PRN: Taking on Human Nature

Physician's Money Digest, October15 2004, Volume 11, Issue 19

I keep coming back to this subject andits effect on our financial lives—beingobjective and rational. Let's again reviewsome of the ways we routinely get in ourown way when it comes to money.

For one thing, we often worry aboutthe wrong things. An example is thesix-figure loans that a lot of young docscarry out of their training. It looks scaryon paper, but it's low-interest debt andshould be paid off last, not first. Whatmost money gurus recommend insteadis to start saving early for things like ahouse, college, and retirement to takefull advantage of the miracle of compoundinterest, especially in a tax-shelteredvehicle like an IRA or 401(k) plan.

Calm Down a Bit

How about our maddening tendencyto follow the herd when buying or sellingsecurities—jumping on the bandwagon,acting on a hot tip, etc? Weknow and read that we'd be better offsticking to a plan of monthly dollar-costaveraging, saving a regular amountmonth in and month out, regardless ofmarket gyrations. We know we shouldbe diversifying over four or five areas ofnonmatching economic behavior (eg,real estate, stocks, and bonds) and periodicallyrebalancing. Following thesesimple steps is the surest route to ourgoals. But, no, we just can't resist beinga player, even if it's almost certain to bean expensive setback.

The reverse is true, too: selling precipitouslybecause of fear and a lack of discipline.Fear and greed are primal survivalinstincts, but studies show we dislike lossmore than we like gain by a ratio of 2 to1. Survival and gain in an environment assophisticated as the financial markets'require thought and planning, not primalinstincts. If we only pay lip service tothis insight, our small, private, emotionaldecisions can lead to expensive regret—another emotional corrosive. It's a hardlesson, but trying too hard to always wininevitably will lead to loss.

A good mantra:

Let's lose the drama. Successfullyachieving financial goals does notinvolve an interesting series of events.Rather, it more often involves a dull,routine, and continuous process. We dobest when we learn to trust thatprocess instead of making the snapdecisions we're trained to survive onprofessionally. We'renot investing for today. After all, withlife spans increasing the way they seemto be, a realistic time frame for manypeople might be in excess of 50 years.

Get It Together


Shop of Horrors?

And perhaps our worst emotionalself-sabotage is procrastination. Yes,we've all done it and said the same rationalizations—too odious to repeat here.Let's just stipulate that any saving you dotoday, no matter how much or in whatmanner, will leave you happier than anycatch-up financial activity you do later,regardless of income, knowledge,advice, etc. What does Audrey, the giantmeat-eating plant, say in the play "Now!"

The last point to make in this screedabout our emotional foibles interferingwith improving our financial statusinvolves our tendency to overcomplicate.No, you don't need to start an offshoreaccount and constantly reviewand adjust your situation. Too manydecisions lead to error, and certainlyhigher transaction costs. Benign neglectis the secret to success more oftenthan you would expect.

Our lives are complicated enough.You know, K.I.S.S. (ie, keep it simple,stupid). When people want to loseweight, we tell them what they don'twant to hear: Eat less and exercisemore. If you want to grow yourfinances, it's the same concept: Spendless and save more. Now excuse mewhile I go and have a Krispy Kreme.

a partner

on the Stanford University

Graduate School of Business

Alumni Consulting Team, is a

practicing primary care physician.

He welcomes questions and

comments at

Jeff Brown, MD, CPE,