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Welcome to the Brian Fultis Behavioral Finance Podcast, where we unravel the mysteries of behavioral finance and unlock the secrets to making smarter, more informed decisions with your money.
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Now, here's your host, Dr.
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Brian Foltis.
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Hey, welcome back, everybody.
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I am excited to be rolling out this week's episode on my fall break here in the middle of October, while the weather is still nice here in Indianapolis, talking about the five forces that explain what we're going to describe as this knowing-doing gap.
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And we're going to try to create this framework that we can use all of these different behavioral finance principles into its own unique bucket.
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So we're going to call this episode why do smart people make fad decisions with their money?
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And what we find out here is a common theme.
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First, saving money.
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Why don't we do it on any consistent level?
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If we have over half of Americans living paycheck to paycheck, I suspect that more than half of Americans actually believe that they should be saving money.
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Don't feel like that is a knowledge, yeah, here.
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Most people know that writing a budget should help or would help them with their finances, yet we still don't do it.
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And if we do actually write it out, do we actually follow it and track it over time?
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There's a big gap in there.
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Diversification with asset allocation.
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We all know we should spread our eggs among different baskets, but then what do we do?
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We actually get hyper-focused on one particular aspect or asset class and fall in love with it, and we put all our eggs in that basket.
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And so we have all of these different gaps or different areas where we have that gap.
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And so we think about even our own lives.
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I go, okay, what would be my gap?
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And I go, oh, I know what this is.
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I know it.
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It's been meeting with an estate lawyer to write the estate plan.
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And I've been putting that off now for over two or three years now, since I've been remarried to get that in order.
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And I know it's I know what I'm supposed to do, and I know it'll cost a little bit, but on the other end, we'll have our finances in order, we'll have the estate plan, we'll have the living will in place, all these things that I know we need to do.
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And yet here I am sitting here today admitting that I haven't done it yet.
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I haven't followed through with that.
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And so think about what that might be for you.
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We all have that thing that we've been neglecting or putting off.
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But what we're going to really talk about here, first of all, is identifying this gap, this knowing, doing gap, and understanding that it's not.
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Sometimes it can be a lack of knowledge, and sometimes it can just be a simple lack of income.
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You're just living day to day, totally understand that.
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And or you just don't know what is right.
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You don't know, you don't have the knowledge in a particular area.
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And so you need that first piece before you then follow through and act on it to actually build that gap.
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However, just as often we see the knowledge can be there, but the behavior is not the actual follow-through.
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That's the gap we are talking about.
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And we're gonna put these into five different forces, five different forces that are kind of causing the gap, and you can at least get some categories out of this.
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Sometimes the categories will overlap based on the gap that we're talking about, but at least it gives us some sort of framework to put some of these tendencies into when we roll out different biases or different effects, different phenomons.
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We can kind of tie it back to this original theme, which is why I feel like this is an important episode to lay out that framework.
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So we always will be referring back to this, unless I change the framework, which is totally possible.
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But at least we have a starting place to go and create our starting point, our starting framework.
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All right, so five forces, organized related biases and effects into recognizable patterns.
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Nongbur one, let's get straight into it.
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Present beats the future.
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Okay, so obviously, benefits and inconvenience we experience now can outweigh consequences that arrive later.
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We would rather consume today than cons benefit from that savings in the future.
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The big one around that is our present bias.
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So buying something today feels more rewarding than adding money for a future goal.
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So we talk about the even the kids with their cookies.
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If they didn't eat their cookie today, then they can have two cookies tomorrow or ice cream.
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We've seen that in different studies.
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Same thing happens with our savings, which is why I talk about exponential growth, compounding growth, because I also have a bunch of a few papers on exponential growth bias, which are our tendency to linearize how our savings will grow over time.
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And now the important part of that bias is if you believe that your savings is gonna grow, if you're sitting on$10,000 that you've received and you believe that if you invest this for 30 years at 10% and you're gonna earn 10% per year, and you're thinking linearly, you're gonna think you're gonna have sacrifice that$10,000 for a future$30,000 or$40,000 based on your linear calculation.
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In reality, it's more like$500,000 that it would grow to over those 30 plus years.
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If you know that, then you're gonna be more likely to save that money if you believe it's gonna grow.
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You're gonna be more likely to spend that money if you only think it's gonna grow the 30,000 or 40,000.
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Okay, so here's that's kind of how it ties together.
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Present bias is big, and that is not only with our money, it's with our lifestyle decisions, with diet, with exercise, putting off a day, cheating on their on your diet, or having a few harmless drinks on the weekend.
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And anyway, present bias, we know then.
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We also have procrastination.
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This is now our intention to do something, whether it's enroll in a retirement plan, the cancel of subscription, return and unwanted purchase, which is our episode from last week with my shirt.
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This is a different shirt.
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But we just keep delaying, keep quitting it off.
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And that's procrastination.
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We also have another thing called inertia or the status quo bias, and that is basically continuing with whatever arrangement that we have.
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This is why we get sucked into free trials, because the companies offering them know that we'll probably just leave it as it is, status quo bias, and get charged eventually before we remember to cancel that subscription.
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And so, anyway, the benefits and inconveniences we experience now can outweigh consequences that will arrive later.
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And so that financial task you've put off, you've pushed it onto your future self.
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This is where the present will overrule the future most of the time.
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That's a big force that connects this knowing, doing gap.
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Alright.
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Number two, emotion beats logic.
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Emotion beats logic.
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This is where feelings about money can influence what we notice, avoid, and choose.
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There are a lot of different packs, different rabbit holes we can go down within behavioral finance that sh that fall into this bucket that emotion beats logic.
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I think that big one that we use in behavioral finance is our loss aversion.
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Okay, so the way that we treat our losses are too on average 2.25 times larger than we treat gains.
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So we feel losses 2.25 times more than we feel gains.
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And so this talks about our emotions, how we feel when our portfolios go up.
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Is it the same happiness as our unhappiness when it goes down the same amount?
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No, that's a loss immersion, and it's talking about how our emotions can override our logic, and especially when it comes to our finances.
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We also have the disposition effect.
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Okay, so this is our tendency in our portfolios to hold on to our losing stocks for too long and to sell our winning stocks too early.
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So when we think about the behavioral aspect and the emotional aspect, when we have a winning stock, we feel that little utility or our happiness level goes up, then it kind of flattens out over time.
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So what we do is we feel that happiness and we stop out of that because we want to lock that in.
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Our ride from an overall happiness or utility standpoint is basically over.
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And so we're just gonna lock in that feeling of I made a good decision, I am smart and I made money.
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Let me take my ball or let me take my chips and go home.
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And so we have a tendency, though, to sell short.
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Whereas if we were to examine this and look over time, that stocks with momentum will continue to rise and that you want to ride that wave as long as possible.
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On the negative side, I can definitely attest to this part where if you feel those losses, you definitely feel those more severely.
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But then something happens over time that you kind of get numb to those losses.
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If you have a real dog, and so I purchased a stock just for fun in my portfolio, and it was based on investing with my heart.
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So I just put a little money into Bumble because that's how I met my wife Mandy on that app.
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And so I bought Bumble stock and I bought it for like$30 or something outrageous at this point.
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And now it the only reason I'm thinking about this is because I saw it was up 60%.
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And I was like, oh, this is awesome.
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It's up 60% today, must have had a good earnings or whatever.
