Modern Family Matters

Behavioral Finance: Learning How to Get Out of Your Own Way and Buy Happiness

August 12, 2020 with Landerholm Family Law Season 1 Episode 10
Modern Family Matters
Behavioral Finance: Learning How to Get Out of Your Own Way and Buy Happiness
Chapters
Modern Family Matters
Behavioral Finance: Learning How to Get Out of Your Own Way and Buy Happiness
Aug 12, 2020 Season 1 Episode 10
with Landerholm Family Law

Financial Advisor, Stefanie Pickard, discusses Behavioral Finance, and how awareness of human tendencies relating to financial decisions can help you work towards financial freedom and risk-reward balance with investments.

Behavioral finance is the study of observed investor and market behaviors. It focuses on the idea that people don’t always make rational financial decisions, however this irrationality is predictable and normal.

Behavioral biases and cognitive errors can be developed from a multitude of different factors, such as past life experiences, general temperament, gender, age, and relationship status.

Examples of types of behavioral biases include: loss aversion, overconfidence, status quo, cognitive dissonance, mental accounting, and sunk-cost effect. These biases are explained in further detail in the podcast. 

Understanding these biases and using them to your advantage is important not only for financial freedom, but to “buy happiness”. You can use these biases to plan life experiences that will bring joy and memories, to donate and give to others in a meaningful way, and to utilize your money in a useful and impactful manner.

Show Notes Transcript

Financial Advisor, Stefanie Pickard, discusses Behavioral Finance, and how awareness of human tendencies relating to financial decisions can help you work towards financial freedom and risk-reward balance with investments.

Behavioral finance is the study of observed investor and market behaviors. It focuses on the idea that people don’t always make rational financial decisions, however this irrationality is predictable and normal.

Behavioral biases and cognitive errors can be developed from a multitude of different factors, such as past life experiences, general temperament, gender, age, and relationship status.

Examples of types of behavioral biases include: loss aversion, overconfidence, status quo, cognitive dissonance, mental accounting, and sunk-cost effect. These biases are explained in further detail in the podcast. 

Understanding these biases and using them to your advantage is important not only for financial freedom, but to “buy happiness”. You can use these biases to plan life experiences that will bring joy and memories, to donate and give to others in a meaningful way, and to utilize your money in a useful and impactful manner.

Intro:

Welcome to Modern Family Matters, a podcast hosted by Steve Altishin, our Director of Client Partnerships here at Landerholm Family Law. We are devoted to exploring topics within the realm of family law that matter most to you. Our discussions will cover a wide range of both legal and personal issues that accompany family law matters. We strongly believe that life events such as marriages, divorces, re-marriages, births, adoptions, children, growing up, growing older, illnesses and deaths do not dissolve a family. Rather, they provide the opportunity to reconfigure and strengthened family dynamics in healthy and positive ways. With expertise from qualified attorneys and professional guests, we hope that our podcasts will help provide answers, clarity, and guidance for the better tomorrow for you and your family. Without further ado, your host, Steve Altishin.

 

Good afternoon and welcome to our Facebook Live broadcast. My name is Steve Altishin, I'm the Director of Client Partnerships with Landerholm Family Law, and today I'm with Stefanie Pickard. How are you doing, Stefanie?

 

Stefanie Pickard  1:23  

I'm doing great. Thanks, Steve.

 

Steve Altishin  1:25  

Well, thank you for coming. Stephanie is a Financial Advisor with Johnstone Financial and she's going to be talking about behavioral finance. She's also going to be giving me a quiz to demonstrate how our own life experiences and biases impact our investment choices, our financial planning, even our estate planning. But Stefanie, first let's talk about what behavioral finance is and how it differs from classical financing.

 

Stefanie Pickard  1:51  

Okay, well, I suppose if you want to say classical finance, you might be getting into modern portfolio theory which is like, yikes, what does that mean? But really, it's just getting the maximum return for whatever risk that you're willing to take on. So it's very much a money driven thing, and really no psychology involved with it really, except for the risk factor of it. So the idea being that every investor is going to act perfectly rational, and stay in the market exactly with their risk tolerance. Whereas behavioral finance knows and studies that people aren't rational, and they do irrational things all the time. And so they might not be rational, but they are normal. So they will act irrationally in a predictable way, basically. And so it's sort of like people might buy life insurance, which is super rational, but also buy a lottery ticket, which is maybe not the best investment, right? So you do both of those things. So they don't always fit together. And so the idea being that people are predictably biased. And so behavioral finance will go in, and it will basically study that and try to figure out how we can best get people back towards that perfect risk reward play. If that makes sense. 

