The Behavior Gap

Last week my hubby and I had dinner with our dear friends Harry and Olivia. Towards the end of the meal Harry asked a very interesting question.
“When you pick up a menu, what side do you look at first – the right or the left?”
Harry and I immediately said “the right” while my hubby and Olivia both said “the left.”
What’s on the right side of a menu? The prices! What’s on the left? The food!
Harry’s question beautifully highlights a trend academics have long noticed – namely that we are often attracted to our financial opposites when it comes to financial behavior.
Our dinner conversation inspired me to consider other areas of our finances where behavioral patterns play a significant roll. Digging around, I was thrilled to discover fresh insights from Carl Richards* in his fantastic new book, The Behavior Gap: simple ways to stop doing dumb things with money. [*Carl Richards is a CFP, founder of Prasada Capital Management, and regular contributor to the New York Times Bucks Blog and NPR’s Marketplace Money. Carl is also famous for making his pithy points using a sharpie and a cocktail napkin.]
The Behavior Gap is the best combination of practical advice and emotional encouragement that I’ve seen in a personal finance book in quite some time. After reading this compelling work, I asked Carl some questions about his unique approach to assessing financial behavior:
MANISHA:  In THE BEHAVIOR GAP you state, “Our conversations about money often leave us feeling confused, misunderstood, and even angry”. Why is this and what can we do about it?

CARL: Growing up most of us were taught that money, sex, and politics were not talked about in polite company, and see what that did to us! We have never really talked about money, and when we do, we expect it to be like math or spreadsheets…unemotional! Well, anyone who has been awake the last few years knows money is emotional! Changing this is simple…but not easy: start talking about it. Start with talking about where you are today, where you want to go. Give yourself permission to start exploring your relationship with money so you can change it!

MANISHA: One of my favorite points you make in THE BEHAVIOR GAP is “You’re Responsible For Your Behavior.” What behaviors do you find people most resistant to taking ownership of or changing?

CARL: Almost everything. Spending less than you earn. Saving. Investing with discipline. It is so much easier to blame others for our mistakes, big bad banks, Wall Street, credit card companies…but it does us NO good (even if its true). Better to just own up to it, learn from the mistake and move on!

MANISHA: Of all the drawings you’ve created for THE BEHAVIOR GAP, when it comes to people finding true financial peace of mind, which one is your favorite and why?

CARL: Are you kidding! That is like asking someone to pick there favorite child, you might have one, but you could never admit it in public! Actually the sketch on page 62 (and to the right) is one that I try to remember everyday. We somehow forgot that the best source of happiness is SO SIMPLE: time with people we love! Of course we try to make it complicated and expensive…but it’s not. I asked one of my kids what their favorite memory of the summer was one year after we had taken a few trips and guess what he remembered? The time we spent throwing rocks in the pond! Not the trips! Not the hotels! Rocks and water? The reality is that it wasn’t about the rocks and the water either, it was about time together with people you love!

As I continue on with “MoneyZen” – my quest to help us all find less financial stress and more life joy, I am struck by the degree to which simply reflecting upon our behavioral patterns around personal finance can lead to greater personal fulfillment. Reading Carl’s delightful new book is a great way to jump start that process!
Have you shifted any financial habits lately that have led to great happiness?

13 Replies to “The Behavior Gap”

  1. I have begun to force myself to spend MORE money on things that make me happy.  I was raised and groomed to rarely, if ever, spend money and to save, save, save!  I now live a financially comfortable life, and at the age of 50 am finally learning to enjoy some of it, within reason.  I would be interested in your addressing this topic, as I can’t imagine that I am the “Lone Ranger.”

    1. With certainty I can say you’re part of a tribe of at least two! I’m 41… and still haven’t really learned to let in MoneyJoy despite also being in a technically very comfortable life – ergo my quest for MoneyZen for all of us :). Actually I can tell you there are many, many people like us. So thank you for sharing this, and I will absolutely address this topic. Out of curiosity… was there some kind of catalyst or life event that helped you open the door to letting some of that joy in the door of life? I’m asking because I’ve been wondering lately if there might be some “best practices” that I could collect from people who have found that balance to share with those of us living on one end or the other of the save/spend spectrum!

      1. Interesting topic. I guess that’s why we choose unconsciously partners who are just the opposite. In order to experience first hand how “the others” do it. Day after day. And if everything goes well we morph into the perfect financial team.

  2. Hi Manisha,
    I always like reading your posts and am interested in the resources you refer to.  But I do think its important to mention that Carl Richards is the financial planner who lost his own home in the down turn.  On some topics, like this one,  one could argue it lends him more credibility.  On others, it might give one pause.  I like Richards and what he has to say.  I also admire him for his courage for in sharing (and sharing in such a public way) what were obviously extremely painful lessons.   I just think it’s an important data point. 
    Keep up the fantastic work!