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I was still holding that, and I realized that huge increase brought my net loss to 80%.
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And so I felt the loss of bumble right away.
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But then after that, you kind of get numb to it.
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So you just kind of go, oh, I don't really care.
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Maybe it'll come back and I can finally get back to my break-even point, and I'm just gonna go down with the ship, as George Costanza would say, and just ride this out.
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Holding stocks for too long is exactly what I'm doing, but it's because I've absorbed that negative loss and I'm just numb to it.
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Emotion beats logic.
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We can also have some of the halo effects around this.
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So this is liking a company, product, uh charismatic founder can influence our judgments about its financial attractiveness.
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I really just cannot think of any examples off the top of my head of what stocks or companies might be influenced by this.
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You can understand this halo effect.
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Definitely gives us that emotional instead of the emotional experience rather than doing your due diligence and finding the fundamentals of these companies.
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We also all the way through in a couple more here, regret aversion, where you hesitate because you anticipate how bad you'll feel if the decision turns out poorly.
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Yeah, I can do that.
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I've fallen into that.
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We also had the house money effect, recent gain or windfall may feel easier to risk than money earned through work.
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So once again, this is just a little bit of mental accounting, but just having our emotions though overriding our logic when we're making our financial decisions.
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Okay.
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An investment is falling below its purchase price instead of valuing its prospects.
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You think I just need to get back to what I paid for.
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Yeah, there's anchoring as well.
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So anyway, emotion beats logic, that is number two.
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So present beats future, emotion beats logic, perception beats reality.
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That is number three.
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Perception beats reality.
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Now that actually sounds like emotion beats logic, but emotion is our emotion, our perception is separated from that emotion.
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It's what we perceive.
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So let me try to give an example here.
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In my classes, I'll show pictures of one is a, if you look at it one way, it can be a rabbit with two ears and two eyes or an eye.
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If you look at it from a different perspective, you can see that it could be a duck that has the platypus and its eye as well.
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You could also show a picture of the faces and the vases.
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So the vase is black and white, the faces mirror it.
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But when you show the students, you can see the different perspectives to go, oh yeah, I can see the faces here.
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And if I adjust, I can also see the vase or the vase here in the middle of this picture.
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And so we can actually go back and forth with our perception, but then I show them, what about the dress?
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So if anybody remembers the dress, this came out a number of years ago on social media talking about the color of the dress.
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And so we'll ask the group who is team black and purple?
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And a lot of people will raise their hand.
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And some people look around, go, okay, who's with me on team gold and white?
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And I'll raise my hand and I'll get a couple of people that join me on this.
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And so the other side of the class was, what are you talking about?
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Gold and white.
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And the gold and white group is going, what are you talking about?
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Purple and blue.
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We go, yeah.
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So I'm showing you the exact same picture.
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Our perceptions are totally different of this.
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And in this situation, you can't see the other side.
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That first example, you could actually come and see, oh, I understand.
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This is the other side.
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Other time, you are so stuck in what you cannot see that other side.
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So our interpretation of ourselves and the situation can differ from the available evidence.
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And so this is where we have some confidence, beliefs, previous money experiences, and our own money story, where our perception will override our reality in many instances on this.
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So that's where we peel it back and we talk about overconfidence, feeling more certain about our investment judgment or our knowledge than our results can justify.
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So this is really interesting.
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What I see with my college students is if they have one of their first investment trades succeed, they're immediately in feeling like they are a very sophisticated investor.
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Their confidence is through the roof, their portfolio is up, and so they have these really good experiences that really push this overconfidence and it kind of has to move them, and it moves them into some pretty risk-taking or risky investments, and that's where they fall into the options and futures trading because they just feel like they can't lose, and then they get burned on that.
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On the other side of the spectrum, you have students who actually had some bad investments off the top of their first couple of investments have performed poorly, and so they have really low confidence around this and are really tentative to move money into their next investment.
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And so we have to try to navigate those previous experiences and see the confidence or overconfidence that can come out of those first experiences.
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We also, within this bucket or with this factor, knowledge, decision, what do we call it?
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The knowledge gap.
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It's been a long day.
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The knowing-doing gap.
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We also have illusion of control.
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Choosing an investment in yourself can make its outcome feel more controllable.
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We can also tuck away, we have some self-attribution bias around here.
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This is a successful investment, kind of reflects our skills.
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So we remember our triumphs more than, and then we try to put away our or hide our failures.
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And so we've got a whole episode on this attribution bias where we think about and we tout our wins and we hide our losses.
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But when we have our social media platforms and everybody showing their wins, it leads to this fear of missing out where you're just like, everybody else is winning these huge parlays on sports betting and everyone's celebrating.
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I have this huge fear of missing out.
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So I'm gonna just, I know I shouldn't be making these big bets on these parlays that'll never hit, but I'm just gonna go do it anyway because I'm gonna miss out on this.
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That might be like the opposite of the knowing-doing gap because you're almost forcing yourself into doing it out of guilt.
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So that might be a whole nother interesting take we can have on that as well.
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So inside this perception are also our money beliefs, our beliefs that kind of start with our childhood memories and will carry into our adulthood if we're not careful or aware of them and need to override them.
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And that's where we get people saying, Oh, I'm bad with money, I'm just a poor college student.
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Investing is only for wealthy people, these different things.
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You if you're advising people or going through your money journey, you know you have your own thing.
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You know you have your own childhood memories that can be good or bad.
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And if you're like me, you're trying to override a lot of those here over time.
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Again, these also influence our perception, which we believe override our reality sometimes.
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And so we've got the next one.
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Social influence beats independent thinking.
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This is factor number four.
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The idea is other people influence what feels normal, desirable, credible, and obligatory.
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And this is where we spend time talking about our social norms.
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Because the social norms, if we're not careful, can override what we actually believe or think we should do.
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This is our independent thinking.
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Without that, we look around and see everybody else appears to be driving a new car.
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Everybody else appears to be having their big house and three.
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Cars in their driveway, and then they're somehow going on Disney vacations, and they have all these different things, and we just see what they're doing.
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Oh, I might as well do it.
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I don't really have the money, it'll be really tight.
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I feel like this is what everybody else is doing.
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I might as well jump on board.
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So those are some big things, but you can also see there's also some smaller social influences on there where you think about students signing up for college when maybe they shouldn't be in a trade, or maybe they if they don't know what to do, maybe you take a little time off and reassess, do a couple of years at community college before you figure out what you're gonna do for your four-year plan.
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Now, of course, I'm a finance professor, I shouldn't be saying it, but it's right, it's true that you don't have to follow what everybody else is doing.
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But again, these social norms, they'll get in your way, especially if you are not carefully thinking about some of these things.
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Social comparison, looking at somebody else's vacation, once again, don't have to look very far.
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Go to social media.
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Somebody's out there traveling Europe, somebody's out there doing some extensive travel, and you're just like, oh wow.
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Once again, you get that FOMO, you're seeing the big house, some of this apparent wealth that people have, and it makes us feel inadequate.
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And so there's different levels, varying levels of that.
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But if you're on social media, you're going to experience that in some way or at some point that you have to assess and go, oh wow, that's having an influence on me or my decision making.
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And once again, this is why it's a factor that overrides our independent thinking.
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We could also have an authority bias around this.
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This is our confident expert talking about or receiving more weight than what their evidence warrants.
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I saw that when I was on the phones at Fidelity, where people would call me up and say, Hey, I need to make the trade, and it's after hours.
