Many of the old sayings and adages that pepper our discourse tell us that human nature, in all of its quirkiness, governs much of our activities. Often, our decisions are based on unspoken assumptions that may not be wise. Therefore, few of us handle our money as objectively as we could. Now, as professional students of human nature, let's focus on some of the manifestations of the perverse, emotional folly that affects our financial life.
It's a fundamental precept of economic theory that people (hopefully) tend to maximize their financial well-being in reasonably sensible ways. For example, many of us unconsciously divide our money into different mental accounts rather than focusing on the gestalt of our financial well-being.
One simple accommodation to this tendency is to move all of your accounts to a 1-stop financial shopping center, such as Schwab, Fidelity, or Vanguard. It makes negotiating between different goals more visible and easier, as the monthly printouts come in the same format and at the same time. It also helps that any purchase or sale action could be done in 1 easily mastered operation. Now your compartmentalization tendency will look a bit more rational.
For another example of our contrariness, you'd assume that a windfall or even a rising income would make us happier. Studies show that this is the case, but only for a limited time. Isn't more money a part of everyone's dream? Perhaps, but this is where things get interesting.
As we adapt to a changing financial reality, our expectations rise and we get on the satisfaction treadmill. Worse, if we see those around us also economically improving, being the envious lot we are, we make the treadmill go faster. It turns out that economic stimulus has a lot to do with looking over our shoulders. Some of the origins of September 11 may be traceable to the envy generated by the burgeoning visibility of economic contrasts around the world made available by the media and the Internet.
Another foible to be aware of so that we don't shoot ourselves financially in the foot is our need to save face, particularly after a loss. We often have very transposed rationalizations. "I'm an expert at picking past performance," "The up market proves how smart I am; the down market proves how dumb my broker is," "If I double my next investment, I'll make the losses all back," and, "I'm due for a big winner, don't you think?" As the classic Pogo cartoon says, "We have met the enemy, and he is us."
Jeff Brown, a partner on the
Stanford Graduate School of
Business Alumni Consulting
Team, teaches in the Stanford
School of Medicine Family
Practice Program. He welcomes questions
or comments at firstname.lastname@example.org.