Behavior Gap Round Up, 6.19.09

Behavior Gap Radio: J.D. Roth of GetRichSlowly.org Joins Carl & Bill

This week’s episode featured J.D. Roth of GetRichSlowly.org. J.D. was kind enough to share his story about how he managed to change his spending habits after racking up a significant amount of debt. In 2004, J.D. discovered Your Money or Your Life and Total Money Makeover and started making changes in how he dealt with money. He wrote an article called Get Rich Slowly that eventually led to a blog by the same name in 2006 about his personal finance journey and how he was getting out of debt.

The concept of doing something difficult over time, but that’s worth it in the long term, is something that we face as humans. As J.D. shared, the biggest thing was setting goals. He knew he had a problem, but didn’t know how to get out. Ultimately what turned things around for him was setting goals, like saving enough money for a new car.

Beyond debt reduction, J.D., Carl, and Bill discussed the role of financial advisors and the difficulty of finding someone you can trust. People ultimately want authentic advice from their financial advisors, not a sales pitch.

Market Analysis

In one classic 1975 study led by Ellen Langer, male undergrads at Yale were asked to predict the results of coin tosses, a cliched example of a random event. Nevertheless, a significant number of the men believed that their performance improved through practice – they got better at calling heads or tails – and that distraction would detract from their performance. How did they justify this wishful thinking? As Langer notes, the men engaged in some sly cognitive filtering and consistently “overremembered past successes”.

Is Wall Street any different? The market, after all, is a classic example of a “random walk,” since the past movement of any particular stock cannot be used to predict its future movement. Given this inherent stochasticity, it’s silly to attempt to explain the daily movement of the market: such an endeavor is like analyzing a series of flipped coins, or trying to explain the payout patterns of a slot machine. We can construct theories – and some of these theories might even sound intelligent – but they’re ultimately futile attempts to stave off the flux.

What’s even more disturbing is that such errant explanations might actually cost us money, since they lead, inevitably, to over-confidence. (Those Yale undergrads vastly overestimated their ability to predict coin flips.) We become so convinced that the logical-sounding explanations are true that we forget we’re dealing with a random, inherently unpredictable system. The end result is too much trading.

The Case for Constructive Capitalism

We can’t build a better tomorrow unless we understand the root causes of today’s crisis.

So much for green shoots. The unintended consequence of bailouts by the dozen is that bond markets are beginning to revolt. As yields get pushed up, all the quantitative easing in the world won’t be able to put the economy back together again. Growth is — yet again — being thwarted.

Why this failure in solutions? Regulators and bankers seem stuck, endlessly debating the root cause of today’s ongoing crisis. Is it a liquidity crisis, a solvency crisis, a crisis of trust? It is all of the above — yet, at root, none of the above. The real crisis is deeper, and more foundational.

Today’s crisis is one of institutions. That’s institution not as in “organization,” but institution as in rule to follow, or, better yet, ideal to strive for. The institutions, or ideals, at the heart of Capitalism 1.0 — exploitation, tyranny, domination, war, to name a few — are great if the economy’s goal is to create the illusion of profit (hi, Wall Street). But they are toxic and self-destructive if its goal is to make people better off. Capitalism 1.0 is best at creating “thin” value — brittle, often illusory, and ultimately unsustainable value.

A new generation of revolutionaries is building a better kind of capitalism from the ground up: Constructive Capitalism.
Constructive capitalism is “better” in a tightly defined economic sense. It redefines the value equation at the heart of capitalism. It is built on a better economics that creates “thicker” value: value that’s meaningful to humans — not just value that pumps up spreadsheets, computer models, and bonsues [sic].

Tagged as: behavior gap radio, capitalism 2.0, constructive capitalism, market analysis, random walk