Zweig’s “Your Money & Your Brain”-Post #1

I’ve blogged a few times in the previous months about my recent fascination with the subject of “neuroeconomics”.  This is a field of study that looks at the role a person’s pschye, emotions, and/or subjective-self plays in making economic decisions.  I’m fascinated by this subject because of the gap between the body of fiscal knowledge that is readily available to households and the widespread lack of financial health.  I used to believe that the primary reason for this gap was a lack of significant fiscal curriculum in our schools.  The idea being that people were never taught how to properly manage their finances and therefore didn’t practice healthy habits.  I still believe that our society could benefit from better education but I now recognize that the issue isn’t necessarily knowledge-based.

The reality is that most households know they should spend less than they make so that they can save for future needs (i.e. retirement, rainy day fund, etc.).  Furthermore, most households have a desire to put their financial lives in order.  The problem is not knowledge it is pschological.  As Jason Zweig points out in his book “Your Money & Your Brain” the human brain has evolved over millions of years and only in very recent history has it been exposed to rational, analytical reasoning.  It’s no wonder that despite our understanding of concepts it is still very difficult for us to put theory into practice.  Here is an excerpt:

…our investing brains often drive us to do things that make no logical sense-but make perfect emotional sense….Our brains were originally designed to get more of whatever would improve our odds of survival and to avoid whatever would worsen the odds.  Emotional circuits deep in our brains make us instinctively crave whatever feels likely to be rewarding- and shun whatever seems liable to be risky….That’s why knowing the right answer, and doing the right thing, are very different.

I look forward to completing this book and gaining a greater understanding of the biology of how decisions are made.  I plan to share other thoughts and excerpts over the course of the next few weeks so please stay tuned.  If you have any interesting thoughts or resources to share on this subject please do so below in the comment section.

Thought for your weekend…

My sister & brother-in-law gave me a subscription to Lapham’s Quarterly for my birthday last year.  If you’re not familiar with this quarterly periodical it is literary magazine founded by former Harper’s editor Lewis Lapham.  Each issue he picks a theme and then searches historical & contemporary literature for inclusion in the issue.  It’s a great magazine but that’s not why I chose to write this post.

Lewis Lapham

His latest issue is entitled “Lines of Work” and deals with employment.  In Lewis’s opening essay he survey’s the US’s historical connection to employment and raises a very interesting point about employment and debt that I had never thought about before.  I thought I would blog about it today in case you wanted something to ponder over the weekend.

Here’s the excerpt:

“…somewhere in the middle of the 1980s on the yellow brick road with Toto and the Gipper… was easy access to conspicuous credit.  For how else could the American Leaves of grass join their top-dressed companions on a golf course unless they borrowed money?  The country’s working and middle classes discovered that it wasn’t the value of the work itself, or its manufacture of a decent living…that made up the sum of a country’s wealth and well-being.  Their great collective enterprise was the labor of consumption, and with it the derivative of debt…”

Leading up to this point in the essay Lewis had painted the US’s connection to work & employment much like the “protestant work ethic” you might imagine.  When American’s wanted something they worked long & hard, saved their money, and eventually purchased that house (if they didn’t build it with their own 2 hands) or car or ________.  In this instance the workers labor & unemployment was a direct means to an end.

But in the 1980s US workers now had the option to work for years and years and years OR purchase that item today using credit and then pay for it over time..  My question is, did the onslaught of widely available credit in our culture create a disconnect between our labor & consumption?

I’d love to hear your comments below.

Bar-Or’s “Play to Prosper”-post #1

I’ve elected to do my book reviews a little differently.  In the past I’ve waited until I completed a book before I recorded thoughts and excerpts that I found interesting.  The problem with this approach is that it is very time consuming because I save all the work for the end.  Therefore, from now on I will record thoughts as I read.

I just started a new book by Yuval Bar-Or entitled Play to Prosper.  I had blogged about Dr. Bar-Or back November HERE.  He is an expert in decision-making in the context of risk and caught my attention because of my interest in the role emotion plays in how we make economic decisions.  His new book is a guide for individual investors to navigate the complicated world of investing.  In his writing he uses sport & games as analogies for explaining the different roles that individuals play in the world of finance.

In the first few chapters he stresses the importance of engaging professionals who are upheld to a fiduciary standard.

“The key is to find those coaches who are fiduciaries, meaning that they have a legal obligation to place your priorities ahead of their own.”

I am proud to mention here that as a CFP® I am required to act in this manner.

