Are there research-based insights that can help me make better money decisions?

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Transcript:

[Michael:] Hey, humans. I’m Michael Liersch, and this is the About Money podcast, presented by Wells Fargo. I’m a behavioral scientist with a PhD in cognitive psychology who loves openly discussing money to help humans better understand their money behaviors. By understanding our money behaviors, we all have the opportunity to make better money decisions. This season, we’re going to talk about jobs money can do for us. Jobs, you might ask? Yes, money does many jobs for us, such as helping us with our family, lifestyle, the community, aging, travel, investing, and more. We have a great lineup of guests for you. So let’s get into it.

In this episode, we’re going to speak with Shlomo Benartzi, who’s a behavioral scientist, UCLA Business School professor, and author of many academic articles and popular books on behavioral finance. Shlomo’s best known for his research findings on behaviors that help us to save more. He’s here to answer the question we’re asking in this episode: Are there research-based insights that can help me make better money decisions?

Shlomo Benartzi, it’s great to see you and hear you, and welcome to the About Money podcast. Thank you for being here.

[Shlomo:] Thank you.

[Michael:] So let’s dig right into it, Shlomo. So the reason why I wanted to make sure you came on the podcast, Shlomo, is I wanted you to first tell people, why should they even care about their behaviors when it comes to money? Tell me what you think.

[Shlomo:] Well, you know, the way I think about it is one of the consequences, if they don’t care, you know, can they make huge money mistakes and there is quite a bit of where, just to give one example, by Terry Odean at UC Berkeley, showing that the returns that investors tend to earn are much lower than they could because they tend to buy and sell at the wrong time.

I might loosely call it kind of the “buy high, sell low” quote, unquote strategy, but it’s really not a strategy, it’s a big mistake — and when you think about it, there’ve been so many individuals who panicked when the pandemic started. They saw their portfolios dropping 30%–40% in a week; they sold at the bottom. And that is a problem. If you’re not actually aware of your own behaviors and biases, if you don’t know how susceptible you are to following the herd, to buying high and selling low, you might actually invest for 30 years and end up with less money than you started with, and not because the markets didn’t go up, just because you were not aware of your own behavioral tendencies.

[Michael:] So, in retrospect, I get what you’re saying, you know, the markets went back up and, you know, if I had stayed invested, I would have been better off, but like how am I supposed to know that, Shlomo? Like, that’s not fair. You’re almost saying this in retrospect where, you know, we never know in the moment. Is it going to go up, is it going to go down? What do you say to those people, Shlomo?

[Shlomo:] It’s an excellent point, because you know, when markets started to drop during the pandemic, we had no clue. Is that going to be this one huge thing we’ve never, ever seen in the 200 years or so of history of U.S. stock markets? Is it going to go down 80%–90%? Will everything be wiped? And we could obviously panic and every time something happens, like the financial crisis in ’08–’09, or the burst of the dot com, there’s always something that could get us scared. And I think the easiest way is probably just not to look.

I mean, when you know, I don’t open my quarterly 401(k) statements, I barely even open the annual ones. You set a strategy and you forget about it. There’s no need to be obsessed with markets’ ups and downs. But it’s easier said than done because your phone comes built in with a stock app, and it’s so easy to click and look and the media is out there and the social media channels, so I think the effort is not what to buy, what to sell; the effort should be, how do I stop looking? Let’s play with the kids, with the grandkids, let’s take a walk, and let’s just ignore Bitcoin.

[Michael:] So when you say not to look but also to set a strategy, what’s the dynamic there? Especially when it comes to things like goal setting and revisiting goals. What are your perspectives on that?

[Shlomo:] If you think actually about GPS and driving in the car, well I might take the freeway, I might take the side street, I might take that side street, whatever. But where are you going? What’s the goal?

[Michael:] That’s right.

[Shlomo:] You can’t actually start the GPS without a goal, and I think investing and making financial decisions is virtually the same.

[Michael:] Tell us about some unproductive behaviors.

