of self-control.
There are thing that we call Ulysses Contact. Called Ulysses Contract, because in the story of Ulysses, he wanted to hear the sound of the sirens, but he knew that you go by the sirens and all these ships crash against the rock, because they were so tempting. He had himself tied to the mast and he had his crew put stuff in their ears so they couldn’t hear the sirens and he told them, “No matter what I say, don’t let me tell you to go sail closer to the sound.”
That worked. They got past the sirens. He heard the songs and it was great and not on Spotify. He didn’t crash. You can setup systems for yourself to do the same thing and make it so that you can’t take it out, that you can’t misspend your money, that you can’t fall victim to your feelings of self-control.
In some ways, that tax penalty that comes when you setup an IRA and you are penalized, I think it’s like 10,000 or maybe it’s a percentage. I’m not sure. You’re penalized if you take early withdrawal. That’s an essence, a Ulysses contract and you’re getting punished for not sticking with the promise you’ve made to yourself.
Being aware of that, being aware that you may have to lock yourself into the good behavior can be a way to overcome self-control. There are other tricks, something we call reward substation, which is if you’re having trouble doing something because it doesn’t feel good, that you find an alternative, a way to reward yourself in a way that does feel good.
Obviously, you don’t want to undermine the benefits, like if you’re having trouble exercising, don’t reward yourself with a milkshake. That’s silly, but if you’re having trouble exercising, reward yourself with an hour of Netflix, or reward yourself with something else that provides you pleasure, so that pushing through that difficult thing that you don’t want to do becomes about achieving a goal that you want, not about achieving whatever the goal is of exercise, of losing weight, of better health and all that if you don’t connect to it.
[0:42:18.9] MB: In many ways, you know that makes me think of essentially using decision architecture to create self-control for yourself similar to everything about weight loss or something like that. Taking all these snacks out of your house, so that there’s nothing to snack on. Or putting your gym clothes next to the bed ready to go, so that you are – make it easier for yourself to go to the gym the next morning.
[0:42:41.0] JK: It’s exactly that. It’s recognizing and being comfortable admitting that we have human failings, that we’re not like perfect machines and saying, “Okay, I’m not a perfect dude that’s just going to get up and work out and never eat candy. I have to make it hard for myself.” Studies regarding like people trying to have better diabetic outcome. That literally show putting a bowl of healthy snacks, celery, carrots, grapes, whatever it is, put in a bowl of healthy snacks in the front of the fridge, or on the counter has tremendous impact versus, like having it be that candy.
You walk through a lot of offices. They have administrative cubicles in the middle and people have little candy. It’s great. You go and you grab some candy and you chat with that person and it’s a great relationship. Because it’s so easy, you just grab it. If you do hide the bad snacks and we’re not saying don’t ever have a snack, you’ll be a miserable person if you never eat a piece of chocolate. If you hide them, you’re less likely to eat them. That’s admitting that it’s a challenge.
I don’t have the data on this. I haven’t seen it, but I know that guys, especially guys who consider themselves high achievers, they don’t want to admit their failings. That is actually the best thing you can do and in some ways, the strength – it’s a sign of a really strong person is recognizing those areas that you’re not also met and seeking to improve them. That’s what we can do when we see what our failings are, whether it’s we eat too much snacks, or we don’t save enough money, or we buy too many thousand dollar shoes.
[0:44:11.9] MB: I mean, that is probably the single most recurrent theme on the podcast, the idea that self-awareness is really the cornerstone of improvement, making better decisions and understanding what needs to be done to get where you want to get and whether it’s saving money, whether it’s your own personal health, whether it’s achieving your goals, you have to start with a really honest assessment of who you are, where you skills are today and once you are capable of doing that, you can really move past any obstacles.
If you get trapped – caught in the trapped of self-sabotage, it becomes really, really hard to – and lack of self-awareness becomes really hard to ever move beyond the same thing that keeps stopping you over and over again.
[0:44:54.8] JK: Absolutely. I will say I’ve been speaking more to groups that are involved in the investment community, like fund managers and people in New York and London, who are super high-achieving alpha dog guys, largely men who – top of the finance game. A world where you think is very just need jerk reaction opposed to things that sounds what I call woo-woo, soft science like self-awareness and mindset.