Recently it’s become apparent to me that most individual investors believe that financial planners are synonymous with investment advisers.  However, this is not the case, only a minority of investment advisers carry the CFP® designation.  Furthermore, most do not want to spend the time planning.  This book provides a nice summary of the role of a financial planner:

Financial Planners take a comprehensive view of the client’s financial situation and develop a plan to achieve the client’s intended overall objectives.  Rather than focusing only on investing, their advice may encompass investments, insurance products, educational trusts and, in some cases, taxation and wills.  (They provide a game plan, but don;t execute it).

I should point out that some planners do execute the plan but often they do not require the client to do so with them.

Lewis’s “The Big Short”

I’ve been meaning to do a quick book review post on “The Big Short” for the past few months but these posts are kind of time consuming.  A couple weeks ago NPR’s Planet Money team did a ‘Deep Read’ interview with the author Michael Lewis.  If you’re not familiar with Lewis he is an author who wrote an iconic book about Wall Street Finance in the late ’80s called “Liar’s Poker” which I reviewed HERE.  It just so happened that Lewis was working for Salomon Brothers in the ’80s where the Mortgage-backed bond was created.

“The Big Short” deals with the collapse of the subprime mortgage-backed bond market so as NPR’s Jacob Goldstein points out he basically wrote books about the alpha and omega.  Although this topic may sound dry and boring Lewis writes in a narrative style and does a great job of capturing the culture of Wall Street then and now.  Lewis himself claims in the interview that he doesn’t like writing about money but instead likes writing about subjects which offer an insight into the social culture of a specific time and place.

I have too many notes to list in this post but I highly recommend the book.

Here are just a few excerpts that I’ll share:

*Quoting a financial professional: “…Any business where you can sell a product and make money without having to worry how the product performs is going to attract sleazy people.

*A hedge fund manager pontificating on Buffett (had to include this quote): “At one point I recognized that Warren Buffett…did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules…I also immediately internalized the idea that no school could teach someone how to be a great investor.

*A recount of the madness: “In Bakersfield, California,  a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000.

*Monetary losses caused by the sumprime era: “…the International Monetary Fund…out losses on US-originated subprime-related assets at a trillion dollars.” (Keep in mind that this was not the amount of the underlying mortgages.  This tally got so high because investment banks were selling Credit Default Swaps and other derivatives that were effectively bets on how the underlying mortgages would perform.)


Lewis’s “Liar’s Poker”

It feels good to be reading for recreation again.  Although, I’ve had trouble finding time to review the books I’ve read.  I completed Michael Lewis’s classic “Liar’s Poker” earlier this summer and am just getting around to posting this.

If you liked the movie “Wall Street” or like reading about the greedy scum on Wall Street then you’ll definitely enjoy this read.  Michael Lewis writes about his personal experience working for Salomon Brothers as a mortgage-backed bond salesman during the 1980’s.  I think the book is even more interesting following the subprime mortgage crash that we recently all got to watch.  Here are some excerpts & thoughts I want to remember:

*Volker’s Fed policy of the late ’70s & early ’80s led to an explosion of bond trading volumes which set the stage for Lehman Brothers to come to prominence.

*“One of the most remarkable things that happened in the 1980s was [the] sharp explosion of debt, way beyond any historical benchmark….is came about, I think, as a result of freeing the financial system, putting into being financial entrepreneurship and not putting into being adequate disciplines and safeguards.  So that’s where we are.”

*”Wall Street brings together borrowers of money with lenders.  Until the spring of 1978, when Salomon formed Wall Street’s first mortgage security department, the term borrower referred to large corporations and to….governments.  It did not include homeowners….From the early 1930s legislators had created a portfolio of incentives for Americans to borrow money to buy their homes…Nudged by a friendly policy…loans grew, and the volume of outstanding mortgages swelled from $55 billion in 1950 to $700 billion in 1976.  In January 1980 that figure became $1.2 trillion.

*Describing the reason securitization of mortgages came to be: “Mortgages were not tradable pieces of paper; they were not bonds…A single home mortgage was a messy investment for Wall Street, which was used to dealing in bigger numbers.  For the home mortgage to become a bond, it had to be depersonalized.  At the very least, a mortgage had to be pooled with other mortgages of other homeowners.

*The traders who profit from the sale of mortgage-backed securities were involved with the creation of Fannie  & Freddie: [Salomon Brothers] “intended to transform [mortgages] into bonds as soon as possible by taking them for stamping to the US Government.  Then they could sell the bonds…as, in effect, US Government bonds.  For that purpose, partly as the result of [Salomon’s] persistent lobbying, two new facilities had sprung up in the federal government alongside Ginnie Mae (Fannie Mae & Freddie Mac).  They guaranteed the mortgages that did not qualify for the Ginnie Mae stamp.  (As a result) Defaulting homeowners became the government’s problem.