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And okay, why are you so eager to buy this stock?
00:24:09.279 --> 00:24:13.200
And he was like, I was just watching Kramer on Mad Money, which is on like 6 p.m.
00:24:13.359 --> 00:24:16.319
on CNBC, and I just wanted to buy this stock.
00:24:16.400 --> 00:24:25.279
And so it's like, fortunately, we're gonna have to sleep on this because you can't buy this until 9:30 in the morning tomorrow when the market opens.
00:24:25.519 --> 00:24:36.720
And you might want to see when that episode of current of Mad Money was recorded, because I believe we're on like a six-month rerun tonight.
00:24:36.960 --> 00:24:38.559
So we want to look at that.
00:24:38.799 --> 00:24:54.480
So, again, like social influence can beat independent thinking, especially when we're looking at some of these prominent people who are touting out these recommendations with such confidence that it just leads us to automatically follow through on them.
00:24:54.720 --> 00:24:57.200
And then social influence beats independent thinking.
00:24:57.359 --> 00:25:02.319
How about we kick in the reciprocity effect that we talked about yesterday?
00:25:02.480 --> 00:25:10.000
That free service, gift, or consultation creates that feeling that you should give something back that's definitely a social influence.
00:25:10.160 --> 00:25:13.759
And I talked about that in our episode last week.
00:25:14.559 --> 00:25:22.480
So, number five, the path influences the choice.
00:25:22.799 --> 00:25:33.359
So now this is the how a decision is presented and organized and made accessible can influence the choice.
00:25:34.160 --> 00:25:45.839
So we've got now within that psychological force, we have defaults that can influence our choice.
00:25:46.400 --> 00:25:53.759
This is whatever that pre-selected option is our retirement contribution.
00:25:53.839 --> 00:25:58.160
Sometimes employers have their default rate set at 3%.
00:25:58.559 --> 00:26:03.039
They're trying to force people into making a contribution and you have to opt out of that.
00:26:03.119 --> 00:26:06.720
That's kind of the smart plan that has been adopted by a lot of companies.
00:26:06.960 --> 00:26:13.359
However, that for most people, that's a little bit low, especially those who are job hopping quite a bit.
00:26:13.519 --> 00:26:20.640
That's gonna keep you at 3, 5%, and 7% if it's following that program of contribution amounts.
00:26:20.799 --> 00:26:25.200
And then if you skip and move to another job, it starts you back at 3%, 5, and 7%.
00:26:25.519 --> 00:26:30.559
So you're gonna be falling low on your retirements.
00:26:30.799 --> 00:26:54.079
Also, people also think about their rollover IRAs, moving money into their account, and they say, okay, I'm all done with my retirement rollover, realizing that they just stuck their entire re their entire retirement account into a money market or into whatever the cash default is at that institution.
00:26:54.400 --> 00:26:58.880
And so the defaults can definitely influence our choice.
00:26:59.440 --> 00:27:06.559
We got to include framing within that, how something is framed, if it's a gain or a loss, positive, negative.
00:27:06.640 --> 00:27:18.480
We have a whole episode on different ways things can be framed, but that path of framing can influence our choice, even if the exact same outcomes are the same.
00:27:18.640 --> 00:27:25.119
So if there's a 80% chance of success or a 20% chance of failure, it's all the same thing.
00:27:25.279 --> 00:27:28.640
But the framing with that can influence our choice.
00:27:33.200 --> 00:27:51.519
Another one, and just in general, there's a number I'll skip it from now, but another one that I think about when we talk about path is simply the number of steps in order to get to the other side is simply too much.
00:27:51.920 --> 00:27:55.759
And they're it's too complicated, there's too many different steps.
00:27:55.920 --> 00:28:07.599
This is something I see in my classroom where I'm ultimately trying to get students to get over to a discount broker and open up a brokerage account.
00:28:07.839 --> 00:28:10.559
Open up a brokerage account and a Roth IRA.
00:28:10.720 --> 00:28:14.799
Oh, if you can do both of those, you're setting it up.
00:28:14.880 --> 00:28:17.440
You're setting yourself up for future success.
00:28:17.759 --> 00:28:24.160
I don't care if you move over a dollar today or$10 or$100, it does not matter.
00:28:24.319 --> 00:28:26.160
We just want to open up that channel.
00:28:26.400 --> 00:28:31.920
If you want to go above and beyond, set up your automatic transfer during that time.
00:28:32.400 --> 00:28:43.200
But as I'm trying to get people to that spot, I'm also realizing that they go, I know I need to do this, but it's just it's complicated.
00:28:43.279 --> 00:28:46.559
I don't know what to click, I don't know what I'm supposed to open up.
00:28:46.799 --> 00:28:51.599
And when you just sit over somebody's shoulder and you say, Yep, that's it, and that's what you need to put in.
00:28:51.759 --> 00:28:59.279
Yep, here's that, and just that guiding voice, that will get them to the other side.
00:28:59.359 --> 00:29:01.440
But without it, they're stuck.
00:29:01.599 --> 00:29:12.799
So this is where the path, if it's too complicated or too many steps, will definitely influence the choice and attribute to this knowing, doing gap.
00:29:14.240 --> 00:29:19.680
So those are the five forces that we've talked about.
00:29:19.839 --> 00:29:26.160
Some of them there are some overlaps, but at least it gives us some sort of framework and buckets of what we can put it in.
00:29:26.400 --> 00:29:40.319
Present beats future, emotion beats logic, perception beats reality, social influence beats independent thinking, and the path influences the choice.
00:29:44.079 --> 00:29:52.640
And so with that, the same behavior can have different explanations.
00:29:53.119 --> 00:30:11.279
Two people making the same decision can be responding to two very different forces, and that's kind of where we get to that final point of being able to understand the forces, understand why we do it, and then give them the appropriate tools to help them across.
00:30:11.440 --> 00:30:20.480
Okay, so if it's if I'm trying to get somebody to open up their account and contribute, it could be I don't have money, I'm living paycheck to paycheck.
00:30:20.960 --> 00:30:22.400
Okay, I get that.
00:30:22.640 --> 00:30:25.119
We can work on trying to get more money.
00:30:25.359 --> 00:30:31.759
If it's something like enrollment requires a number of confusing steps, I go, okay, that's the path.
00:30:31.920 --> 00:30:34.880
Let's clear the path, let's walk you through.
00:30:35.119 --> 00:30:42.480
If nobody, if they tell you that, yeah, I know what I'm supposed to do, I'm the first person in my family to open this account.
00:30:43.200 --> 00:30:55.599
Now that that can be the social component that we need to talk about here and breaking those social norms and going, oh, we're gonna override that and be logical thinkers around that.
00:30:55.920 --> 00:31:01.039
And, or it could be just I feel uncomfortable, I'm anxious, there's an emotion around it.
00:31:01.200 --> 00:31:03.200
And you go, yeah, I get it.
00:31:03.519 --> 00:31:09.200
Signing up for something, especially that's different or new and putting out your personal information can be intimidating.
00:31:09.279 --> 00:31:13.279
And all we're gonna just try to do is create that path and then we'll leave it alone.
00:31:13.440 --> 00:31:16.000
We don't have to even move a dime today.
00:31:16.160 --> 00:31:24.720
We're just gonna open up that account, give you a login, and then we'll leave it alone to try to attack the emotion that's overriding their behaviors.