I have been really pleasantly surprised by how receptive they become. I don’t have the data to say they weren’t receptive 15 years ago, but I feel like that they probably weren’t. I mean, that’s not hard science. Regardless, I’ve been happy to see how they have embraced that, even these highest achievers in a field that you think are very closed off to emotions playing a role. They’re very open to it.
I tell people, like if these super alpha dogs get it, the rest of us can certainly get it. You see in sports too, like Tom Brady is an alpha dog, but he is very like, “It’s about your mind-body set. It’s about your health, mental health, your physical health, and having all those pieces together.” I’m really pleased that that’s extending to all different practices in all different fields.
[0:46:13.4] MB: One other bias that you wrote about that I want to touch on is fairness and effort. Tell me a little bit about how we sometimes think erroneously about that.
[0:46:22.5] JK: Sure, as I said before what happens is it’s hard to assess the value of something in the financial realm and other realms is what’s it worth to pay. We go for these shortcuts. One shortcut that we take is we assess the effort it took to produce something. People are more willing to pay for a locksmith that fumbles around and breaks them stuff and have to run back to his shop 10 times, it takes an hour to open your door.
Then locksmith who comes and opens it in a minute, not because it looks like it was a lot more effort, that it was a lot more fair to pay for all that work. When really what should matter is what’s the value to you of getting into your house? It shouldn’t matter how long it take. In fact, that first – the second person who spend just one minute is more valuable, because in the other hand that other locksmith you’re paying for his incompetence.
We don’t know how to asses value. What’s the value of getting into your home? What is that worth financially? Unless, you’re working hourly and the tab is running, or the meter is running in your house, there’s no way to know what that’s worth. We fall for effort.
It’s something that happens to us outside of the locksmith. People will pay more for data recovery if a technician takes a week to fix and save your computer data than if they take an hour. Consultants. Large firms hire like a McKenzie or an outside consultant. They show up with a 600-slide PowerPoint presentation explaining everything they’ve done. The food was served on the flight out to Columbus that week to study with you. All you care about is the final slide and the final recommendation, but they had this long thing, because it shows how hard they worked and then they throw you a check for 250 grand for your company and you sign off on it, because it’s hard to assess the value of what they’ve done. You look at the effort of whether or not it’s fair.
It’s a real challenge, because people can take advantage of that. You might say, McKenzie takes advantage of the fact that we don’t know how to assess their value. There are times and that’s good and times when that’s a challenge. There is a story, I think it’s just a fable, but it’s illustrative that a woman saw Pablo Picasso in a park and walked up to Pablo Picasso and said, “Will you paint my portrait?” He said, “Sure.” He looked at her for a minute, then with a single brush stroke, he painted a perfect image of her and gave it to her and she said, “Oh, my God. This is beautiful. You captured everything about me. I don’t know how you possibly did this. How much do I owe you?”
He said, “$5,000.” She said, “What? That’s totally unfair. It took you no effort. It only took you a minute.” He said, “No, it took me a lifetime plus a minute.” She judging just on that effort couldn’t assess the value of his whole lifetime of knowledge. It’s those knowledge economy, the people that are professional writers, but they only take an hour to do something. She is paying for that hour, you’re not really paying them what the value is. We oftentimes will underestimate value, at the same time will overestimate, because we see the effort.
Restaurants are great at playing into this. You get a menu item at a fancy restaurant and it describes everything about the food, like where the spinach was grown, the meat, what the name of the cow was and how often it was petted by aboriginal kids, all these things and how far it traveled across the land and how many people lost its fee bringing this piece of meat to you. It’s really just a cheeseburger, and you’ll pay $35 for it, because it seems like it was worth the effort. A reliance on what we can see is a challenge.
It’s been interesting to me to see how companies become more aware of that, not just to be that manipulative person, but also to proactively – I mean, the City of Boston had a real problem, because there are tons of potholes in the winter. Let’s say there are a 10,000 potholes around the City of Boston. If you live in Boston, you open your door, you see three potholes on your street, you call the city, you never see them fix it. You’re going to think they’re doing nothing.
The City of Boston, they created basically a website that show the 10,000 potholes and also showed which ones they fixed that da. If you went there and saw, “Oh, they fixed 25 potholes today. It wasn’t the one on my street, but they’re clearly working.” Suddenly, you see their effort. Suddenly you appreciate the value of took enough steps, like your tax dollars and your government and all that. The point is they are showing me effort.