*Creation of a CMO: “To create a CMO, one gathered hundreds of millions of dollars of ordinary mortgage bonds Ginnie Maes, Fannie Maes, and Freddie Macs.  These bonds were placed in a trust.  The trust paid a rate of interest to its owners… The (owners), however, were not all the same.  Take a typical three-hundred-million-dollar CMO.  It would be divided into three tranches, or slices of a hundred million dollars each.  Investors in each tranch received interest payments.  But the owners of the first tranch received all principal repayments from all the three-hundred-million dollars of mortgage bonds held in trust.  Not until the first tranche holders were entirely paid off did second tranche investors receive any payments…

*The creation of new mortgage-backed products (i.e. CMO’s, tranches, splitting principal and interest payments) was partly driven by the Savings & Loan Industry’s desire to acquire assets that they could stick “off-balance sheet” because regulators had yet to regulate the new product.

*Leverage: “…it is a wonder that more attention is not paid to the daily leveraging that occurs within investors’ portfolios.  Say I wanted my customer to buy thirty million dollars’ worth of AT&T bonds.  Even if he had no cash at his disposal, he could pledge that AT&T bonds as collateral and borrow the money from Salomon Brothers to buy the bonds.  We were genuinely a full-service casino…

*No one knows: “I spent much of my working life inventing logical lies…Most of the time when markets move, no one has any idea why.  A man who can tell a good story can make a good living as a broker.  It was the job of people like me to makeup reasons…..Heavy selling out of the Middle East was an old standby.

*Rating agencies: “…the rating services, like most commercial banks, relied almost exclusively on the past… in rendering their opinions.  The outcome of the analysis was determined by the procedure rather than by the analyst.

*Page 218 does a pretty good job of summarizing the causes of the S&L crisis.  Basically, S&L’s were in trouble and Congress gave them access to cheap money and loosened regulations so they could invest in junk bonds.  We all know how that ended.

*A little wisdom to end the book: “He said that every decision he has forced himself to make because it was unexpected has been a good one.  It was refreshing to hear a case for unpredictability in this age of careful planning.

Stieg Larsson’s Millenium Series

Stieg Larsson

I just got done reading the third and final novel in Stieg Larsson’s Millenium Series (The Girl With a Dragon Tattoo, The Girl who Played with Fire, & The Girl who Kicked the Hornet’s Nest).  I don’t think I’ll spend anytime reviewing them on this blog since they are not financially related AND because they’ve been widely publicized.  However, I will say they were very entertaining even for a guy who doesn’t regularly read murder mysteries.

Also, if you have read any of these you may find this article in the NY Times interesting about the dispute between Stieg’s partner and his family.

Recreational Reading on hold

I am currently in the middle of preparing to sit for the CFP(R) Board’s CERTIFIED FINANCIAL PLANNER(R) test in July 2010.  I have been at it since the Fall of 2009 and my efforts have prevented me from doing any recreational reading.   I’m looking forward to completing the test (and hopefully passing) and having my evenings and weekends back at which point I plan to get back to reading and reviewing books for this blog.  In the meantime, back to the text books!

New book about Rand

Apparently there is a new biography about Ayn Rand’s life out on the shelves.  I plan to purchase it in the near future.  Here is a link to the NY Times book review.  Maybe this will motivate me to finally get “The Fountainhead” up on my book review page.

Gladwell’s “Blink: The Power of Thinking Without Thinking”

After recently reading “Outliers”, Malcolm Gladwell’s latest book, I was inspired to read “Blink” which was the remaining of his I hadn’t yet read.

I really like Gladwell for two reasons.  First, the subject matter he writes about is both relevant and interesting.  The stuff he covers is right under our nose all day everyday but we don’t take the time to study it.  Second, his style of writing is easy to read.  Although he is teaching the reader a lesson its as if he’s writing a story  rather than academic thesis.

In this book Gladwell explores the role that our unconscious mind plays in how we think, choose, judge, contemplate, and act.  The book goes into great detail exploring how our initial impressions are shaped by our unconscious associations and how these “snap judgments” can lead us to make both poor and positive decisions.