00:31:25.279 --> 00:31:27.599
All right, so that's where we're gonna leave you here.
00:31:27.759 --> 00:31:35.519
We'll come back to more and more of these, but at least now we have that framework that we'll be referring back to.
00:31:35.759 --> 00:31:43.920
If you have some ideas around this or thoughts we want to add, remember, this is our foundational framework that we're using.
00:31:44.079 --> 00:31:45.599
This is not the end product.
00:31:45.759 --> 00:31:50.160
So as we add more biases, we can kind of kick them into some of these different factors.
00:31:50.319 --> 00:31:55.680
It might morph into different more or less of the factors, but that's kind of where I'm at.
00:31:56.000 --> 00:32:16.079
Wanted to get that shared with everybody as I start formulating this framework, but at least we can now have some sort of deep discussion around behavioral finance when we get asked the question: why do smart people make dumb decisions with their money?
00:32:16.400 --> 00:32:19.200
Now we know it's the knowing-doing gap.
00:32:19.519 --> 00:32:24.240
And yeah, there's this bridge between what we know we should do and what we actually do.
00:32:24.400 --> 00:32:32.160
And now we know the five different forces, main forces that factor in, and we're gonna start building in the rest.
00:32:32.400 --> 00:32:36.559
And with that, I will leave you to the rest of your day.
00:32:36.720 --> 00:32:39.680
Thank you so much for watching, listening.
00:32:39.839 --> 00:32:46.240
And if you have any questions or want to reach out, would love to hear from you, just click right on the link in the show notes.
00:32:46.559 --> 00:32:50.160
You can find me Brianfoltis.com, find me on LinkedIn, Dr.
00:32:50.240 --> 00:32:53.599
Brian Fultis, and moneystrong.net.
00:32:54.720 --> 00:32:57.839
Get your hands on some of the materials, find me on YouTube.
00:32:58.079 --> 00:33:00.000
A lot of the videos are already out here as well.
00:33:00.240 --> 00:33:01.359
Anyway, I'll leave you alone.
00:33:01.440 --> 00:33:04.000
Have a wonderful rest of your day, and we'll talk to you next week.
00:33:04.160 --> 00:33:04.799
Thanks, everyone.
00:33:04.960 --> 00:33:05.440
Bye.
00:33:07.119 --> 00:33:12.400
Thank you for tuning in to another episode of the Brian Fultis Behavioral Finance Podcast.
00:33:12.640 --> 00:33:19.759
We hope you found our exploration into the fascinating world of human behavior and finance, both enlightening and thought provoking.
00:33:19.920 --> 00:33:22.319
Be sure to subscribe for future episodes.
00:33:22.400 --> 00:33:26.480
And until next time, stay curious and financially savvy.
00:00:04.160 --> 00:00:15.279
Welcome to the Brian Fultis Behavioral Finance Podcast, where we unravel the mysteries of behavioral finance and unlock the secrets to making smarter, more informed decisions with your money.
00:00:15.439 --> 00:00:17.359
Now, here's your host, Dr.
00:00:17.440 --> 00:00:18.719
Brian Foltis.
00:00:24.800 --> 00:00:26.640
Hey, welcome back, everybody.
00:00:26.879 --> 00:00:47.280
I am excited to be rolling out this week's episode on my fall break here in the middle of October, while the weather is still nice here in Indianapolis, talking about the five forces that explain what we're going to describe as this knowing-doing gap.
00:00:47.759 --> 00:00:58.159
And we're going to try to create this framework that we can use all of these different behavioral finance principles into its own unique bucket.
00:00:58.560 --> 00:01:05.280
So we're going to call this episode why do smart people make fad decisions with their money?
00:01:05.680 --> 00:01:11.359
And what we find out here is a common theme.
00:01:11.680 --> 00:01:13.920
First, saving money.
00:01:17.359 --> 00:01:20.640
Why don't we do it on any consistent level?
00:01:20.879 --> 00:01:31.040
If we have over half of Americans living paycheck to paycheck, I suspect that more than half of Americans actually believe that they should be saving money.
00:01:31.359 --> 00:01:34.799
Don't feel like that is a knowledge, yeah, here.
00:01:36.239 --> 00:01:43.200
Most people know that writing a budget should help or would help them with their finances, yet we still don't do it.
00:01:43.359 --> 00:01:49.920
And if we do actually write it out, do we actually follow it and track it over time?
00:01:50.480 --> 00:01:52.319
There's a big gap in there.
00:01:53.359 --> 00:01:56.879
Diversification with asset allocation.
00:01:57.200 --> 00:02:02.159
We all know we should spread our eggs among different baskets, but then what do we do?
00:02:02.400 --> 00:02:11.280
We actually get hyper-focused on one particular aspect or asset class and fall in love with it, and we put all our eggs in that basket.
00:02:11.520 --> 00:02:17.439
And so we have all of these different gaps or different areas where we have that gap.
00:02:17.680 --> 00:02:20.240
And so we think about even our own lives.
00:02:20.479 --> 00:02:22.560
I go, okay, what would be my gap?
00:02:22.639 --> 00:02:24.639
And I go, oh, I know what this is.
00:02:24.800 --> 00:02:25.680
I know it.
00:02:26.000 --> 00:02:31.199
It's been meeting with an estate lawyer to write the estate plan.
00:02:31.439 --> 00:02:41.039
And I've been putting that off now for over two or three years now, since I've been remarried to get that in order.
00:02:41.199 --> 00:02:55.280
And I know it's I know what I'm supposed to do, and I know it'll cost a little bit, but on the other end, we'll have our finances in order, we'll have the estate plan, we'll have the living will in place, all these things that I know we need to do.
00:02:55.520 --> 00:03:00.240
And yet here I am sitting here today admitting that I haven't done it yet.
00:03:00.400 --> 00:03:02.159
I haven't followed through with that.
00:03:02.479 --> 00:03:05.280
And so think about what that might be for you.
00:03:05.520 --> 00:03:09.360
We all have that thing that we've been neglecting or putting off.
00:03:09.680 --> 00:03:20.960
But what we're going to really talk about here, first of all, is identifying this gap, this knowing, doing gap, and understanding that it's not.
00:03:21.439 --> 00:03:27.360
Sometimes it can be a lack of knowledge, and sometimes it can just be a simple lack of income.
00:03:27.599 --> 00:03:31.520
You're just living day to day, totally understand that.
00:03:32.159 --> 00:03:35.360
And or you just don't know what is right.
00:03:35.520 --> 00:03:38.879
You don't know, you don't have the knowledge in a particular area.
00:03:39.039 --> 00:03:46.639
And so you need that first piece before you then follow through and act on it to actually build that gap.
00:03:47.520 --> 00:03:55.919
However, just as often we see the knowledge can be there, but the behavior is not the actual follow-through.
00:03:56.080 --> 00:03:58.560
That's the gap we are talking about.
00:03:58.960 --> 00:04:12.240
And we're gonna put these into five different forces, five different forces that are kind of causing the gap, and you can at least get some categories out of this.
00:04:12.400 --> 00:04:31.040
Sometimes the categories will overlap based on the gap that we're talking about, but at least it gives us some sort of framework to put some of these tendencies into when we roll out different biases or different effects, different phenomons.
00:04:31.199 --> 00:04:39.120
We can kind of tie it back to this original theme, which is why I feel like this is an important episode to lay out that framework.