[Shlomo:] So one unproductive behavior is looking, for example, at Bitcoin and seeing it going up, month after month, doubling and doubling again, and if I invested in it, I would have been so rich by now. And then we kind of extrapolate, and we put our money into it. Now, I know nothing about cryptos; I have no crystal ball to know where Bitcoin will be, but there is this general phenomena that we tend to look for a path that doesn’t really exist in the data. We kind of try to make a story even when things are not really predictable, and we have to be careful. So, excessive extrapolation, buying things after we’ve seen them doubling, one, two, three, years in a row, is a very unproductive behavior.

[Michael:] So what can help people overcome that tendency, that human tendency to over extrapolate?

[Shlomo:] A very easy way, which is set it and forget it. And I’ll give you an example. With investing it’s kind of obvious, you know, pick your strategy, put the money there and just don’t check on it for 5 years, for 10. I mean, what does it matter? Markets go up, go down, the usual cycles. But let’s use an example from the savings domain.

[Michael:] OK.

[Shlomo:] Because it’s very difficult for most people to find the money and the discipline to save for the future, especially if you think about long-term goals like 401(k) savings. And I’ve done work with Richard Baylor from The University of Chicago back in the mid-’90s. We tried to help people who save for retirement to save more. And we came up with this program that makes it easy for people to save. Once you sign up, every time you get a pay raise, you’re going to save more money. And it’s going to be on autopilot. And in the first case study, 80% of blue collar employees decided to join the program.

They couldn’t save right away, they didn’t have the means, they couldn’t finish the month paying the bills. But when they thought about saving in the future, especially if they get a pay raise, it sounded really easy. And when you put it on an autopilot, and that’s really important, the autopilot — it just happens, they don’t have to take any action. Then within 3½ years, those blue collar employees quadrupled their saving rates.

[Michael:] Wow.

[Shlomo:] From 3½ to almost 14%. So I think there are very easy ways to create sound financial trajectories, but it’s often the case of just set it and forget it.

[Michael:] So, part of this is the pre-commitment aspect. And even if I can’t do it today, can I somehow set up a programmatic approach to pre-commit to do it tomorrow without having to quote, unquote approve that again, or say yes to it again. Because when I get that raise or when I get that increase in my salary or I get that, you know, surprise tax refund, maybe if I were to have to make that decision in the moment, I would make the decision to have a little more fun or spend it, but if I pre-committed to take that and put it away, to your point, in a savings or an investing or just some sort of financial plan, perhaps I would make a different set of decisions and I might not even notice, and then when I look back, to your point, 3 years, 4 years later, I would say whoa, that’s a ton of money that I would have never otherwise saved and maybe I missed a dinner here or a piece of clothing there, but did that really matter in retrospect? Am I getting you right, Shlomo?

[Shlomo:] Absolutely, and I think you, you’re touching a really important overall point, which is those decisions are not black and white, yes and no. It’s not like yes I can save now or no I can’t save now, forget about it. There is another option, maybe I can save later, and it’s really timely because a lot of people have been struggling during the pandemic.

[Michael:] Yes.

[Shlomo:] And some have been tapping into their 401(k) accounts. And I totally get it, but again, it’s not a black and white decision. I don’t touch it at all because maybe you do have very expensive credit card debt that you should pay a bit. On the other extreme, let me take out all of my 401(k) savings because I need money.

So, the middle ground there would be something like, oh you want to take your money out, we understand it, how much did you want to take out? Oh, do you think you could take out just half? And I call it kind of the “take out half” nudge; if you need more, you come back later. But there are many cases where we tend to think about financial decisions as yes-no, black-white.

[Michael:] Sure, a light switch, on-off. Yeah.

[Shlomo:] And there’s always another, exactly, there’s another solution that might fit you better.

[Michael:] I love that idea of the dimmer, and this take half idea. I want to move to a topic that’s very close to a lot of our minds, especially in the pandemic, which you brought up, which are our devices.

[Shlomo:] What I believe is happening, and we’re seeing more and more evidence, is that on the small devices, we got used to doing things really fast, just tap, swipe, next, and with that comes the risks that we’re going to see the markets drop down during a pandemic or whatever other correction, and now it’s just a click away to sell the entire portfolio. And we also find that people know less about money if you ask the same question on an iPhone versus a desktop.

