I was talking to my friend Michael today and he used a term to describe our mutual fear of a populist revolt against wall street and the financial sector: Financial McCarthyism
It got me thinking about the wisdom (or actually the lack of wisdom) in making wall street and the investors and executives that inhabit it the scapegoats of this financial mess we are in.
Yes, a lot of people in the financial industry made a lot of bad bets, were paid excessive sums for making those bad bets, and are at least partly to blame for the mess we are in.
But there’s plenty of blame to go around; the politicians who created the political environment for the housing bubble, the regulators who didn’t regulate, the borrowers who didn’t think about the ramifications of paying too much and borrowing too much, and I could go on and on.
Not all of us are complicit in the making of this mess but certainly a lot of us are.
Can You Beat the Market? It’s a $100 Billion Question.
Investors collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult.
Personal finance is not about more willpower
If you think personal finance is about trying harder, ask yourself: How has that worked for you in the last month? The last year? Have you really saved more? Invested more?
The idea that personal finance is about willpower is based around the heroic idea that our willpower is the most centrally important driver in our lives. But social psychologists know that the situation around us is at least as important as our personality.
Expected vs. Unexpected Certainty (courtesy of Marginal Revolution)
But evolution has given us skills for dealing with uncertainty—not skills that necessarily help us manage our finances, but skills that have kept our ancestors alive through the millennia. It is not known exactly how we are wired to act in the face of uncertainty, but a few theories—even if false—are thought provoking…Expected uncertainty occurs when we are in a familiar environment and have had a lot of experience with its unreliable predictive relationships. We have pretty good probability estimates and strong top-down expectations. Unexpected uncertainty, on the other hand, occurs when there is a major shift in context causing our top-down expectations to be grossly wrong. According to this theory, the degree of expected uncertainty is signaled by the amount of one neurotransmitter (acetylcholine) that causes us to pay less attention to our models—our preconceptions—and more to what we are actually experiencing. The neurotransmitter that signals unexpected uncertainty (norepinephrine), on the other hand, has the additional effect of causing us to shift attention in order to search for new cues that might be predictive in the new context, thus helping us to form new models rather than just tune the old ones. Increased levels of norepinephrine are also associated with increased anxiety.
If something like this theory is correct, then what is responsible for the anxiety we are feeling is not just uncertainty; it is unexpected uncertainty. Maybe a measure of comfort can be taken from the possibility that the brain machinery causing our anxiety is also encouraging us to look beyond the information streams we have been relying on up to now as we try to form new models that can guide us as we move forward.
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Personal finance and willpower – pay yourself first, investing before using remaining income mostly as desired .
Personal finance and willpower – pay yourself first, investing before using remaining income mostly as desired .
Personal finance and willpower – pay yourself first, investing before using remaining income mostly as desired .
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