00:04:39.279 --> 00:04:46.240
So we always will be referring back to this, unless I change the framework, which is totally possible.
00:04:46.560 --> 00:04:52.959
But at least we have a starting place to go and create our starting point, our starting framework.
00:04:56.800 --> 00:05:04.399
All right, so five forces, organized related biases and effects into recognizable patterns.
00:05:04.639 --> 00:05:08.000
Nongbur one, let's get straight into it.
00:05:08.639 --> 00:05:11.279
Present beats the future.
00:05:11.519 --> 00:05:21.040
Okay, so obviously, benefits and inconvenience we experience now can outweigh consequences that arrive later.
00:05:21.279 --> 00:05:29.279
We would rather consume today than cons benefit from that savings in the future.
00:05:29.519 --> 00:05:32.240
The big one around that is our present bias.
00:05:32.319 --> 00:05:37.759
So buying something today feels more rewarding than adding money for a future goal.
00:05:37.920 --> 00:05:42.560
So we talk about the even the kids with their cookies.
00:05:42.879 --> 00:05:48.079
If they didn't eat their cookie today, then they can have two cookies tomorrow or ice cream.
00:05:48.160 --> 00:05:50.000
We've seen that in different studies.
00:05:50.240 --> 00:06:07.920
Same thing happens with our savings, which is why I talk about exponential growth, compounding growth, because I also have a bunch of a few papers on exponential growth bias, which are our tendency to linearize how our savings will grow over time.
00:06:08.079 --> 00:06:34.720
And now the important part of that bias is if you believe that your savings is gonna grow, if you're sitting on$10,000 that you've received and you believe that if you invest this for 30 years at 10% and you're gonna earn 10% per year, and you're thinking linearly, you're gonna think you're gonna have sacrifice that$10,000 for a future$30,000 or$40,000 based on your linear calculation.
00:06:35.040 --> 00:06:43.680
In reality, it's more like$500,000 that it would grow to over those 30 plus years.
00:06:44.319 --> 00:06:51.040
If you know that, then you're gonna be more likely to save that money if you believe it's gonna grow.
00:06:51.199 --> 00:06:56.319
You're gonna be more likely to spend that money if you only think it's gonna grow the 30,000 or 40,000.
00:06:56.480 --> 00:06:58.959
Okay, so here's that's kind of how it ties together.
00:06:59.199 --> 00:07:21.120
Present bias is big, and that is not only with our money, it's with our lifestyle decisions, with diet, with exercise, putting off a day, cheating on their on your diet, or having a few harmless drinks on the weekend.
00:07:21.439 --> 00:07:25.600
And anyway, present bias, we know then.
00:07:25.759 --> 00:07:28.639
We also have procrastination.
00:07:29.199 --> 00:07:42.240
This is now our intention to do something, whether it's enroll in a retirement plan, the cancel of subscription, return and unwanted purchase, which is our episode from last week with my shirt.
00:07:42.319 --> 00:07:43.839
This is a different shirt.
00:07:44.000 --> 00:07:46.800
But we just keep delaying, keep quitting it off.
00:07:47.199 --> 00:07:48.959
And that's procrastination.
00:07:49.199 --> 00:07:59.120
We also have another thing called inertia or the status quo bias, and that is basically continuing with whatever arrangement that we have.
00:07:59.360 --> 00:08:19.360
This is why we get sucked into free trials, because the companies offering them know that we'll probably just leave it as it is, status quo bias, and get charged eventually before we remember to cancel that subscription.
00:08:20.160 --> 00:08:30.800
And so, anyway, the benefits and inconveniences we experience now can outweigh consequences that will arrive later.
00:08:32.799 --> 00:08:39.840
And so that financial task you've put off, you've pushed it onto your future self.
00:08:40.000 --> 00:08:45.759
This is where the present will overrule the future most of the time.
00:08:45.840 --> 00:08:51.200
That's a big force that connects this knowing, doing gap.
00:08:52.080 --> 00:08:52.639
Alright.
00:08:53.039 --> 00:08:56.960
Number two, emotion beats logic.
00:08:57.679 --> 00:08:59.120
Emotion beats logic.
00:08:59.279 --> 00:09:06.639
This is where feelings about money can influence what we notice, avoid, and choose.
00:09:07.919 --> 00:09:20.240
There are a lot of different packs, different rabbit holes we can go down within behavioral finance that sh that fall into this bucket that emotion beats logic.
00:09:20.399 --> 00:09:24.879
I think that big one that we use in behavioral finance is our loss aversion.
00:09:25.039 --> 00:09:34.799
Okay, so the way that we treat our losses are too on average 2.25 times larger than we treat gains.
00:09:34.960 --> 00:09:40.720
So we feel losses 2.25 times more than we feel gains.
00:09:41.039 --> 00:09:47.759
And so this talks about our emotions, how we feel when our portfolios go up.
00:09:48.000 --> 00:09:56.000
Is it the same happiness as our unhappiness when it goes down the same amount?
00:09:56.240 --> 00:10:06.480
No, that's a loss immersion, and it's talking about how our emotions can override our logic, and especially when it comes to our finances.
00:10:06.799 --> 00:10:09.440
We also have the disposition effect.
00:10:09.519 --> 00:10:22.080
Okay, so this is our tendency in our portfolios to hold on to our losing stocks for too long and to sell our winning stocks too early.
00:10:22.320 --> 00:10:35.440
So when we think about the behavioral aspect and the emotional aspect, when we have a winning stock, we feel that little utility or our happiness level goes up, then it kind of flattens out over time.
00:10:35.600 --> 00:10:43.440
So what we do is we feel that happiness and we stop out of that because we want to lock that in.
00:10:43.759 --> 00:10:49.679
Our ride from an overall happiness or utility standpoint is basically over.
00:10:50.000 --> 00:10:57.679
And so we're just gonna lock in that feeling of I made a good decision, I am smart and I made money.
00:10:57.919 --> 00:11:02.080
Let me take my ball or let me take my chips and go home.
00:11:02.240 --> 00:11:06.080
And so we have a tendency, though, to sell short.
00:11:06.320 --> 00:11:18.159
Whereas if we were to examine this and look over time, that stocks with momentum will continue to rise and that you want to ride that wave as long as possible.
00:11:18.720 --> 00:11:27.600
On the negative side, I can definitely attest to this part where if you feel those losses, you definitely feel those more severely.
00:11:27.679 --> 00:11:33.200
But then something happens over time that you kind of get numb to those losses.
00:11:33.279 --> 00:11:43.840
If you have a real dog, and so I purchased a stock just for fun in my portfolio, and it was based on investing with my heart.
00:11:44.000 --> 00:11:50.399
So I just put a little money into Bumble because that's how I met my wife Mandy on that app.
00:11:50.799 --> 00:11:58.799
And so I bought Bumble stock and I bought it for like$30 or something outrageous at this point.
00:11:59.120 --> 00:12:04.639
And now it the only reason I'm thinking about this is because I saw it was up 60%.
00:12:05.039 --> 00:12:06.480
And I was like, oh, this is awesome.
00:12:06.559 --> 00:12:10.080
It's up 60% today, must have had a good earnings or whatever.
00:12:10.399 --> 00:12:18.240
I was still holding that, and I realized that huge increase brought my net loss to 80%.
00:12:19.039 --> 00:12:22.639
And so I felt the loss of bumble right away.