He ascribes the term “thin-slicing” to our unconscious minds ability, “to find patterns in situations and behaviors based on very narrow slices of experience.”  For example, have you ever observed a person’s mannerisms from afar for only a brief period and made a judgment on what kind of person they are?  That is “thin-slicing”.   But how can our mind be so quick to pass judgment on such subjects?

As Gladwell says on page 69, “We have, as human beings, a storytelling problem.  We’re a bit too quick to come up with explanations for things we don’t really have an explanation for.”  For the next few chapters Gladwell looks into how our unconscious mind can be altered which in turn alters how we appraise a person or situation.

In the second chapter he references a couple experiments that demonstrate how a person’s mind-state will impact their future judgment.  For example, two groups of similar people were given trivia questions.  Prior to the experiment one group was told to think about being a college professor while another group was told to concentrate on soccer hooligans.  As you could probably guess the group that thought about college professors outperformed the other group.  Gladwell explains that this mental preparation essentially stimulates the unconscious mind into making future decisions in line with your environment.

In the following chapter he covers physical associations and how they can impact a persons judgment.  On page 76 he writes, “I think that there are facts about people’s appearance- their size or shape or color or sex- that can trigger a very similar set of powerful associations.”  Although few people in our “PC” world care to admit that physical stereotypes play a role in their judgment I think it is safe to say that they are very real.  Gladwell concurs on page 85, “The disturbing thing…is that..our unconscious attitudes may be utterly incompatible with our stated conscious values.”  Don’t think this sentence applies to you?  Test yourself @

At the end of the day Gladwell shows that there are a myriad of things that impact our unconscious mind and in turn impact our initial impressions regarding a situation.  It’s important that as humans we understand that.  When making important decisions we should not only weigh the information that we have available to us but we should also weigh the environmental factors which may also be altering our interpretation of that information.

Furthermore, whenever possible, we should look for ways to minimize the environmental impact of our minds so that we can make more organic decisions.  Of course, this is easier said than done.

Here are some additional notes:

*Importance of support in a healthy relationship- In one of the experiments Gladwell references regarding healthy & unhealthy relationships the psychologist points out that “support” in conversation is crucial to determining whether or not a relationship will work out in the long-run.

*Treat others well: In another study that Gladwell references doctors who treated their patients well were much less likely to be sued for malpractice than doctors who were either unfriendly towards their patients or who displayed superiority.  Lesson: Treat people well and they’ll be more forgiving of your mistakes.

*Lesson for salespeople: Starting on page 88 Gladwell introduces us to Bob Golomb who is a car sales manager in Flemington, New Jersey.  He has been hugely successful throughout his career and he credits his success to one principle- “never to judge anyone on the basis of his or her appearance.  He assumes that everyone who walks in the door has the exact same chance of buying a car.”  In thinking about this I feel as though I am pretty good about not letting my “thin-slices” impact the effort I put forth in helping people in my business.  I think I can thank my mom for that.  She is a very warm and welcoming person no matter what the appearance of a person.  I grew up under her tutelage and I have her to thank.

*In the fourth chapter one of the topics covered is quantity of information.  Sometimes too much information and paralyze your ability to make decisions.  Especially when the decision is one that is typically made in a “blink”.  The example he gives is with buying jam.  A retail store tested jam sales by offering a table with 24 options one time and 6 in another.  Although conventional wisdom would tell us that a consumer with more choice would be more apt to buy, in this instance it was not the case.  When presented with less information the consumer bought more often.  Kind of like blog posts.  When I write too much people are less apt to read the post :).

*Describing an ‘expert’ on page 179: “The first impressions of experts are different (from non-experts)…  When we become an expert in something, our tastes grow more esoteric and complex…  it is really only experts who are able to reliably account for their reactions.”  In other words, when an expert is experiencing in their field of expertise they are conscious of of their unconscious associations.  They can explain why they do or don’t like something with conviction.  In Gladwell’s words on page 183: “Our unconscious reactions come out of a locked room, and we can’t look inside that room.  But with experience we become expert at using our behavior and our training to interpret- and decode- what lies behind our snap judgments and first impressions.

*Facial expressions- On page 199 Gladwell points out that facial expressions which express our thoughts, feelings, etc. are common amongst humans across cultures.

*Where a smile on your face: From page 208- “…we take it as a given that first we experience an emotion, and then we may- or may not- express the emotion on our face.  We think of the face as the residue of emotion.  What this research showed though, is that the process works in the opposite direction as well.  Emotion can also start on the face.

*Where we get information: Most of the subconscious information we get to interpret information is from the emotion they display on their face.  Research shows that a person can practice reading faces and become more effective in picking up others emotions/ motivations.

