The Upside of Irrationality, The Unexpected Benefits of Defying Logic at Work and at Home, is the sequel to Dan Ariely’s Predictably Irrational, which I discussed in June.

I have to say, I enjoyed Dan’s first book enough that I had pretty high hopes for the sequel, and I was not disappointed. Similar to Predictably Irrational, we are walked through a series of experiments that offer a view as to how we approach certain decisions and how we are motivated.

One experiment we are offered is to try to understand the connection between payment and performance. The assumption of “pay for performance” may be more theory than reality it would seem, as one experiment which upped the ante on some simple tasks to a level of three weeks pay for only an hour’s work showed that the pressure of higher potential earnings actually decreased performance. As budgets for academic studies of this nature tend to be limited, this experiment was conducted in India, where the wages were lower than in the US.

In another example, we are introduced to the demotivation that follows work that’s discarded. For the experiment, people are paid to assemble a lego structure, one after the next. The demotivation came as for one group of builders, their structure was taken apart right in front of them. For those who saw their creation kept in tact, they worked longer and were happier doing so. This may seem ridiculous, but I’ve witnessed real life examples. Engineers whose designs were completed, on time, under budget, fully functional, yet, for whatever reason, found their project canceled. Such engineers don’t last long at companies that don’t value their work.

These two examples I offered are also discussed in an interview with NPR’s Robert Siegel in his interview with Dan Ariely, Exploring The ‘Upside Of Irrationality‘. You can listen to the interview or read the transcript, as you wish.

I’d also like to mention that Dan Ariely has a blog in which he stays pretty active, conducts experiments, and offers links to his videos. A great site to explore the topics introduced by these books.

FTC disclaimer – I borrowed this book from my library and was not compensated for this article.

Joe

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written by JOE \\ tags: behavior, book review, dan ariely, market norm, predictably irrational

Predictably Irrational, The Hidden Forces That Shape Our Decisions, was published in 2008, but somehow just came to my attention recently. As with any good book, I’m sorry I hadn’t heard of it sooner, but sometimes the forces that be come together in my favor, as the author Dan Ariely has written a sequel titled The Upside of Irrationality which by coincidence, is due in stores today.

If I haven’t made it clear, I found this book to be a fascinating read. In a genre similar to Freakonomics, Dan offers a series of anecdotes and experiments which he weaves into his central premise, that people act in an irrational,  yet predictable way. I could share a number of those with you, and suggest you read the book for a more thorough analysis, but instead, allow me to share with you examples from my own life that reflect the exact phenomenon Dan described.

A few weeks back, I found myself in a store called Lush, purveyors of bath and body items and home of the $7.95 for 3.5oz bar of soap. Yes, that’s $36.34 per pound, and about 25 times my benchmark price for soap spending. This was with my 11 year old daughter, and the total, $46, was a month’s allowance or about 8 hours of time spent babysitting. The cashier looks at us and says “you get a free bar with a $50 purchase.” So, like an idiot, I tell her to grab two bars she’d like and I paid the difference. Spending $7.95 for two bars of soap made no sense, really, but as Dan described, a similar situation took place when Amazon started offering free shipping for orders over $25. You buy a $19.95 book, and see that just $5.05 more will get you free shipping, so of course, you buy another book, one you may not have really wanted or could have gotten from the library.

Next, my daughter’s aunt and grandmother had given her Starbucks gift cards during our last visit. I then observed how she used the cards over the next few weeks, treating friends to drinks, or asking if I wanted to go, offering to pick up the tab. She’s generous by nature, but it was clear to me that she was more so when it was not with her own cash. Holding a gift card in her hand made a difference in how she treated the $50 of value locked in that plastic. Dan shared similar stories of controlled experiments determining how people treat a gift card or credit card differently than cash.