 

Steve Altishin  3:16  

That makes complete sense. So do these biases just sort of come out of the blue? Or is there an origin for those biases? How do you figure out that they're there? 

 

Stefanie Pickard  3:29  

I mean, it's gonna be a little bit different for everyone. As far as how strong they are, it could be based off of your past life experiences for sure. And it just could be your general temperament or anything else. There are certain things, you know, men and women are different, older people, younger people, your relationship status, all kinds of things can kind of play into what biases might be stronger or weaker. But yeah, it does fall under a lot of different--there's a lot of background there for sure.

 

Steve Altishin  3:57  

So can these biases affect how people treat their estate planning? And I'm assuming that's what happens then.

 

Stefanie Pickard  4:04  

Their estate planning for sure. Yeah. Or, to kind of get to the other area of law for Landerholm, how they behave maybe in a divorce situation. So, these types of biases are not, of course, just limited to finance, it's to everything in life. How you value what you own, how you value what you do, how you use your time, anything like that would definitely play into any of these biases and cognitive errors that people make when it comes to making investments- it applies to everything really. 

 

Steve Altishin  4:38  

I like that. So you've got a test for me to take. And it's about how my biases and my past experiences may end up affecting how I invest or how I plan my finances. So what I'd like to do is invite everyone in the audience, everyone listening, to also take this with me. I've been talking to Stefanie and this is not a test that she normally gives to clients as much as it's a demonstration and uses it with other financial advisors. It's a tool for her to demonstrate what she's talking about today. And so she's gonna do that on us. So Stef, what do you have to say about that?

 

Stefanie Pickard  5:35  

Well, I think if you do want to participate at home then grab a piece of paper. Pen and paper is all you need real quick, and then I'll explain the rules real quick for you. This was just mentioned, but this is from the Psychology of Investing by a John Nofsinger, so this is kind of their work and I just want to give credit to that. So the idea being is that I'm gonna ask you 10 questions, and the answer will be a number and you're going to give a range. So you want to give a minimum and a maximum, so two numbers will be your answer for each one, 1-10. And within that range, I want you, Steve, to be 90% confident that the answer lies between that range. Okay? 

 

Steve Altishin  6:14  

So if I go zero to one million, I'll probably be 100% confident. You want me to find that sweet spot of 90% confidence?

 

Stefanie Pickard  6:25  

Yeah, so if you're pretty unsure, then you should probably make a pretty wide range. But if you're pretty confident then maybe a little bit more of a narrow range. You want to hit about 90% sure, does that make sense?

 

Steve Altishin  6:35  

That makes total sense. If nothing else, I do have confidence.

 

Stefanie Pickard  6:41  

Of your knowledge on these topics? Okay, you're gonna be like, 'What in the world is she talking about?' But here we go. Here we go. Question number one, pen and paper, 90% range. Number one question: What is the average weight, in pounds, of an adult blue whale? No cheating.

 

Steve Altishin  7:02  

Of an adult blue whale? This is in pounds and I want to be 90% certain and I'm gonna give you a range? Oh my gosh. Okay. I'm gonna write that down, and I don't tell you yet?

 

Stefanie Pickard  7:17  

Yeah, you don't have to tell me, we'll give you all the answers at the end and then you'll score it.

 

Steve Altishin  7:20  

Okay, and then I'll tell you what I wrote down? I am writing down a number that I am 90% confident with. 

 

Stefanie Pickard  7:34  

Alright, number two: in what year was the Mona Lisa painted by Leonardo da Vinci? So minimum year, maximum year. Okay. 

 

Steve Altishin  7:43  

Okay. If I get this wrong my wife's gonna kill me.

 

Stefanie Pickard  7:48  

Yeah, these are general knowledge questions so you might be able to hit on some. Okay. Sounds like you're ready for number three already. Number three: how many independent countries were members of the United Nations in 2017? 