*On page 214 Gladwell provides a very good explanation of what an autistic person experiences.  I don’t know much about autism and found his description very interesting.  Autistic people, “have difficulty interpreting nonverbal cues, such as gestures and facial expressions or putting themselves inside someone elses head or drawing an understanding from anything other than the literal meaning of words.

*In chapter 6 on one the topics covered is the impact stressful situations have on our ability to interpret information.  Essentially, when our heart rate increases under the stress of a difficult situation we do not consciously interpret information.  We react based on what our unconscious mind believes we should do.  However, it is possible to train under high stress situations to improve our decision making capabilities.

Things I will follow up on after reading this book:
-Look for programs to help me improve my ability to read the emotions of others by studying facial expressions.

Kent’s “Healthy Money Healthy Planet: Developing sustainability through new money systems”

While strolling through one of the best second-hand book stores in NZ (Title Book Galleries) I ran across this title from Deirdre Kent, an unknown writer from NZ.  Being that I have an interest in economics as well as sustainability I thought it would be a good one for me to read.

Kent’s premise is that the problems that exist in the global economy (i.e. climate change, depletion of natural resources, income inequality) stem from fractional reserve banking (FRB) systems and interest-bearing debt.  Here is a summary found on page 213:

“…the unhealthy interest-based money system we currently have demands that the money supply keeps growing, and at an exponential rate.  It is therefore clear that interest-charged money is inherently inflationary.”

Or, in this simple example found on page 20:

“Suppose a bank lends out $100 to each of 10 families at 10 per cent interest.  To repay the loan, families are required to grow crops and produce goods to sell.  At the end of the year, each family is expected to pay back their principal of $100, together with $10 interest, a total of $110….There is now $1,000 in circulation, but the system requires $1,100 to be paid back at the end of the year to the bank, hence there is an inescapable shortfall….”

To solve the world’s problems Kent calls for radical monetary changes by drawing on ideas from older economists such as Henry George & Silvio Gesell.  Namely, Kent would like to see local complimentary currencies exist along with national currencies.  In addition, she’d like to see local community banking and interest-free loans (its not yet clear how private banks would make money).  Lastly, she would assign a “hoarding charge” to those people who didn’t spend their currency within a certain timeframe.  The goal of this last initiative is to increase the velocity of money.  Somehow though she would not assign this charge to savings deposits.  But then would that really increase the velocity of money?

Although I did find Kent’s identification of issues in the existing FRB system intriguing, I felt the solutions she proposes in the book lack detail as well as sound economic thinking.

Here are my notes:

*Economics is for everyone- “Economics is for everyone.  We can’t avoid it, as it permeates every field of our lives- work, food, clothing, mortgages, jobs, business, budgets, family, education, investments, wages, savings, housing, and of course, shopping.  Since the discipline involves making value judgments about what is worthwhile and what constitutes progress, it is far too important to be left solely to economists…”

*Power of compound interest: “…if a single penny had been invested at the birth of christ, at a 5 per cent interest rate, it would buy 134 billion balls of gold equal to the weight of the earth at modern gold prices.”

*On page 71-72 Kent outlines 6 reasons why GDP is a poor indicator of economic progress.  Here is an example: “Being pregnant, chasing toddlers and breastfeeding do not add to the GDP, but looking after other people’s children in a daycare centre does.” or on page 81: “…when fish are left in the sea to replenish stocks, they are not considered a monetary “asset” to the economy; only when they are sold in the markets…”

*Islamic finance: “… is based on the belief that the provider of capital and the user of capital should share the risk of business ventures equally, whether these are industries, farms, service companies or simple trade deals.  Translated into banking terms, this means that the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures.”

*Local complimentary currencies- Kent does provide a nice summary of complimentary currencies that were recently or are currently in use on pages 128-153 and again on 292-294.  There include Salt Spring Island certificates, Ithaca HOURS, and LETS.  This is interesting stuff.

*Looking at nature to solve economic problems- “…in nature species adapt by conserving what is working and altering what is not; they don’t just suddenly change.”

*High profits=low service- Kent references a study done in the 1990s in NZ which showed that there was an inverse correlation between a banks profits and the level of its customer service.  Does the same hold true in the US?  I wonder.

*Things I’ll research further after reading this book:
a) how money is created under a FRB system
b) alternative measures of economic progress such as the Genuine Progress Indicator (GPI by Redefining progress) or Human Development Index (HDI by the UN)
c) ITEX, a commercial trade barter system, which was originally started in Portland in 1982.
d) Silvio Gesell