Last, Dan offers an interesting discussion of social norms vs market norms. You wouldn’t approach your mother-in-law after a fine Thanksgiving meal and offer her the perceived value of the meal, that’s not quite socially acceptable. Yet, there are times when the social and business collide. I’ll offer a recent example from my family. Last year, our daughter expressed an interest in babysitting/mother’s helping. At 10, we felt she was mature enough to help out a mom so she could study for an upcoming exam while my daughter watched her little one in the next room. Worked out great. Skip ahead to this year. A mom who happens to be a close friend of ours drops her 4 year old off and we all kind of hang around the house. When she picked her up, somehow my wife tells her to keep her money. Of course, my daughter waits until our guests are gone and asks what just happened. So my wife pays her, and in turn, I ask what just happened. How did I just get stuck paying my own daughter to watch someone else’s child and more important, how do we spell out when payment is expected (by my daughter)?

After reading Predictably Irrational, I gained new insight into situations that I ran into as well as a different perspective on some just passed. I hope my own stories helped illustrate just how easily the lessons of this book can be applied you own life. In some cases, you might just understand better how you just paid $8 for a dollar’s worth of soap, other times, it might help you change the direction you might take in the decision process.

If you read it, please share your own thoughts on this great book. Are you or your friends predictably irrational too?

Joe

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written by JOE \\ tags: behavior, book review, market norm, predictably irrational

Charles Dickens’ David Copperfield was first published in 1908*, and this quote is from that book:

I don’t know if Dr Thomas Stanley, author of Stop Acting Rich, is aware of this quote, but after read his latest book, I suspect he’d agree wholeheartedly with the sentiment.

If you are looking for investment advice, this is not the book for you. Dr Stanley does not offer stock tips or advice on retirement planning. He has spent the better part of the last three decades studying the habits and writing about millionaires. His conclusion is that “most people will never earn enough money to become wealthy and to be hyperconsumers at the same time.” Stop Acting Rich offers examples of how the millionaires Dr Stanley observed lived, and teaches us how to make the distinction between the Income Statement Affluent (IA) and the Balance Sheet Affluent (BA). We see how it’s easy for a doctor earning $250,000/yr to live a lifestyle that has every dollar spent and maybe then some, yet a teacher or engineer whose family income may be ‘just’ in the mid-$100K but living beneath their means, managing to save their way to wealth.

Through the book we are shown brand examples, Timex vs Rolex for the choice of watches for instance. Real millionaires tend to not waste their money on the thousand dollar watches, preferring Seiko or Timex. As a fan of statistics and data, I appreciated the depth of analysis showing the correlation between real wealth and living the glittering rich life with no assets to show for it. In fact, it’s often tough to tell just by looks what someone’s balance sheet looks like. Most rich folk do not own vacation homes, boats, or planes. I recall an interview with Warren Buffet, who trades off year to year for the spot of richest man in the US. Mr Buffet was asked about boats, and he said that he had no interest in them, that when you’re Warren Buffet, you get invited on other people’s boats enough that you can avoid the hassle of maintaining one. He said that he was happy to spend time with his friends in his living room watching the 46 inch plasma TV and eating sandwiches. No champagne, no caviar.

A fair amount of writing is given to the discussion of Grey Goose Vodka and how its purchase correlates to glittering rich. Grey Goose buyers tend to drive prestige makes of cars, wear Rolex watches, drink other high end spirits, and spend more dining out. So as I was reading about this, I checked out my pantry (I don’t have a liquor cabinet) and sure enough, Grey Goose. Last I recalled, we had a bottle of Absolut or Smirnoff in there. I asked my wife if someone brought it over and she told me that the last time her sister was over she asked her what her preferred vodka was. Two thoughts came to mind as I heard this. First, for the bottle that will likely last over a year, $15 or $50 won’t ruin our budget. Second, given the details about how there’s little difference in vodka as it’s known for its lack of taste, my dear sister in law fell for the advertising pitch, and my dear wife, trying to make her sister feel welcome in our home, threw away an extra $20 or $30 to do so.