 

Steve Altishin  8:16  

Okay I've got a number down.

 

Stefanie Pickard  8:28  

All right. Number four: what is the air distance in miles between, so as the crow flies, between Paris, France, and Sydney, Australia?

 

Steve Altishin  8:38  

Paris, France to Sydney, Australia. Air distance in miles? Okay I'm writing down a number.

 

Stefanie Pickard  8:55  

Okay, number five: how many bones are in the human body?

 

Steve Altishin  9:02  

 Oh my God, my toes got like 50 doesn't it? Okay, hold it. I'm gonna write down a number.

 

Stefanie Pickard  9:20  

All right, number six, we're doing well, we're halfway through. How many total combatants, so from any nation, were killed in World War One? Kind of a sad question, but yeah, certainly a sad question. Okay, number seven: how many items, so books, manuscripts, microforms, sheet music, anything, were listed in the US Library of Congress at the end of 2016? So basically, how many books were in the library Congress, but it's really way more than books. All right, we're doing great. Number eight: how long, in miles, is the Amazon River?

 

Steve Altishin  10:16  

How long in miles is the Amazon River? With all the twisting and turning!

 

Stefanie Pickard  10:22  

Do you see why I don't do this to clients? I only do this to my colleagues, not my clients.

 

I don't want to make them feel bad about general knowledge.

 

Steve Altishin  10:33  

Alright I'm going to say that there's that many to that many.

 

Stefanie Pickard  10:38  

Okay. All right. What are we up to here? Number nine. Oh, I like this one. I love that I know this now because I've done it so many times. How fast does the earth spin in miles per hour at the equator? So how fast is it moving?

 

Steve Altishin  10:59  

Okay, hold on, I should be able to figure this out. Give me two seconds. Okay, I'm gonna write this one really narrow. 

 

Stefanie Pickard  11:13  

Okay, pretty confident! And last question: how many earthquakes, per year, on average, does the National Earthquake Information Center locate and publish globally? So basically how many earthquakes on average are there in a year? It's kind of a simpler way of putting that.

 

Steve Altishin  11:45  

That's a huge number. I'm gonna say, for this one, I may be off so bad. 

 

Stefanie Pickard  11:56  

Well you don't have to tell me your answers if you don't want to. 

 

Steve Altishin  12:03  

Oh I definitely am, I want you to know if I'm right or wrong.

 

Stefanie Pickard  11:59  

Alright, you ready for the answers? Yeah, this first one usually blows everybody away, number one, how big is a whale?

 

Steve Altishin  12:19  

I have 70,000 to 90,000 pounds.

 

Stefanie Pickard  12:22  

250,000 pounds.

 

Steve Altishin  12:26  

Oh my gosh. I definitely missed that one.

 

Stefanie Pickard  12:32  

Okay, number two. Hopefully you'll get this one. The year was 1513.

 

Steve Altishin  12:38  

I wrote 1500 to 1515

 

Stefanie Pickard  12:42  

Whoa, you wrote 1500 and 1515? That is a very narrow range and you got it. 

 

Steve Altishin  12:51  

That one I was kind of confident in. 

 

Stefanie Pickard  12:53  

Wow, that is awesome. Good for you, you do know that. Okay, number three, the UN question: 193 countries.

 

Steve Altishin  12:53  

Ah! I was 105 to 125.

 

Stefanie Pickard  13:06  

Okay, a little under, a little under. All right, number four is the Paris to Sydney question. The answer is 10,543 miles.

 

Steve Altishin  13:19  

Oh! I put 11,000 to 14,000. I'm one for four.

 

Stefanie Pickard  13:29  

Oh, you were so close. Okay, number five: 206 bones.

 

Steve Altishin  13:30  

Ah! I was 150-170. I was off.

 

Stefanie Pickard  13:39  

Okay, a little low. Oh, this one is rough. Number six is the World War One question: 8.3 million people.

 

Steve Altishin  13:51  

I said 10 to 20 million.

 

Stefanie Pickard  13:53  

Oh okay! You were a little up, you were getting closer to World War Two I think, although that's not my my area of expertise. Number seven, this one's tough: The Library of Congress: 164 million items. 