00:12:22.720 --> 00:12:24.879
But then after that, you kind of get numb to it.
00:12:25.120 --> 00:12:28.000
So you just kind of go, oh, I don't really care.
00:12:28.159 --> 00:12:38.240
Maybe it'll come back and I can finally get back to my break-even point, and I'm just gonna go down with the ship, as George Costanza would say, and just ride this out.
00:12:38.480 --> 00:12:47.679
Holding stocks for too long is exactly what I'm doing, but it's because I've absorbed that negative loss and I'm just numb to it.
00:12:48.080 --> 00:12:50.559
Emotion beats logic.
00:12:51.039 --> 00:12:53.840
We can also have some of the halo effects around this.
00:12:53.919 --> 00:13:02.639
So this is liking a company, product, uh charismatic founder can influence our judgments about its financial attractiveness.
00:13:03.120 --> 00:13:10.559
I really just cannot think of any examples off the top of my head of what stocks or companies might be influenced by this.
00:13:11.039 --> 00:13:13.519
You can understand this halo effect.
00:13:13.679 --> 00:13:24.720
Definitely gives us that emotional instead of the emotional experience rather than doing your due diligence and finding the fundamentals of these companies.
00:13:26.159 --> 00:13:35.679
We also all the way through in a couple more here, regret aversion, where you hesitate because you anticipate how bad you'll feel if the decision turns out poorly.
00:13:35.919 --> 00:13:37.039
Yeah, I can do that.
00:13:37.200 --> 00:13:38.720
I've fallen into that.
00:13:39.039 --> 00:13:46.879
We also had the house money effect, recent gain or windfall may feel easier to risk than money earned through work.
00:13:47.120 --> 00:13:59.679
So once again, this is just a little bit of mental accounting, but just having our emotions though overriding our logic when we're making our financial decisions.
00:14:02.399 --> 00:14:02.720
Okay.
00:14:03.840 --> 00:14:08.480
An investment is falling below its purchase price instead of valuing its prospects.
00:14:08.559 --> 00:14:12.080
You think I just need to get back to what I paid for.
00:14:12.480 --> 00:14:14.399
Yeah, there's anchoring as well.
00:14:14.879 --> 00:14:18.960
So anyway, emotion beats logic, that is number two.
00:14:19.360 --> 00:14:27.279
So present beats future, emotion beats logic, perception beats reality.
00:14:27.440 --> 00:14:28.639
That is number three.
00:14:28.960 --> 00:14:31.279
Perception beats reality.
00:14:31.440 --> 00:14:43.919
Now that actually sounds like emotion beats logic, but emotion is our emotion, our perception is separated from that emotion.
00:14:44.080 --> 00:14:45.279
It's what we perceive.
00:14:45.360 --> 00:14:48.080
So let me try to give an example here.
00:14:48.240 --> 00:15:00.799
In my classes, I'll show pictures of one is a, if you look at it one way, it can be a rabbit with two ears and two eyes or an eye.
00:15:01.039 --> 00:15:09.360
If you look at it from a different perspective, you can see that it could be a duck that has the platypus and its eye as well.
00:15:09.600 --> 00:15:15.600
You could also show a picture of the faces and the vases.
00:15:15.840 --> 00:15:19.840
So the vase is black and white, the faces mirror it.
00:15:20.240 --> 00:15:27.840
But when you show the students, you can see the different perspectives to go, oh yeah, I can see the faces here.
00:15:27.919 --> 00:15:34.159
And if I adjust, I can also see the vase or the vase here in the middle of this picture.
00:15:34.320 --> 00:15:42.399
And so we can actually go back and forth with our perception, but then I show them, what about the dress?
00:15:42.639 --> 00:15:50.159
So if anybody remembers the dress, this came out a number of years ago on social media talking about the color of the dress.
00:15:50.320 --> 00:15:57.279
And so we'll ask the group who is team black and purple?
00:15:57.600 --> 00:15:59.840
And a lot of people will raise their hand.
00:16:00.000 --> 00:16:06.240
And some people look around, go, okay, who's with me on team gold and white?
00:16:06.720 --> 00:16:12.320
And I'll raise my hand and I'll get a couple of people that join me on this.
00:16:12.480 --> 00:16:16.559
And so the other side of the class was, what are you talking about?
00:16:16.799 --> 00:16:18.000
Gold and white.
00:16:18.240 --> 00:16:21.759
And the gold and white group is going, what are you talking about?
00:16:22.159 --> 00:16:24.639
Purple and blue.
00:16:26.559 --> 00:16:27.600
We go, yeah.
00:16:27.840 --> 00:16:30.960
So I'm showing you the exact same picture.
00:16:31.200 --> 00:16:34.879
Our perceptions are totally different of this.
00:16:35.200 --> 00:16:39.600
And in this situation, you can't see the other side.
00:16:39.840 --> 00:16:43.120
That first example, you could actually come and see, oh, I understand.
00:16:43.279 --> 00:16:44.559
This is the other side.
00:16:44.799 --> 00:16:51.039
Other time, you are so stuck in what you cannot see that other side.
00:16:51.360 --> 00:16:59.200
So our interpretation of ourselves and the situation can differ from the available evidence.
00:16:59.840 --> 00:17:19.839
And so this is where we have some confidence, beliefs, previous money experiences, and our own money story, where our perception will override our reality in many instances on this.
00:17:20.480 --> 00:17:31.119
So that's where we peel it back and we talk about overconfidence, feeling more certain about our investment judgment or our knowledge than our results can justify.
00:17:31.279 --> 00:17:32.400
So this is really interesting.
00:17:32.480 --> 00:17:47.440
What I see with my college students is if they have one of their first investment trades succeed, they're immediately in feeling like they are a very sophisticated investor.
00:17:47.599 --> 00:18:11.440
Their confidence is through the roof, their portfolio is up, and so they have these really good experiences that really push this overconfidence and it kind of has to move them, and it moves them into some pretty risk-taking or risky investments, and that's where they fall into the options and futures trading because they just feel like they can't lose, and then they get burned on that.
00:18:11.599 --> 00:18:28.720
On the other side of the spectrum, you have students who actually had some bad investments off the top of their first couple of investments have performed poorly, and so they have really low confidence around this and are really tentative to move money into their next investment.
00:18:28.880 --> 00:18:40.160
And so we have to try to navigate those previous experiences and see the confidence or overconfidence that can come out of those first experiences.
00:18:41.119 --> 00:18:49.039
We also, within this bucket or with this factor, knowledge, decision, what do we call it?
00:18:49.119 --> 00:18:50.559
The knowledge gap.
00:18:51.440 --> 00:18:52.960
It's been a long day.
00:18:53.200 --> 00:18:55.039
The knowing-doing gap.
00:18:55.519 --> 00:18:57.920
We also have illusion of control.
00:18:58.880 --> 00:19:06.079
Choosing an investment in yourself can make its outcome feel more controllable.
00:19:06.640 --> 00:19:12.000
We can also tuck away, we have some self-attribution bias around here.
00:19:12.319 --> 00:19:16.640
This is a successful investment, kind of reflects our skills.
00:19:16.720 --> 00:19:24.880
So we remember our triumphs more than, and then we try to put away our or hide our failures.
00:19:25.119 --> 00:19:36.640
And so we've got a whole episode on this attribution bias where we think about and we tout our wins and we hide our losses.
