Articles of Interest - June 13

Written by Joe Pitzl, CFP® | 14 June 2012

Pulling the Levers (Carl Richards, BehaviorGap)
In this short video, Carl discusses that instead of thinking our investing success rests on any one thing, it helps to recognize that we have multiple levers we can pull for financial success.
 

Why You Need to Ditch Your Retirement Plan (Tim Maurer, Forbes)
The author, Tim Maurer, questions the concept of a traditional retirement. "The notion of a traditional retirement is not a tradition and has no historical basis. Think about it." He goes on to explain that the idea of retirement is a very new concept that literally distracts us from a more meaningful pursuit - fulfillment. We would all be better off if we stopped focusing on saving and using our money for retirement and started focusing more on using those resources for fulfillment.
 

7 Ways to Experience More Joy (James Baraz and Shoshana Alexander, Experience Life Magazine)
"Joy is not for the lucky few, it is a choice anyone can make." This is a wonderful article sent by one of our clients that outlines simple steps anyone can take to reframe their mindset to experience more happiness. Like anything worth pusuing in life, happiness requires vision, effort and practice.

Intelligent Decisions.               Simplification.              Peace of Mind.

The Stories our Minds Tell Us

Written by Joe Pitzl, CFP® | 16 May 2012

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

In a 1983 study, psychologists Daniel Kahneman and Amos Tversky provided a group of people with a list of 8 occupations and asked them to rank Linda’s likely occupation based on the fictional profile outlined above. The occupation of bank teller ranked 8^th out of 8 – dead last.

Kahneman and Tversky took this result and created a follow-up question: which of the following is more likely?

1. Linda is a bank teller
2. Linda is a bank teller and is active in the feminist movement

Our brains are wired to visualize, and the more lifelike the image, the more we cling to it. The addition of descriptive details allows our mind to paint a more vivid picture of the concept we are wrestling with. Naturally, we seek additional details to support the story unfolding in our minds.

This is the mechanism that allows us to “get lost” in a great novel and bring the story to life. A great novelist is an expert at using words to produce images in our minds. We actually see the story unfolding in our brains as we read the words on the page. It is a very cool ability we have been blessed with as human beings. However, this wiring can severely impair our judgment and decision-making.

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Links of Interest - May 16

Written by Joe Pitzl, CFP® | 16 May 2012

How Are Decisions Really Made? (Joe Pitzl, IFS Blog)

In this blogpost, we explore the roots of the decision-making process and argue that humans make (financial) decisions through a very irrational process. And while we can't change that - we are biologically wired to function in this manner - a heightened awareness of this wiring can help us slow down and make better decisions in a more consistent manner.

The Perma-Bears Will Never Be Convinced (Value Walk)

The author of this article explains that no matter how positive the news, people will somehow find a way for it to be bad. The exerpt within this column is almost comical if it wasn't so typical of analysts, economists and bar-stool advisors alike. He argues that today, "Being a “bear” is cool. Just look around. Bears are the economic equivalent of hipsters. Everything is a joke, everything is to be mocked and anyone who thinks the opposite of them is just clearly a moron. Despite everything that has happened since the depths of ’08-’09, people are still overwhelmingly pessimistic. Pick any 10 randoms headlines from any financial publication. If 8 of them aren’t negative, I’d be shocked."

The Big Danger With Investment Banks (Tom Frost, Wall Street Journal)

Tom Frost argues what we have long believed. The Glass-Steagall Act of 1993 (which was repealed in 1999) must be reinstated. In short, Glass-Steagall was put in place after the depression to prevent exactly what happened over the last decade. Frost argues that any bank that accepts insured deposits from the public should not be allowed to engage in the risky activities they are allowed to participate in today.

James Montier on the Failures of Modern Finance (Robert Heubscher, Advisor Perspectives)

In his keynote presentation at the CFA Institute Annual Conference, James Montier completely blasts the industry, both professional and academic, and blames them for the recent economic crisis. We love Montier's work and have quoted him extensively the last few years. Never one to sugar-coat an issue, Montier blames the industry for adopting and clinging to bad models, policies, incentives and behaviors. He cited the NRA slogan, “It’s not guns that kill people; It’s people that kill people,” and a rebuttal, “People kill people, but so would monkeys if you give them guns.” Montier said he takes a similar view of financial practioners and financial models. “If you were to give a bunch of monkeys a CAPM pricing model or a VAR risk model, you will end up creating a financial crisis,” he said. “In fact, I am pretty sure that is just what we have done.” The industry has taken terms like "risk" and redefined them, because real risk does not fit into their complex algorithms and prevents them from doing pretty mathematics.“Mathematics is ordinarily considered as producing precise, dependable results. But in the stock market, the more elaborate and obtuse the mathematics, the more uncertain and speculative the conclusions we draw therefrom. Whenever calculus is brought in, or higher algebra, you can take it as a warning signal that the operator is trying to substitute theory for experience.”

Happy Reading!

Intelligent Decisions.               Simplification.              Peace of Mind.

How are Financial Decisions Really Made?

Written by Joe Pitzl, CFP® | 12 April 2012

The brain scan on the left side of the image below was taken just before an individual placed a stock trade. The right side is a scan of a brain just before being given a hit of cocaine.

The most troubling thing about these images is that activity is limited to the exact same part of the brain in either event. In fact, the images are virtually indistinguishable.

Contrary to common belief, our decisions are actually made with our "right brains" (note: the terms "right brain" and "left brain" are used throughout this post to refer to the "emotional" and "rational" systems of our brains. While our brains are commonly referred to in this manner, they are not literally designed this way). This statement is controversial because we generally believe that we are rational people and make most of our decisions after an objective evaluation. In reality, we actually make most of our decisions before we are consciously aware that we have made them!

With respect to our financial lives, this is even more controversial because as soon as we hear the word finance, our "left brain" springs into action. We have conditioned ourselves to believe that finance and mathematics are inextricably linked, and therefore, we believe we make financial decisions based on a linear thought process. However, the process of financial decision-making actually begins with a decision (or hypothesis, gut feeling, market forecast, etc.) followed by an attempt to rationalize it. We must not confuse this with rational thought.

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