 

Steve Altishin  14:10  

Oh! I said 140 to 150 million. 

 

Stefanie Pickard  14:15  

Oh okay! Off but close. Number eight, the Amazon River: 4000 miles.

 

Steve Altishin  14:26  

I said 7,000 to 9,000.

 

Stefanie Pickard  14:28  

All right, number nine is 1044 miles per hour.

 

Steve Altishin  14:38  

I had 1,000 to 1,250. I got that one!

 

Stefanie Pickard  14:44  

Oh wow, you got that right in the range. Okay and the last one, such a wild guess, the earthquakes: 20,000.

 

Steve Altishin  14:53  

Oh my god. I had a million to a million and a half.

 

Stefanie Pickard  14:55  

Oh wow! So what did you get?

 

Steve Altishin  15:00  

I got two right.

 

Stefanie Pickard  15:01  

You got two? Okay, not bad, not bad. I did my whole office, and I think our high score on here was three, if that makes you feel any better. So the idea being, though, is that you should have gotten nine, you should have gotten 9 out of 10 because you should have been 90% sure. Right? But guess what? Even people that are statisticians might only get five out of 10 in this.and The idea behind this being that you have no knowledge on this topic. But you think you know about it, right? People think way too much, and they think they know too much. They think they know more than other people. But people have a lot of difficulty analyzing, processing large numbers, and they're overconfident about things that they don't know about. So one last quick question, kind of a number 11, as it relates to the market and ties this back into investing. Okay, it's a little bit longer, but in 1928, the Dow Jones Industrial Average began with 30 stocks in 1929. It was valued at 300. At the end of 2016, it was valued at 19,787. Okay, so from 300 to 19,787. The Dow is a price weighted average, but dividends are omitted. So, what would it have been if dividends were reinvested? So from 300, what would it have been in 2016?

 

Steve Altishin  16:44  

I'm gonna guess.

 

Stefanie Pickard  16:45  

Do you have a 90% range for that?

 

Steve Altishin  16:47  

Oh my God. Okay, hold on, hold on. I'm thinking of the rule of 72.

 

Stefanie Pickard  16:52  

Yeah, okay, good! 

 

Steve Altishin  16:55  

I'm gonna go with 60,000.

 

Stefanie Pickard  17:12  

Okay, so the actual answer would have been 613,514. But if you think about it in a different way-- so, that sounds enormous, right? But the idea is that, actually, over 88 years, that's just over a 9% return. So if you frame it that way, that's much more reasonable. But even after I gave you that whole quiz about how you didn't know anything, and really tried to stick it to you, you still were like, way off. And so that's the idea, is that people still, even if they're aware of it, they get in their own way, understanding these types of things. And so that's kind of my weird yet connectable way of explaining what goes on behind the psychology of trying to help investors stick to their plan, basically. It's to say, "Hey, you don't know anything". That's why I don't give it to clients because I don't want to actually really show them.

 

Steve Altishin  18:18  

Well, then what happens? Just kind of as a side thought before we move on: if you give this to, say, a married couple, or if you give this to two people who maybe are just friends, odds are they're gonna have widely different answers too. The conflict is sort of built in and hard to get rid of because everyone has their own biases. Everyone has their own different experiences. So what causes this? I mean, why don't we behave rationally? The fact that we don't and we do inflate things and deflate things. What are the causes of it?

 

Stefanie Pickard  19:14  

Well, why don't I get into some examples? This is a really broad topic. But I kind of honed in on a few examples that I thought of that could be interesting and people could connect with to kind of understand a little bit more. So the first bias and error that I would say that people make, especially when it applies to so many things but investment in particular, that I think a lot of people would understand is loss aversion. So you've experienced a loss. You invested, even just super recently the market, of course, went totally crazy in March and went down so much. Well say you were just feeling "I'm losing all my money" and you pull out and then you sold at the bottom. And when it comes to getting back into the market, you're thinking "I lost so bad", or even in an individual stock, "I bought this stock and then it went down". So it went down so much or something like that and they're feeling that they're gonna stay away from that forever. You get people that, despite their best interest, they won't get in the market, they won't get in a particular position. They'll say "I'll only invest in this", or "I won't invest in equities, it's only fixed income", things like that, just because they're so averse to that loss that they've experienced in the past. It's a little bit like being bit by a snake, yikes, and then they won't go back there. And I think that that kind of parallels with a lot of things that you guys do there at Landerholm as well.