    1. Lisa – Thanks for your kind note & for brining up a subject that is dramatically under-discussed: What happens when your financial planner has made mistakes in their own life?
      During my 15 years working in the Wild-World-Of-Wall-Street… I often felt like I was living in a gigantic episode of the Emperors’ New Clothes. It seemed like a land where everyone was perfect and no one ever made mistakes. Over time I personally found I gravitated most strongly to those leaders and practitioners who were authentic and honest about their own ups and down. Because EVERYONE has them.
      Whether it’s financial planning, medicine, law, or accounting… these are all fields that can seem like there are absolutely clear cut black and white answers – but the honest truth is there is a lot of gray. So one question I always like to hear people ask their planners is what is the biggest personal mistake they’ve ever made with their money. Those planners who answer honestly (folks like Carl Richards whose work I admire greatly) go way up in my estimation.
      In my case I would say the three biggest financial mistakes I’ve made (so far! 🙂 are: (1) in my early 20s I saved voraciously but invested WAY too conservatively… it wasn’t until my late 20s that I started investing in equities so I missed out on some vital years of growth, (2) In 2008 I left a job where I had ownership in the firm. I received cash for those shares and since that was right at the time the market was cratering I left those fund in cash. Then I started a new job and was so busy I didn’t get around to reinvesting that cash until late summer 2009 … thus missing a lot of that market upside, and (3) when I got married – I didn’t fully realize how much different attitudes towards personal finances could affect ones marital happiness and how essential it is to come to marital conversations about money with an attitude of love and compassion (yeesh, I was my tongue sharp in those early days, thankfully my hubby is wonderful and those conversations ultimately brought us much closer). Out of all these “mistakes” I learned much — and a great deal of my subsequent writings have been motivated by a desire to help people avoid very road bumps I hit head on.
      So HUGE thank you for bringing up this topic – and my suggestion to readers is to seek out professionals in all areas of your life who are confident enough to discuss the ups and the downs. I’ve yet to meet anyone who didn’t have both :). and… Happy New Year! – Manisha

      1. Thanks for your response and candor Manisha.  Your response touches on a closely related issue that I feel is also way under discussed.  In your comments about Wall Street, you mentioned:
        “It seemed like a land where everyone was perfect and no one ever made mistakes. Over time I personally found I gravitated most strongly to those leaders and practitioners who were authentic and honest about their own ups and down. Because EVERYONE has them. ”
        I’d venture to say it’s more than an issue of ups and downs not being discussed.   Its the fact that typically only the ups are discussed!
        It only takes a few people boasting of big wins in the market to make you feel like you’re the one poor sucker sitting in the dark.  The truth is, when someone boasts of a big win, you typically have absolutely *no* context for it.  How big a bet did they make?  How exposed were they?  Were they really smart — or just lucky?  Could they replicate that win?  How consistently could they do it going forward?  And more curiously  (they may even roll their eyes at such a pedestrian a question) what’s that big win look like after you factor in trading costs and taxes?  
        In contrast to this, how often do you hear someone openly admit (like you or Carl Richards) something akin to:  
         “Gee… I took a bath on that one.” 
        I’ve learned that the information we hear in passing about investing is often more than selectively filtered.  Yet it’s this kind of selective sharing that ends up making the silent majority feel like they’re the few poor clueless souls who really should be jumping onto some band wagon or other before they’re left behind feeling like road kill. 
        I think understanding the bravado that accompanies a lot of investing and / or financial “advising” would help a lot of people feel at least a little more at peace with the ups and downs that inevitably come their way.  
        My two cents anyway.  Thanks for both listening and engaging.
        Wishing you all the best,

        1. Yes, yes, yes – you’ve nailed it. It’s the asymmetrical nature of the way financial information/news is typically presented that is so damaging.
          Hmmm… I feel a new blog post brewing on this topic 😉
          How different our world might be if people felt comfortable just being… Real!

          1. I agree.  It would be so nice.
            Two final thoughts (you’ve already been more than patient!):
            1. If you do a blog post on this topic, I’d love it if you included (if you haven’t already done so elsewhere) some of the data that’s gotten some press lately about gender, overconfidence, and stock investing.  Men are more confident and, as a result trade something like 45% more often than women.  But they pay the price with lower returns.
            2. All this makes me reflect on the power of true / real stories from the frontlines.  I know many are reluctant to share — but true stories are in some ways the most instructive of all.  What if you had a week / month inviting real people (Wall Street types, everyday people, other professionals, celebs, etc.) to share their stories in the same spirit that you and Richard offered yours  (i.e. please!  help me make this experience worth something!  use this story and learn from my mistakes!) 
            I’m brainstorming here just cause it’s fun.  Thanks for indulging me.

          2. Am LOVING this exchange Lisa :)… my January is a bit crunched so it may be February before I’m able to address this properly but in the meantime let me just say….
            (1) YES! I saw this over and over when I was an institutional portfolio manager. Women gravitate towards more of a buy-and-hold approach, and that style of investing has historically generated much stronger returns than the testosterone churn-and-burn style. The Odean & Barber study on this is a classic: BOYS WILL BE BOYS: GENDER, OVERCONFIDENCE, AND …
            (2) My dream is to one day have a TV or radio show in which we do exactly that – true, authentic, honest stories about money & life (not a reality TV version) could have such far reaching consequences it makes the hairs stand up on my arms to think about it…

          3. I think about this stuff too as it’s also a passion.  (I have a copy of the same Odean and Barber study.) 
            Re #2, have you ever considered a book with this focus?  Sort of a Studs Terkel take on attitudes and experience toward money in America.  You could look at it from several different perspectives… gender, class, ethnicity, socio-economic and/or educational background, inter-generational or historic influences,  etc.
            I’m interested in helping people one on one — but ultimately I think stories (and specifically personal stories) are what hold the greatest power and carry the greatest sway.
            I’d love it if you kept me posted on your plans, especially if you needed another pair of eyes and ears.  (Or a co-collaborator!)
            Wishing you all the best —

          4. Re #1 – I keep hoping they’ll update the study to see what happened during the 2008-2009 downturn Re #2 – yes indeed… am working on a proposal along those lines right now!

  3. Hi Manisha, I usually order a meal that is among the lowest priced at a restaurant. It’s a habit I practiced since my youth! If I were a gourmet, maybe it would make a huge difference, but I enjoy the environment and activity of eating out as much as the actual meal.

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