Oftentimes, companies that are being undervalued, or people that are being undervalued could show their effort more. The trick is of course when to know as a consumer are they showing a real effort that we should value, or are they showing effort in a fake attempt to inflate their worth?
[0:50:49.5] MB: I love that Picasso story, and it’s funny. I was actually going to give that example, but you beat me to it. It’s one of my favorite stories and I commonly share that with people. I’m curious, we talked a little bit about this and as we’re wrapping up, what are some practical pieces of advice, or maybe a piece of homework to give to somebody listening to this, that they could start with as a beginning step towards understanding their own biases and how that impacts their thinking specifically within the realm of money?
[0:51:19.8] JK: Well, there are a ton of things you can do. Before giving a piece of advice, it applies to everyone. The suggestion would be to look at which bias, or which value queue really resonates with something you do, and then sort of address that. One common thing you can do is if you are – the pain of paying I mentioned is something that’s very common and that a lot of people suffer with is start paying cash a little bit more.
It’s a challenge in our economy to try to be all cash. Many places don’t even take it anymore, but start paying cash a little more frequently and see if you make different choices. Similarly, you could look at your monthly credit card bill, or even get a buddy, a spending buddy and I don’t suggest you use a spell, so if a neighbor listeners are married, but get a spending buddy and go through your monthly credit card and just explain every item on there and justify it and say what it was.
Then you’ll find just having gone through that process when you start spending again and you have your next credit card bill, you either do it again with a spending buddy, or just be aware of that. You’ll be more conscious of what each item is that you spent. Talked about the idea of having a different account for discretionary spending and you can do that. If you have the ability, you can try using a prepaid debit cards for weekly spending.
If you really are spending too much money on a week-to-week basis, like you go out and you spend a lot, set up as give yourself a prepaid debit card of however much money you think you can spend each week and give it to yourself on Monday. Don’t give it on Friday, because Friday you’ll go out on the weekend and spend it all. Give it to yourself on Monday and that’s all you can spend.
Stuff like this is pretty restrictive and I wouldn’t suggest going through your life like this, but you do it two or three or five times and you start to recognize your own patterns and you start to get into better habits. Then you can go back to stuff that’s maybe a little less cumbersome. To whatever extent possible, don’t have things on autopay. Don’t just use the latest technology, because it’s easier to pay. Amazon developed a store recently where you just walk in, you never go to a checkout counter, you walk in, you put stuff in your bag and a little chip reader, scanner somehow connects your credit card and pays. You walk in, you walk out.
That’s so much “easier” to shop. That’s not good for your spending. Don’t leap to the first new technology thinking it’s great, without thinking about what it really does. Ultimately, the thing is just to stop and think every now I then, I mentioned the different type of spending, the small spending, the habit spending and the big spending. Every now and then just stop and think about those habits, stop and think about the big spending, and just take a beat and think about opportunity cost, think about what else you could do. You’ll find that that adjust your mind and adjust your mindset and adjust the way that you value money in the future.
[0:54:07.9] MB: Jeff, where can listeners find you and your books online?
[0:54:12.0] JK: JeffKreisler, K-R-E-I-S-L-E-R.com. My Twitter is JeffKreisler. I also have a behavioral science Twitter JeffKreislerbs and the [inaudible 0:54:21.8] to there. Starting in 2018, I’ll be the editor of a new website called peoplescience.com, which is all applied behavioral science. Certainly just going to jeffkreisler and following down that rabbit hole.
Plus I speak for groups all over the nation, colleges and companies. I’m often near you wherever you are. Folks coming out around the world, so I’m hoping to get abroad on 2018. Jeff Kreisler is a good start. Yeah, that’s it.
[0:54:51.5] MB: Well, Jeff thank you so much for coming on the show sharing all of the wisdom that you have about personal finance, biases and how we often missthink money.
[0:54:59.8] JK: Thanks so much for having me. It’s a great podcast. I hope you have the greatest success.
[0:55:04.2] MB: Thank you so much for listening to the Science of Success. We created this show to help you our listeners master evidence-based growth. I love hearing from listeners. If you want to reach out, share your story, or just say hi, shoot me an e-mail. My e-mail is firstname.lastname@example.org. That’s M-A-T-T@successpodcast.com. I’d love to hear from you and I read and respond to every single listener e-mail.
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