 

Steve Altishin  20:38  

Yeah, I was thinking that. Because loss aversion isn't just "Well, I had a bad marriage" or "I got a divorce and so I don't want to get married again, because I thought it was going to be great and it didn't turn out that way". Also, though, do you find potentially that people who have loss, not necessarily loss in a stock, but who have experienced loss and great disappointment, let's say in a marriage that they thought would last forever-- is it possible to carry that bias to other areas, such as the willingness to take risks in an investment?

 

Stefanie Pickard  21:28  

Absolutely. I think it can kind of shape your entire outlook. So beyond investing or money management or anything like that, but anything that comes from outside of money management could certainly be brought in, and vice versa. So yeah, absolutely.

 

Steve Altishin  21:42  

It would seem like it'd be a good practice for people who have experienced loss, that before they go run out and change their own investment portfolio, maybe they should talk to someone who kind of understands what's going on? 

 

Stefanie Pickard  22:01  

Yeah, absolutely. Certainly knowledge could help and being presented with a lot of facts. And there's certainly ways of kind of overcoming that with people to say, "Hey, you don't earn enough money, and basically no one earns enough money, to be able to just retire with cash. You've got to take some risk. You've got to be able to take some risks with that money in order to earn more. In order to retire or save for lots of things, even college or a house or anything, you might need to eventually take some risk with that money besides just hoarding it in cash.” So, being presented with some cold facts about that could certainly help somebody, kind of unarming them with knowledge. 

The other side of that would be overconfidence, and you're going to see that too. And that's really just when people think that their knowledge is better than others. Kind of like what we're getting at with the quiz that really leads us towards overconfidence; you're overconfident that something's gonna fall in that range. You really think that you know better than other people do, that you're really clever. Rather than smart, it's clever, you know? Even things like, as a non-financial side of things, there are studies where they say, "Okay, I'm gonna flip this coin, what are the chances of heads, what are chances of tails?" 50/50, right? But then you say, "Well, what if I told you that this coin has been tails like 10 times in a row?" Well, it's still 5/50. But biased people think "Well maybe it's gonna be tails". And that kind of leads towards this overconfidence. "Well, I know a little bit more, I have this insider information" or whatever. No, you don't know. So that's another one that we see. We see it with clients where they'll say "Well I played the market really well before once. I'm gonna play it well again". And you know, that might have been okay for them back then. But now they're retired, they shouldn't take on as much risk, or something like that, so it doesn't fit in with their plan.

 

Steve Altishin  24:12  

Well, I totally get that. So we do have a question that's come in. Kind of attached more to your loss aversion one. And the question basically is: how do you know if you can trust your financial advisor? How do you know that your financial advisor is trustworthy, after you've experienced and lost confidence because of a loss? How do you handle that with someone who's worried about getting advice from you?

 

Stefanie Pickard  24:48  

That seems totally reasonable. And that really goes towards that advisor should be working really hard to gain your trust in a lot of ways. They should be sitting on the same side of the table as you, that's for sure. You should be seeing somebody that is clearly working with you, their fiduciary. They should only have your best interest in mind. On the other side of that is that they're super qualified. There's different ranges of qualifications out there. This isn't necessarily a plug, but everyone who works here at Johnstone is a certified financial planner. As an advisor, that's a really rigorous program that is a large hurdle for people to pass through. And then of course, the CFP board holds us to a particular standard that's more broad than others. So that would be another really important thing to look for. A lot of people out there that are CFPs definitely would say that that's really the minimum qualification. So qualifications and just somebody that's clearly on your side. So really vetting somebody. Somebody that's super interested in taking a large amount of time to get to know you, to get to know your situation, your goals, everything, before they ever even try to engage you in a client relationship. It would be a really good way to build trust and know that somebody's going to understand how you feel. And I guess also, if you feel comfortable approaching somebody and saying, "I have this loss aversion", you know, whatever else, and they react in a positive way and say "let's work within that", that's gonna be good, too. 