[Michael:] So we’re basically, we are less able, what is it, to respond to things, process information, what is it on the screen versus on a piece of paper? What’s going on there?

[Shlomo:] So I think a few things, and just the one caveat is that this entire area of research is relatively new. But having said that, there’s beautiful work by Shiri Melumad at Columbia University that the decision-making on smaller devices tend to be more emotional.

[Michael:] Oh. OK.

[Shlomo:] And if you take all of this together, the fact that I believe, I strongly believe, there’s more impulsive kind of faster pace, you add on it the emotions of the moment and the ease of virtually taking some transaction with one click, and you can literally get devastating outcomes, actually, making serious financial decisions on a little mobile device while you’re, you know, waiting for the subway or whatever else and you’re preoccupied with 10 other things.

[Michael:] That’s really interesting and I hadn’t really thought of it that way, something that really, you know, cued me here in what you said is, you’re right, it’s the combination of things, the environment, the context of the phone itself, and all the other things you’re doing. And then what also cued me too is, I guess it’s not surprising that we may not be as smart when we’re answering questions on a phone versus in another mode, because it’s just so quick and we’re not deliberating as much, which is I think ultimately what you’re highlighting. We’re not taking a step back.

[Shlomo:] Correct.

[Michael:] There’s a big action bias there that’s also overlaid by a bunch of other stuff, emotion and otherwise. Am I getting it right, Shlomo?

[Shlomo:] Absolutely, and one other thing to your point about the environment, it’s unusual to turn a mobile device your focus; you normally multitask, you know, you’re at the traffic light, you’re waiting for the green.

[Michael:] I hope we’re not at a traffic light while multitasking on our device.

[Shlomo:] You know, people pull the phone, and they look quickly and then put it back down.

[Michael:] OK, OK. Fine.

[Shlomo:] So we’re constantly multitasking, and while we strongly believe that it’s really easy for us, the data is actually miserable about us human beings being able to multitask. We are not very good at that. And I think that’s a big issue with the smartphones is that because we tend to do seven things while we’re also tapping on the phone that the quality of the financial decisions deteriorates really fast.

[Michael:] What do you think is the single most important, or let’s say profound, piece of advice, financial advice, you would give people who are looking to make better money decisions in their life?

[Shlomo:] I think you set me up because I think what actually their thinking is, I’m going to get rich quickly, how do I do it? Well, that’s not going to happen. But let me use the airplane analogy.

[Michael:] OK.

[Shlomo:] First of all, you have to pick a destination; you can’t just go to the airport without knowing where you want to fly, and I think that’s very similar to setting a goal. What am I trying to achieve? What are the goals that matter to me? And then find an autopilot to do the work for you. Save 6% this year and 8 next year, then 10 the year after, and then let the autopilot do it. Do nothing other than that. No need to look at your portfolio going up and down, no need to think if it’s time to take money out. It should be easy at the end of the day.

[Michael:] So in a sense, we’re making it harder on ourselves, Shlomo, by a missing the goal setting part. Am I catching your drift here, Shlomo?

[Shlomo:] That is absolutely correct.

[Michael:] So, the last question I’m going to have for you, Shlomo: Why are you so passionate about this topic?

[Shlomo:] I think it’s really the impact; behavioral finance empowers you to make a difference because you could do the research, and the research can change lives.

[Michael:] Wow, well, Shlomo, I really appreciate you sharing that with us. I’m so grateful for you being here on the About Money podcast. Thank you.

[Shlomo:] Thank you, Michael.

[Michael:] Many thanks to Shlomo for sharing his perspectives on the About Money Podcast.

That’s it for this episode of the About Money podcast. Please email us with the topics that you would like us to address at aboutmoney@wellsfargo.com. And if you really liked the episode, share it with family, friends, and anyone who listens to podcasts. About Money is produced by Wells Fargo. You can learn more about ways to work with us at wellsfargo.com/aboutmoney. I’m Michael Liersch, asking you to talk about money today.

Announcer:

The views expressed by Shlomo Benartzi are his own and do not necessarily reflect the opinion of Wells Fargo & Company or its affiliates.

This information is provided for educational and illustrative purposes only.

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