00:19:36.880 --> 00:19:52.160
But when we have our social media platforms and everybody showing their wins, it leads to this fear of missing out where you're just like, everybody else is winning these huge parlays on sports betting and everyone's celebrating.
00:19:52.319 --> 00:19:54.480
I have this huge fear of missing out.
00:19:54.559 --> 00:20:07.680
So I'm gonna just, I know I shouldn't be making these big bets on these parlays that'll never hit, but I'm just gonna go do it anyway because I'm gonna miss out on this.
00:20:07.920 --> 00:20:15.200
That might be like the opposite of the knowing-doing gap because you're almost forcing yourself into doing it out of guilt.
00:20:15.359 --> 00:20:18.960
So that might be a whole nother interesting take we can have on that as well.
00:20:19.279 --> 00:20:35.519
So inside this perception are also our money beliefs, our beliefs that kind of start with our childhood memories and will carry into our adulthood if we're not careful or aware of them and need to override them.
00:20:35.920 --> 00:20:42.559
And that's where we get people saying, Oh, I'm bad with money, I'm just a poor college student.
00:20:42.880 --> 00:20:46.240
Investing is only for wealthy people, these different things.
00:20:46.400 --> 00:20:52.480
You if you're advising people or going through your money journey, you know you have your own thing.
00:20:52.720 --> 00:20:57.680
You know you have your own childhood memories that can be good or bad.
00:20:58.000 --> 00:21:03.519
And if you're like me, you're trying to override a lot of those here over time.
00:21:03.759 --> 00:21:11.920
Again, these also influence our perception, which we believe override our reality sometimes.
00:21:13.759 --> 00:21:17.920
And so we've got the next one.
00:21:20.160 --> 00:21:23.680
Social influence beats independent thinking.
00:21:23.759 --> 00:21:26.079
This is factor number four.
00:21:26.799 --> 00:21:35.279
The idea is other people influence what feels normal, desirable, credible, and obligatory.
00:21:35.680 --> 00:21:40.079
And this is where we spend time talking about our social norms.
00:21:40.559 --> 00:21:48.000
Because the social norms, if we're not careful, can override what we actually believe or think we should do.
00:21:48.240 --> 00:21:50.000
This is our independent thinking.
00:21:50.240 --> 00:21:54.799
Without that, we look around and see everybody else appears to be driving a new car.
00:21:54.960 --> 00:21:59.519
Everybody else appears to be having their big house and three.
00:22:00.640 --> 00:22:10.400
Cars in their driveway, and then they're somehow going on Disney vacations, and they have all these different things, and we just see what they're doing.
00:22:10.559 --> 00:22:11.680
Oh, I might as well do it.
00:22:11.759 --> 00:22:14.160
I don't really have the money, it'll be really tight.
00:22:14.480 --> 00:22:16.640
I feel like this is what everybody else is doing.
00:22:16.720 --> 00:22:19.039
I might as well jump on board.
00:22:19.359 --> 00:22:46.079
So those are some big things, but you can also see there's also some smaller social influences on there where you think about students signing up for college when maybe they shouldn't be in a trade, or maybe they if they don't know what to do, maybe you take a little time off and reassess, do a couple of years at community college before you figure out what you're gonna do for your four-year plan.
00:22:46.240 --> 00:22:55.839
Now, of course, I'm a finance professor, I shouldn't be saying it, but it's right, it's true that you don't have to follow what everybody else is doing.
00:22:56.160 --> 00:23:03.920
But again, these social norms, they'll get in your way, especially if you are not carefully thinking about some of these things.
00:23:04.240 --> 00:23:09.359
Social comparison, looking at somebody else's vacation, once again, don't have to look very far.
00:23:09.519 --> 00:23:10.400
Go to social media.
00:23:10.559 --> 00:23:17.839
Somebody's out there traveling Europe, somebody's out there doing some extensive travel, and you're just like, oh wow.
00:23:18.559 --> 00:23:27.200
Once again, you get that FOMO, you're seeing the big house, some of this apparent wealth that people have, and it makes us feel inadequate.
00:23:27.359 --> 00:23:30.720
And so there's different levels, varying levels of that.
00:23:30.960 --> 00:23:43.039
But if you're on social media, you're going to experience that in some way or at some point that you have to assess and go, oh wow, that's having an influence on me or my decision making.
00:23:43.200 --> 00:23:47.200
And once again, this is why it's a factor that overrides our independent thinking.
00:23:47.599 --> 00:23:49.839
We could also have an authority bias around this.
00:23:50.000 --> 00:23:57.599
This is our confident expert talking about or receiving more weight than what their evidence warrants.
00:23:57.839 --> 00:24:06.480
I saw that when I was on the phones at Fidelity, where people would call me up and say, Hey, I need to make the trade, and it's after hours.
00:24:06.559 --> 00:24:09.200
And okay, why are you so eager to buy this stock?
00:24:09.279 --> 00:24:13.200
And he was like, I was just watching Kramer on Mad Money, which is on like 6 p.m.
00:24:13.359 --> 00:24:16.319
on CNBC, and I just wanted to buy this stock.
00:24:16.400 --> 00:24:25.279
And so it's like, fortunately, we're gonna have to sleep on this because you can't buy this until 9:30 in the morning tomorrow when the market opens.
00:24:25.519 --> 00:24:36.720
And you might want to see when that episode of current of Mad Money was recorded, because I believe we're on like a six-month rerun tonight.
00:24:36.960 --> 00:24:38.559
So we want to look at that.
00:24:38.799 --> 00:24:54.480
So, again, like social influence can beat independent thinking, especially when we're looking at some of these prominent people who are touting out these recommendations with such confidence that it just leads us to automatically follow through on them.
00:24:54.720 --> 00:24:57.200
And then social influence beats independent thinking.
00:24:57.359 --> 00:25:02.319
How about we kick in the reciprocity effect that we talked about yesterday?
00:25:02.480 --> 00:25:10.000
That free service, gift, or consultation creates that feeling that you should give something back that's definitely a social influence.
00:25:10.160 --> 00:25:13.759
And I talked about that in our episode last week.
00:25:14.559 --> 00:25:22.480
So, number five, the path influences the choice.
00:25:22.799 --> 00:25:33.359
So now this is the how a decision is presented and organized and made accessible can influence the choice.
00:25:34.160 --> 00:25:45.839
So we've got now within that psychological force, we have defaults that can influence our choice.
00:25:46.400 --> 00:25:53.759
This is whatever that pre-selected option is our retirement contribution.
00:25:53.839 --> 00:25:58.160
Sometimes employers have their default rate set at 3%.
00:25:58.559 --> 00:26:03.039
They're trying to force people into making a contribution and you have to opt out of that.
00:26:03.119 --> 00:26:06.720
That's kind of the smart plan that has been adopted by a lot of companies.
00:26:06.960 --> 00:26:13.359
However, that for most people, that's a little bit low, especially those who are job hopping quite a bit.
00:26:13.519 --> 00:26:20.640
That's gonna keep you at 3, 5%, and 7% if it's following that program of contribution amounts.
00:26:20.799 --> 00:26:25.200
And then if you skip and move to another job, it starts you back at 3%, 5, and 7%.
00:26:25.519 --> 00:26:30.559
So you're gonna be falling low on your retirements.
00:26:30.799 --> 00:26:54.079
Also, people also think about their rollover IRAs, moving money into their account, and they say, okay, I'm all done with my retirement rollover, realizing that they just stuck their entire re their entire retirement account into a money market or into whatever the cash default is at that institution.