I enjoyed this book as much as I did prior books in Dr Stanley’s Millionaire series. It helped validate my own choices in cars (Toyota, built in the USA, by the way) watches (Timex) and other purchasing decisions that help keep my family on a path toward a stronger balance sheet. If you’d like to understand what the rich really buy, and wear, and where they go to eat, take some time and read this book, you’ll be surprised.

Joe

*Note: One of my faithful readers, Elle, alerted me that the date was 1850. Thanks Elle, I fact check my finance data a bit better than this. I promise.

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written by JOE \\ tags: book review, Frugal, millionaire, rich, richistan, wealthy

Give Me Get Me Buy Me is the title of Donna Corwin’s recent book. Subtitled Preventing or Reversing Entitlement in Your Child’s Attitude, it proved itself to be an interesting read. I’ll first offer the mandated FTC disclosure, I received a copy of the book in exchange for this review through the kind people at TLC book tours. I am the father of an 11 year old girl and when I read the description, I felt this book fit within my personal goals as well as the scope of my blog.

On one hand, this book is brief, 9 chapters over 180 pages in a trade paperback. On the other hand, the author wastes no time tackling the issue at hand, keeping the anecdotes short, as a way of illustrating a given scenario, and offering a path to solving the particular behavioral issue being addressed.

The first  chapter discusses the external pressures which begin innocently enough but result in our creating the sense of entitlement in our children. We want ‘the best’ for our children, don’t we? Once we get beyond the safety issues (yes, the stroller and crib need to be sturdy and safe) we move toward the designer realm and once the train has left that station, we don’t know how to stop. One only need to Google “designer diaper bags“  to understand this point. There is a combination of pressure from the media and from our peers to focus on possessions and to strive for bigger and better status symbols. Advertisers have made an art of convincing us that we need and in fact, deserve, the latest gizmo, larger, flatter TV, bigger house, etc. Our children have become aware of the cars their friends’ parents drive, the size of their houses, the vacations they take. All of this lends itself to a ‘keeping up with the Joneses’ for both parent and child. When this is identified and understood, we can begin to address it.

We move along to better understand how our own views on money, possessions, and instant gratification originated and are passed down to our children. Maybe when we grew up we didn’t have all the things we wanted and are now overcompensating by trying to not have our children want for anything. Perhaps we were spoiled, and having everything handed to us, continue that mentality for the next generation. The author makes no claim to any background in psychology, but from reading this book, this section especially, her understanding of human nature really come through.

Through the rest of the book, the author offers practical, concrete advice to move our child away from the ‘give me’ attitude to one that’s less selfish, less entitled. For the younger child, she suggests a point system, rewarding positive behaviors and actions, while removing points for improper behavior.  For older children, strategies include regular family meetings to keep the dialog going and to set expectations. I was pleased to find an abundance of advice that I plan to adopt in my own attempts at being a better father.

One suggestion I’d offer, perhaps one which the author took for granted, is that unless you are a single parent, both parents need to read this book, together if possible. Any suggestions you’d implement to induce change within the family dynamic should really be a two parent effort. If for no other reason, children should see their parents on the same page for the major issues. It would be quite the failure in communication if the child discovers that mom is the strict “we can’t afford that” parent, yet dad pulls his wallet out at every request (or vice versa). My next step is to leave my copy on my wife’s night table and encourage her to discuss it with me chapter by chapter.

Giveaway: The publisher has offered to share a free copy with my readers. I will hold a random drawing of those who offer a comment to this post. The drawing will be held the weekend of March 27-28. Good luck.

Joe

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written by JOE \\ tags: book review, child rearing, entitlement, family

With so many people in the world, it should come as no surprise when an author writes a book on a topic that I’ve been thinking about for some time. It started with a scene in the 1984 Robin Williams film Moscow on the Hudson where he’s in a supermarket and is overwhelmed by the choices of coffee available for purchase. Fortunately, I’ve never passed out in the coffee aisle, but over the years I’ve felt myself a bit paralyzed by the shear number of choices that we have to make on a daily basis, the supermarket among them.

