Weekend Reads for Financial Advisors: Fragile Nest Eggs, Happiness, and Luck vs. Skill

I want it, and I want it NOW! Sound familiar? While that petulant behavior may remind you of your toddler, it’s surprisingly common in adults, too. That’s because it is an example of “temporal discounting” — our tendency to want things now rather than later. It seems we are hardwired for instant gratification.

In “The Challenges of Living Longer,” Francesca Gino, a social scientist and associate professor at Harvard Business School, writes that when it comes to retirement planning, we face two barriers: first, our financial knowledge; and second, psychological barriers that stand in the way of being prepared for those extra years. “The most critical one is our inability to plan for the distant, long-term future,” she says. “Research from both the fields of psychology and economics suggests that people care more about present outcomes than they do about future ones, a tendency called temporal discounting.”

There are two main factors that contribute to this tendency, says Gino. “First, present rewards trigger stronger emotional reactions than do future ones . . . And second, we mispredict how we might feel in the future if certain events were to transpire.”

With that in mind, here are some “present rewards” in the form of recent articles (and video clips) you may have missed:

Retirement

• Remember the widely viewed and much discussed PBS Frontline documentary “The Retirement Gamble” that aired in April? Well, John Rekenthaler, vice president of research for Morningstar, offers a detailed “takedown” of the assertions in “To the Back of the Line, Frontline: Rekenthaler Drop-Kicks PBS’s Documentary.” (Morningstar)
• Jeff Sommer’s article “For Retirees, a Million-Dollar Illusion” also struck a nerve. There were nearly 650 comments, prompting Sommer to write a follow-up, “Suddenly, Retiree Nest Eggs Look More Fragile,” to address some of the issues that were raised. Sommers noted that he focused on $1 million because of its symbolic power, not because it represents the savings of a typical American family. In fact, he points out, the median financial net worth of American households of all ages, excluding homes and cars, is $10,890, as estimated by Edward N. Wolff, an economics professor at New York University. For households headed by those in the 55-to-64 age bracket, it’s $61,300. In the follow-up article, Sommers addresses some of the systemic issues that led to this state of affairs. “As Jack VanDerhei, research director of the nonprofit, nonpartisan Employee Benefit Research Institute, puts it, ‘very large numbers of people are at risk of running out of money in retirement.’ In a recent study, the institute found that roughly 44 percent of households in the baby boom and Gen X generations — those born from 1948 to 1975 — were likely to run short of cash in their retirement years.” (New York Times)
• Here’s an interesting retirement solution I had never heard of: a “tontine.” Moshe A. Milvesky (@RetirementQuant) explains that if you want retirement security, look to the Renaissance. (Wall Street Journal)
• Are we comparing ourselves too closely with others when planning for retirement? In “Letting Go of Keeping Up,” Mina Cikara, an assistant professor at Carnegie Mellon University, argues that behavioral research shows that comparing ourself to others can sometimes prove detrimental — especially when it comes to financial decision making. (Prudential sponsored content via The Atlantic)

Practice Management/Technology

• In a guest post, Alan Moore, founder and president of Serenity Financial Consulting, shares a comprehensive list of every software package and technology tool he’s using to operate his new RIA, along with why he chose it and what it costs. (Nerd’s Eye View)

Note to Self

When clients are paying attention to noise, we call it dumb. When advisors do it, we call it research. @behaviorgap #MIC25

— Scott Wenger (@ScottWengerNYC) June 14, 2013

Happiness

• When I stumbled on “What Are the Three Ways to Train Your Brain to Be Happy?” my first reaction was: “C’mon. Seriously?” I’m not a fan of pop psychology or self-help books, but I have to admit, these steps sound a lot like common sense. You decide:
  • Count your blessings.
  • Only compare yourself to those worse off than you.
  • Tell yourself a positive story about the challenges in your life.
• In this 45-minute video clip, Betsey Stevenson and Justin Wolfers (a.k.a. “the it couple of the world of economics”) discuss the economics of modern marriage. If you don’t have time to watch, here’s an article based on the New America Foundation forum: “Economist Betsey Stevenson: Working Parenthood ‘Not Just a Woman’s Issue.’” (Salon)

Tax and Estate Planning

• “How to Avoid an Estate Battle After You Die” (New York Times)

Behavioral Finance/Innovation

• In a recent blog post, “The Cognitive Bias Keeping Us from Innovating,” Andy Zynga notes that most five-year-olds have “no trouble turning an old blanket and a couple of chairs into an impenetrable fort. But as we get older, knowledge and experience increasingly displace imagination and our ability to see an object for anything other than its original purpose.” This is called functional fixedness. (Who knew?) And functional fixedness, it turns out, is a well-known cognitive bias that can crimp our thinking when it comes to innovation. (Harvard Business Review)
• Luck vs. skill when it comes to investing? In this video report (and transcript), Michael Mauboussin, head of global financial strategies at Credit Suisse, explains why humans tend to overweight the role of skill and underestimate the role of luck in investing success — and how we can correct for our perceptions. (Morningstar)
• And speaking of Mauboussin, here is his behavioral economics reading list. (Farnam Street)
• This is probably the most interesting article I have come across in a while: “Composing Your Thoughts — Neuroscience: Music That Upsets Expectations Is What Makes Your Gray Matter Sing.” To quote: “Thwarting expectations and creating ambiguity is fundamental to great art.” (Nautilus)
• What is your most important asset? Stocks? Bonds? Property? Art? None of the above. It is human capital. “The Biggest Financial Asset in Your Portfolio Is You.” (New York Times)
• If you think you do just fine on five or six hours of shut-eye, think again. “Research shows that most people require seven or eight hours of sleep to function optimally,” according to “Cheating Ourselves of Sleep.” As one sleep researcher put it, “Sleep affects almost every tissue in our bodies.” (New York Times).
• While we’re on the subject of ZZZZs, Carl Richards (@behaviorgap) looks at the connection between sleep, self-discipline, and investing. (Behavior Gap)

Financial Literary/Future of Finance

Can Financial Education Rebuild America’s Economy? My simple answer, yes.http://t.co/3FU9u6I2R8

— Annamaria Lusardi (@Dr_AnnaLusardi) June 15, 2013

Investing/Bubbles

• “GMO’s Montier on Why to Hold Cash” (Advisor Perspectives)
• “The Art Of Investing: The Rewards Aren’t Always Financial” (NPR)
• Rob Arnott corrects popular misconceptions about the equity risk premium. (CFA Institute Magazine, PDF)
• Bubble, bubble, toil, and trouble. A recent study found “greater positive emotion in facial expressions before the market opens predicts higher prices and larger bubbles,” prompting Jason Zweig to ask:

can software that reads facial expressions predict market bubbles? http://t.co/tLMMrDpHX1 #WSJ

— Jason Zweig (@jasonzweigwsj) June 18, 2013

And Now For Something Completely Different

• “Find a way of life you love and have the courage to live it.” Watch: “Time Lapse of Mount Everest.” (Washington Post)

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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