00:26:54.400 --> 00:26:58.880
And so the defaults can definitely influence our choice.
00:26:59.440 --> 00:27:06.559
We got to include framing within that, how something is framed, if it's a gain or a loss, positive, negative.
00:27:06.640 --> 00:27:18.480
We have a whole episode on different ways things can be framed, but that path of framing can influence our choice, even if the exact same outcomes are the same.
00:27:18.640 --> 00:27:25.119
So if there's a 80% chance of success or a 20% chance of failure, it's all the same thing.
00:27:25.279 --> 00:27:28.640
But the framing with that can influence our choice.
00:27:33.200 --> 00:27:51.519
Another one, and just in general, there's a number I'll skip it from now, but another one that I think about when we talk about path is simply the number of steps in order to get to the other side is simply too much.
00:27:51.920 --> 00:27:55.759
And they're it's too complicated, there's too many different steps.
00:27:55.920 --> 00:28:07.599
This is something I see in my classroom where I'm ultimately trying to get students to get over to a discount broker and open up a brokerage account.
00:28:07.839 --> 00:28:10.559
Open up a brokerage account and a Roth IRA.
00:28:10.720 --> 00:28:14.799
Oh, if you can do both of those, you're setting it up.
00:28:14.880 --> 00:28:17.440
You're setting yourself up for future success.
00:28:17.759 --> 00:28:24.160
I don't care if you move over a dollar today or$10 or$100, it does not matter.
00:28:24.319 --> 00:28:26.160
We just want to open up that channel.
00:28:26.400 --> 00:28:31.920
If you want to go above and beyond, set up your automatic transfer during that time.
00:28:32.400 --> 00:28:43.200
But as I'm trying to get people to that spot, I'm also realizing that they go, I know I need to do this, but it's just it's complicated.
00:28:43.279 --> 00:28:46.559
I don't know what to click, I don't know what I'm supposed to open up.
00:28:46.799 --> 00:28:51.599
And when you just sit over somebody's shoulder and you say, Yep, that's it, and that's what you need to put in.
00:28:51.759 --> 00:28:59.279
Yep, here's that, and just that guiding voice, that will get them to the other side.
00:28:59.359 --> 00:29:01.440
But without it, they're stuck.
00:29:01.599 --> 00:29:12.799
So this is where the path, if it's too complicated or too many steps, will definitely influence the choice and attribute to this knowing, doing gap.
00:29:14.240 --> 00:29:19.680
So those are the five forces that we've talked about.
00:29:19.839 --> 00:29:26.160
Some of them there are some overlaps, but at least it gives us some sort of framework and buckets of what we can put it in.
00:29:26.400 --> 00:29:40.319
Present beats future, emotion beats logic, perception beats reality, social influence beats independent thinking, and the path influences the choice.
00:29:44.079 --> 00:29:52.640
And so with that, the same behavior can have different explanations.
00:29:53.119 --> 00:30:11.279
Two people making the same decision can be responding to two very different forces, and that's kind of where we get to that final point of being able to understand the forces, understand why we do it, and then give them the appropriate tools to help them across.
00:30:11.440 --> 00:30:20.480
Okay, so if it's if I'm trying to get somebody to open up their account and contribute, it could be I don't have money, I'm living paycheck to paycheck.
00:30:20.960 --> 00:30:22.400
Okay, I get that.
00:30:22.640 --> 00:30:25.119
We can work on trying to get more money.
00:30:25.359 --> 00:30:31.759
If it's something like enrollment requires a number of confusing steps, I go, okay, that's the path.
00:30:31.920 --> 00:30:34.880
Let's clear the path, let's walk you through.
00:30:35.119 --> 00:30:42.480
If nobody, if they tell you that, yeah, I know what I'm supposed to do, I'm the first person in my family to open this account.
00:30:43.200 --> 00:30:55.599
Now that that can be the social component that we need to talk about here and breaking those social norms and going, oh, we're gonna override that and be logical thinkers around that.
00:30:55.920 --> 00:31:01.039
And, or it could be just I feel uncomfortable, I'm anxious, there's an emotion around it.
00:31:01.200 --> 00:31:03.200
And you go, yeah, I get it.
00:31:03.519 --> 00:31:09.200
Signing up for something, especially that's different or new and putting out your personal information can be intimidating.
00:31:09.279 --> 00:31:13.279
And all we're gonna just try to do is create that path and then we'll leave it alone.
00:31:13.440 --> 00:31:16.000
We don't have to even move a dime today.
00:31:16.160 --> 00:31:24.720
We're just gonna open up that account, give you a login, and then we'll leave it alone to try to attack the emotion that's overriding their behaviors.
00:31:25.279 --> 00:31:27.599
All right, so that's where we're gonna leave you here.
00:31:27.759 --> 00:31:35.519
We'll come back to more and more of these, but at least now we have that framework that we'll be referring back to.
00:31:35.759 --> 00:31:43.920
If you have some ideas around this or thoughts we want to add, remember, this is our foundational framework that we're using.
00:31:44.079 --> 00:31:45.599
This is not the end product.
00:31:45.759 --> 00:31:50.160
So as we add more biases, we can kind of kick them into some of these different factors.
00:31:50.319 --> 00:31:55.680
It might morph into different more or less of the factors, but that's kind of where I'm at.
00:31:56.000 --> 00:32:16.079
Wanted to get that shared with everybody as I start formulating this framework, but at least we can now have some sort of deep discussion around behavioral finance when we get asked the question: why do smart people make dumb decisions with their money?
00:32:16.400 --> 00:32:19.200
Now we know it's the knowing-doing gap.
00:32:19.519 --> 00:32:24.240
And yeah, there's this bridge between what we know we should do and what we actually do.
00:32:24.400 --> 00:32:32.160
And now we know the five different forces, main forces that factor in, and we're gonna start building in the rest.
00:32:32.400 --> 00:32:36.559
And with that, I will leave you to the rest of your day.
00:32:36.720 --> 00:32:39.680
Thank you so much for watching, listening.
00:32:39.839 --> 00:32:46.240
And if you have any questions or want to reach out, would love to hear from you, just click right on the link in the show notes.
00:32:46.559 --> 00:32:50.160
You can find me Brianfoltis.com, find me on LinkedIn, Dr.
00:32:50.240 --> 00:32:53.599
Brian Fultis, and moneystrong.net.
00:32:54.720 --> 00:32:57.839
Get your hands on some of the materials, find me on YouTube.
00:32:58.079 --> 00:33:00.000
A lot of the videos are already out here as well.
00:33:00.240 --> 00:33:01.359
Anyway, I'll leave you alone.
00:33:01.440 --> 00:33:04.000
Have a wonderful rest of your day, and we'll talk to you next week.
00:33:04.160 --> 00:33:04.799
Thanks, everyone.
00:33:04.960 --> 00:33:05.440
Bye.
00:33:07.119 --> 00:33:12.400
Thank you for tuning in to another episode of the Brian Fultis Behavioral Finance Podcast.
00:33:12.640 --> 00:33:19.759
We hope you found our exploration into the fascinating world of human behavior and finance, both enlightening and thought provoking.
00:33:19.920 --> 00:33:22.319
Be sure to subscribe for future episodes.
00:33:22.400 --> 00:33:26.480
And until next time, stay curious and financially savvy.