 

Steve Altishin  26:14  

Yeah. I mean, that makes complete sense. And like we've kind of talked about, the fact that you are really an expert in this whole idea of behavioral finance, it's not like you respond to people by saying "how dare you not trust me?"

 

Stefanie Pickard  26:42  

Yeah, I have to I have to win your trust. Certainly. And in so many ways. And one of them would just be throughout the relationship, continue to win the trust of the client as well. So yeah, well, that's a great question, thank you,

 

Steve Altishin  26:58  

So what's the next barrier?

 

Stefanie Pickard  27:01  

I really like this one, either it's called the status quo or the endowment bias. It's basically when people overvalue the things they already own. So this could obviously go with stocks, "Oh I already have this portfolio." And this goes exactly into estate planning, because there's been studies about if you inherit something that's already invested in a certain way, you're more likely to keep it that way. Whereas it may have been it, that whole investment was based off of somebody else. It was their goals, their life, their lifecycle. Potentially a much older person than the person that's inheriting it. So they need to completely revamp how that account might be invested. But that status quo bias will hang on. And it also goes to individual possessions. Somebody that divorced may hang on to the house because they value it more.

 

Steve Altishin  27:54  

Even though there's a better split, they've been there for years.

 

Stefanie Pickard  27:59  

Yeah. The economics might not make any sense to keep the house, but they're hanging on to it. Well, that's a really strong bias. I think all of us can really understand that. That makes a lot of sense. 

 

Steve Altishin  28:08  

Absolutely. And I know people who have in their wills basically said, "I'm leaving this item to John. But John, you can't get rid of it". Because people don't want to see that change.

 

Stefanie Pickard  28:27  

Yeah, I totally get it. I think it plays into everything. "Oh, that's a big one. That really means a lot to me." 

 

Steve Altishin  28:42  

My wife says I've got shirts from 30 years ago, I still wear and I like them. I should probably throw them away.

 

Stefanie Pickard  28:49  

Well they look good on you, you know? They fit, they're all worn in.

 

Steve Altishin  28:56  

So what else is blocking us?

 

Stefanie Pickard  28:59  

I like this one: cognitive dissonance. So this is the idea that your brain is experiencing this discomfort with a contradiction. So, for example, you know you're real smart, you know everything. And then you think of a time when you didn't and there's that yucky feeling. Or you're lying in bed at night and you think you're a really nice person but you remember something kind of off putting that you said to somebody and you kind of cringe. I think of it as kind of a cringy thing. And that can play into investing. You made this decision, you thought you knew what was right, and then oh... yikes. And what it does is it has this paralyzing effect where you don't make any decision. You just sit on things, you don't change anything, or you blame somebody else and try to push it off of you because you don't like the way that feels.

 

Steve Altishin  29:54  

Yeah, I mean, that's another one that's kind of right in the wheelhouse. So we have another question. And this goes back a little bit to the overconfidence question. If someone is interested in investing money, whether through the day trading or the market, it doesn't matter, what are the benefits of doing that themselves? Why should they hire a financial advisor? And that kind of relates back to why I don't know how many earthquakes there are.

 

Stefanie Pickard  30:35  

Right. Sure. I think that a financial advisor, more than anything, is going to be able to think much more broadly as far as your full financial picture. So I even had somebody say to me once, "Why would you study insurance when you're a financial planner?" Well, insurance is an enormous part of your financial plan, or estate planning, or tax planning. So what we do, especially as financial advisors, is we're going to incorporate your whole life. Then also all of the psychological stuff, the behavioral finance, your risk reward, everything like that is an enormous advantage versus trying to kind of go out there on your own. That would be my answer as to why you need a financial advisor.

 

Steve Altishin  31:26  

I've used this before, and it's a true story, but it comes back to mind. When my wife was having her first baby, I was there, and the doctor turns me and says, "Do you want to cut the umbilical cord?" And I'm looking around at a doctor and three nurses and all I can think of is that somebody here has got to be more qualified than me!

 

Stefanie Pickard  32:02  

Exactly. It helps to have a knowledgeable person on your side who is not only thinking outside of where your head might be and is trying to help you in that way, but then is also taking in the big picture, which is super helpful. 

The next barrier I really like is mental accounting, which you may be thinking, well, what is that? 

 

Steve Altishin  32:20  

Yeah, what is that? 