I took this photo a few months back with the thought of writing about this, and then came across The Paradox of Choice by Barry Schwartz which made for an interesting read. The author who I suspect is a bit older than I am (I’m bad at looking at a picture and guessing one’s age, I am 47 by the way) starts with an anecdote about the purchase of a pair of blue jeans. He knows he’s a 32×28 (waist/inseam) but is bombarded with choices, slim fit, easy fit, relaxed, baggy, or extra baggy. Does he like stonewashed, acid washed, or distressed? Zipper or button fly? When I was a teen, I frequented a jeans store that hemmed for $2. So to get it just right, I’d buy the correct waist, but on the long side, wear them and wash them a few times, then go back for my $2 hemming. Barry remarks that what should have been a simple purchase somehow turned into nearly a day long process.

In this country a lack of choice would be unimaginable, yet the number of choices we have with nearly every purchase we make is not liberating but debilitating. We are offered examples of studies that confirmed the phenomenon of too many choices. In a number of different settings, potential customers are offered a few choices of a sample food item, and others, over a dozen. In every case, those offered fewer choices, made a decision and more frequently a purchase than the group that was overwhelmed with items.

I think that Costco hit the jackpot by recognizing this years ago. On my last visit to Costco I found myself chatting with another customer about how cheap the huge shrimp were, and the store manager happened to be within earshot. I asked him if he had heard of this book (he hadn’t) and told he that I now understood Costco’s success. It was the lack of too many choices. Almost no items are available in different sizes, except of course for clothing, and most items aren’t offered by more than 2 or three brands. This fills one’s cart with little in the way of time wasting decisions.

Further along in the book we are introduced to the concept of Maximizer vs Satisficer. The first group tends to try to make sure that every purchase decision is absolutely the best, or as near to the best as possible. The second group, however, will choose something that’s good enough and live with that decision. In my own life, I tend toward being a satisficer. When in my early 40′s, I had the unique situation of buying my first car (having had company issued cars ever since graduating college) I made a very fast decision. It so happened that my best friend and two of my coworkers all had the same make and model car. I asked their opinions and all three were happy with their choice. So, I made the decision to go with that car and spared myself the time and anxiety I hear so many people endure on a car purchase. A few hours on line and I was able to get an idea of dealer cost vs MSRP, to go in and just buy the car.

To be totally honest here, there were times and may still be the occasional time when I tend toward maximizing. In high school I scored a 770 on the math SATs (for those who do not know, this is an exam graded on a scale off 200-800 required by most colleges as part of the admission process) and was very upset not to have a perfect score. My classmates actually sympathized knowing that this was my goal and consoled me, even though it was the highest score in my year. Of course I studied more, actually ‘drilled’ is the right word as I prepped to take it again. The second time I aced it, got the 800.

Years ago, the company I worked for had 4 fund choices, Bond fund, Balanced, Large Cap, company Stock. Of course those choices don’t seem adequate, and the employees spoke out. Three years after bumping the choices to 12, 95% of the total plan value remained in the original 4 funds, and participation in the 401(k) actually fell instead of rising. This situation is repeated in the book as yet another example of more choice really not helping the consumer, only confusing them.

I hope you enjoyed this discussion. It wasn’t a random book I chose to read, as the topic itself had haunted me for years, and I had planned to share my thought on this topic before I was made aware of the book. I enjoyed this book and recommend it if you find the idea interesting.

Joe

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written by JOE \\ tags: book review, choices, decisions, paradox of choice, shopping

I recently read Your Money Ratios, 8 Simple Tools for Financial Security, by Charles Farrell.