 

Stefanie Pickard  32:27  

Okay, so it's how you associate the reward of consuming, so think retail therapy, that's one way of kind of thinking about it, with the cost. So how you're rewarded by that consumption versus the cost of what it is. And how this kind of plays out, and kind of example because I think an example works out best, is would you rather prepay for a vacation or pay for it after you get back? And most people, well, what do you say Steve?

 

 Gee, I would prepay for it.

 

Yeah, most people will prepay. Whereas it actually kind of, if you're thinking of time value money, and you really want to get into it, makes more sense to pay for it afterwards because you're hanging onto the money longer. And if there's any risks with a vacation, it gets cancelled or whatever else, maybe you have more recourse if you paid for it afterwards. And so it doesn't really make sense. But almost everyone says, "Well, I'd rather prepay for it, because I don't want to have to think about the pain of paying for it. That takes away from my enjoyment of consuming it." Does that make sense?

 

Steve Altishin  33:30  

Oh, it makes complete sense. And even above that, we used to get Blazer season tickets, and you pay for eight months before game. But when we go to games they feel like they're free. And there's this sort of joyous feeling about that. I'm wondering though, if that may be changing, at least temporarily right now, with COVID. And that goes back to loss, because there's been a lot of financial loss with people who have not been able to do their vacations.

 

Stefanie Pickard  34:10  

Sure, yeah. And some people might be rethinking that, like "Oh man, I prepaid for it, I had to scramble and it was such a hassle to get a refund. I was on the phone with the company for for three hours" or whatever. Well, it's funny that you mentioned the tickets, because that kind of goes into our next one, the sunk cost effect, which is the idea that you already paid for something and you're letting this expense that's already gone affect your current financial decisions. So say you bought tickets, and then you heard that you got all these tickets. And then you heard that it's raining and all this stuff, right? And it's horrible weather but you get all the way up to the rose quarter and all that jazz. So if you got the tickets for free, would you be more likely to go or not? 

 

Steve Altishin  35:06  

I would go if I had to pay for it. 

 

Stefanie Pickard  35:09  

Exactly. Even though it shouldn't make a difference, you're much more likely to go. Also, if you had just bought the tickets, you're more likely to go than if you bought a long time ago. So it's kind of a time thing and a money thing. So that's kind of an interesting one, as far as that goes. Those are my examples, but there are so many, we could go forever. But those are kind of what I picked that made sense for this presentation. 

 

Steve Altishin  35:33  

And again, that kind of leads back to people with family conflict and when you're trying to divide a marital estate. You might hear "Well, I paid x for this." And then, "Well, that doesn't mean it's worth x now." The historical costs are, I know in economics, a big no no. Don't consider them.

 

Stefanie Pickard  36:01  

Yeah, you're exactly right. It's interesting.

 

Steve Altishin  36:09  

So now, we've been talking about this. Behavioral finance is a super interesting subject- hard to initially get your head about what it is until I could actually listen to it from you. So I'm thinking to myself, Well, okay, you're going to listen and you're going to go out there and build a plan for somebody. You're going to start one up, that's part of what this is, that's what you do. But, I was gonna ask you a question. How do you put behavioral finance into practice? You kind of said, well, Steve, it's not necessarily just about building a plan is about staying on a plan and implementing a plan. 

 

Stefanie Pickard  37:01  

Yeah, it's about helping people build a plan, for sure. And I might really think about a client, "Oh, they value this so much. We're never gonna touch the Boeing stock because he worked at Boeing forever". And I know, status quo. There it is. We're hanging on to it. But I know it and it's okay, because it's not derailing the plan. Or we have to have this really hard conversation because it is derailing the plan. There's just not enough diversification here. It's a real concern. You're too tied up in Boeing, or something like that, just as an example. So developing a plan, sticking to a plan, and then as I'm working with a client, being aware of any of these disconnects, I see it all the time. You know, definitely loss aversion, definitely overconfidence when it comes to talking to clients; "I did this before and it's gonna work this time", you know, things like that. And so it's understanding it, and then gently moving from that place of: I understand where you're coming from. You're wrong, but you're not abnormal. And then moving them towards having those conversations of presenting them with facts. All kinds of things that you can use to combat these biases with clients- that's where you get that implementation.

 

Steve Altishin  38:30  

You said the phrase that I was thinking, which is just because you're not being rational, doesn't mean you're not being normal. You're not necessarily being wrong. It's what you are, it's part of you. And going back to what I consider traditional, it's not just the X's in the O's-- it's you. You're the Y and Z. And so that leads to the question, and we put it out in our Facebook tidbits because it makes for an interesting question. The question being: if happiness is your goal, can money really buy happiness? Maybe it can.

 

Stefanie Pickard  39:30  

Yeah, I think that we can use some of these biases to make ourselves happier, to buy happiness a little bit. And going back a little bit to what we talked about earlier when we talked about this mental accounting, and some of the sunk costs things and stuff like that. Kind of using those to your advantage. What makes you happier when it comes to the vacation? You know what is. It might not be the right financial decision, but boy, it makes you a lot happier to prepay for that vacation. So yeah, other things like:  buy experiences, rather than material things, because you have that lovely memory of the experience that you can relive over and over again, whereas the material thing, the shiny ca,r kind of becomes part of the background. It's not necessarily always the best economic decision, but it is definitely like the best behavioral finance decision to make. As far as buying experiences, maybe buying smaller experiences, so multiples of them, rather than one big one, so you have more enjoyment of that. And prepaying for things and then consuming later so that you have that lovely anticipation of maybe saving up for a vacation. That's part of it. You have anticipation, and everything leading up to it has all this enjoyment. You have this thing in your mind that it's coming, it's coming, it's coming, and you get to enjoy it then and then you can enjoy it afterwards because it was an experience. And then finally, just using your money to help others. So donating. Donating more locally tends to have more impact with people, so a local organization that you know is impacting the local community. People that you know, so buying things for people. Buying gifts, using your money to help others is another really wonderful way of buying happiness.

 

Steve Altishin  41:12  

And I think you're not just buying happiness, you're also buying happier families. I think we talked about this, but 30 or 40 years ago I heard this and I still use it almost every day and it's that you buy your memories and you rent your stuff. You are buying happiness in that kind of respect. This has been great, Stefanie. This has really been good. Are there any other issues we should touch on or that we should go back and revisit? It felt to me like this really hit the point of what behavioral finance is, which was my first question. What I did not know before, I know a little bit more about now.

 

Stefanie Pickard  42:06  

Yeah, hopefully that kind of explains it. The quiz is kind of a fun way to connect. So hopefully even people that watch this later will maybe be able to get out a pen and paper before they hear the answers, just to kind of test themselves to see, "Oh, man, I really don't know numbers like I thought I did" or something. It's a fun and interesting topic, for sure. But then it also applies to not only your financial life, but your life in general which is really cool.

 

Steve Altishin  42:23  

It absolutely does. Alright, I'm being told we're running out of time. Thank you so much. This was just really good. And I think it was helpful on a lot of levels. I'm gonna say goodbye, but not yet. First, I want to invite everyone listening who enjoyed our broadcast to comment to let us know. If you have any issues you would actually like us to talk about in the future, please feel free to email me, Steve. I'm [email protected] Once again, I'm the Director of Client Partnerships at Landerholm Law, who's presenting this series of Facebook Lives. And I'd be happy to take your issues and look at them for making a broadcast later. Also, if there's anyone out there who would like to be a guest, again, shoot me an email-that would be great. So until next time, everyone stay safe. Everyone stay happy, everyone stay healthy, and enjoy the day. Goodbye.

 

Outro:

You're listening to Modern Family Matters a legal podcast, focusing on providing real answers and direction for individuals and families as they navigate the growths, changes, and challenges of creating their new family dynamics. Modern Family Matters is sponsored by Landerholm Family Law, serving Oregon and the Pacific Northwest and devoted to providing clients with compassionate and fierce legal advocacy with a firm belief in the importance of upholding the family unit amidst complex transitions. If you are in need of legal counsel or have additional questions about a family law matter important to you, you can visit our Landerholm Family website www.landerholmfamilylaw.com, or call us at (503) 227-0200 to schedule a case evaluation with one of our seasoned attorneys. Modern Family Matters, advocating for your better tomorrow and offering solutions on legal matters, important to the modern family.