The Disclaimer
I was asked to review this book in exchange for a copy, and chance to give a copy to one of my readers. This didn’t influence my thoughts on this book which are genuine and my own. I did however pick up this book with a bias. Charlie Farrell wrote an article on CBS Market Watch titled Don’t Rush Into Roth IRA Conversions. With all of the cheerleading surrounding the Roth IRA, this article echoed the warning that I’ve written about myself. I consider it serendipity to have read this article shortly before I began reading Your Money Ratios.

The Ratios
Capital to Income – Very simply, your current saved assets compared to your current annual income
Savings Ratio – The percent of your income you need to save each year
Mortgage to Income Ratio – How large your mortgage is compared to income
Education Debt – Amount owed compared to income
Investments – percent ratio of stocks and bonds
Disability Insurance – The monthly income you’d get as a percentage of current income
Life insurance – The number of years salary of the policy
Long Term Care Insurance – Insurance for this care, kicking in at age 55

Financial authors run a risk, too much detail and a reader will lose interest, too little, and the message may not get across. In this case, I think Charles Farrell did an excellent job straddling that line, staying on point, and keeping my attention throughout the book. To be honest, he had me at “when it comes to your money, and your future, you want to be Mr. Spock, not James T. Kirk.”

Charles offers a step by step process, so the reader isn’t left on his own to fill in the blanks. Starting with an 80% of income replacement target (where did that come from? Well, if you’re saving 12% and another 7.65% goes to payroll witholdings, you’re living on 80% now) we are walked through the percent of income to save at different ages and how to invest this savings in order to reach the target. I’d point out that the assumption is for Social Security to provide 20% of one’s working income. If you object, thinking this is too high, my Social Security Benefits post from last May should put your mind at ease. The benefit is regressive so a $90K earner may get $27K/yr (30%) but a $50K earner will get nearly $21K (42%) so Charles’ numbers are actually conservative.

Frequent reference is made to his Unifying Theory of Personal Finance:
“All decisions you make should help move you from being a laborer to being a capitalist”

This is not a poke at people who work with their hands. It’s an encouragement to save enough wealth so your money’s return has a significant impact. Consider, the first few years of savings, the interest or growth on your account doesn’t feel like much. But once your savings are equal to a year’s pay, a 10% increase is nearly as much as the 12% you add to the account, and it’s grown by 22% in that year.

I think that this book would benefit people at any stage of their life (hmm, maybe the blurb on the cover stating “for every stage of life” really sunk in). Someone just starting out can get a good understanding of how to start on a good financial path, knowing in their 20′s what their goal is 30 some years hence. An older reader can get an understanding of whether or not they’re on target and perhaps better calculate what their goals are. More than anything, the writing style and tone of the book was something that put me at ease. We are offered targets but not made to fell that these number are rigid, carved in stone. Even the replace ratios are offered as targets, 80% at age 65, but a fallback position of 70% at age 65 or 70 is also discussed if one either can’t reach the 80%/65 or doesn’t need that sum.

There is also an invitation to go to Your Money Ratios website and check out how you rate, your Money Mass Index.

I’d do a disservice to not be clear about what you won’t find in this book. The investing method is simple, a mix of stocks and bonds with a brief reference to diversifying with international stocks. Some might object that this section might have been expanded upon. For a comprehensive overview of asset, I’d suggest a book such as William Bernstein’s The Intelligent Asset Allocator. From a practical standpoint, the mix of stocks and bonds suggested will have a far greater impact than the further diversification within the groups is likely to provide. In the end, an enjoyable and educational read.

The Giveaway
To help promote the book, the publisher has offered me a copy to give away to one lucky reader. If you wish to be entered for the drawing please sign up for my RSS email subscription and I will chose a winner on January 31. Yes, you can unsubscribe after the drawing, but you wouldn’t want to, right? (Note – this giveaway is valid only for my readers in the US and Canada, they cannot ship elsewhere.) Good luck!

Joe

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written by JOE \\ tags: book review, Finance, Retirement