« Freakonomics Radio

298. Everything You Always Wanted to Know About Money (But Were Afraid to Ask) (Rebroadcast)

2018-03-29 | 🔗
The bad news: roughly 70 percent of Americans are financially illiterate. The good news: all the important stuff can fit on one index card. Here's how to become your own financial superhero.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This podcast dynamically inserts audio advertisements of varying lengths for each download. As a result, the transcription time indexes may be inaccurate.
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A bunch of years ago. I just quit what I thought was my dream career, trying to become a rock star and now is trying to figure out what came next. I was considering three options: number one was to become a shrink really liked psychology, but in the end I decided it was too selfish to spend my days helping other people with their problems. Number two was to become a financial adviser. I really liked learning about saving and budgeting and investing. But again I was selfish. I didn't want to devote all my energy to other people's problems. Number three was to become a writer and that's what I did, but the other ideas just go away. There is at least a little bit psychology in just about every episode of economics, radio. As for the financial sector, that's something we all wrestle with every day is net today on for economics, radio will wrestle with it together. We will wrestle with the standard advice on how much to save
You have just told me to save twenty percent of my money. You will wrestle with the fact that manual windfall does not guarantee long term success. We found at fifteen percent, declare bankruptcy and will lay out a personal finance roadmap that anyone can follow a year if it's? Basically, I am pretty simple void. Emotion, and concentrate on the economics. I'm fine.
From W and Y see studios. This is frequent. Comics radio, the podcast that explores the hidden side of everything. Here's your house, Stephen Dogma Anna Maria Lucidity is an economist who teachers in the business school at George Washington University. I born and raised in MILAN, and move to the. U s about twenty five years or so ago. For my graduate studies, as you can tell, she stole, sounds a bit milanese. I have to say I I cannot get ready these inside mean when the sorority first move to the states. Many things were unfamiliar our sports, for instance, especially american football. I became interested in football
because everybody is watching football on Sunday saw enough. I needed to talk to my friend. We add to talk about football for, and then, when I met the football players than I, to be able to talk football seriously when she met the football players? What's at all about? Well, a few years back, George Washington University started Especial MBA program called STAR and stands for special talent, access and responsibility. The programme was designed people who are already very successful, they are often very wealthy and they have to manage many things are not just that well, but also their name. The reputation- and it just so happens that most of day, students were actually athletes and the majority of a police were actually football players. These were
the professional football players. Some of them were from the Baltimore Ravens and I am a big Baltimore Ravens fan. They are first of all incredible students. They are my favorite students. Why were they her favorites Lucindy found her athlete students? Incredibly disciplined and perhaps not surprisingly, good team players should also impressed with her charitable they were and she was charmed by their sheer size, One day she was talking about the financing options of buying a car. The example should always used in previous classes was a toy Yoda Corolla, but the football players all started. Giggling one student raised his hand, Professor Anna, he said I do not fit into a toilet occur, the Saudi also realise that these nfl players were facing an unusual financial predicament. These are people which are very talented, very competent.
They have no knowledge of how to manage this money. Where often they come from background. Where you know nobody else, oh damn, financial literacy. Financial literacy is and has been for a couple decades- animal blue Socrates passion in a week. Financial decisions every day, The financial decision that we make today are different than the decision that our parents made our parents, don't have to worry about Ben shows. He then phase the type of mortgages we face now didn't have. Probably all the credit cards and all discuss more credit at their fingertips and also they didn't I've student loans. But we see other trans as well, for Ex
For financial markets around the world have become more complex. Many economists for many years have assumed that most people are financially literate. So, for example, we assume that people know, about interests compounding, and they know about three sculleries diversification and they act accordingly. But how much do people really know about the most basic financial principles? That is what lucidity in collaboration with the economist, Olivia Mitchell, set out to learn that came up with three survey questions. This was actually
even by the fact that in the first survey we only room for three they piggy back to their financial literacy. Questions onto the two thousand for health and retirement study being limited to three questions turned out to be a blessing because, first of all, these questions are very predictive, but also because they are only tree. They were adopted in so many national surveys. In the U S, and then in as many as fifteen other countries around the world Recently. A variation of these questions have been added to a global survey. So now we know about financial literacy around the world. Ok, before we hear about the state of financial literacy around the world with here the question
number one suppose you have one hundred dollars in a savings account in the interest rate was two percent per year after five years. How much do you think you would have in the account if you left the money to grow, The answers were multiple choice. A more than a hundred two dollars be exactly a hundred two dollars see less then a hundred two dollars or if you really want to play along D, I dont know, and the correct answer is: the correct answer is a more than a hundred two dollars, because two percent interest on a hundred dollars in a year is two dollars, so
after year, one you have a hundred two dollars and then over the remaining four years. The interest grows on that hundred two dollars and so on, and that is why compound interest has been called the eighth wonder of the world question one is about compounding terrorists, but really is about assessing numeracy. Ok, question number two question too, is about to flee
Sean imagine that the interest rate on your savings account was one percent per year and inflation was two percent per year after one year. How much would you be able to buy we'd the money in these account? The answers a more than today be exactly the same as today see less than today, or do I don't know the authorities last end today, because if inflation is two percent, prices go up two percent, but if you have only earn one percent in your saving account, you basically can by less and question number three question three as to do about risk. They were civic
a shown. Do you think the following statement is true or false? Buying a single company stock, you actually provides a safer return, then stop much one fund through force and, of course, because I do not at all- and the correct answer is true. Buying a single stock is safer than buying a mutual fund. Just kidding that's false, because a single company is a lottery Skeer than a basket of stocks, don't put all of your eggs in one basket. Ok, how do you do get all three right. If so, that would put you in a distinct minority. Americans are not financially literate, that's right. The Saudi found that only around thirty percent of the respondents got all three questions right. The numbers,
are pretty similar around the world, even in other rich countries. In the Eu S, financial literacy has some distinct demographic differences. Those facing most challenges sorry and Mitchell wrote are the young and the old women african Americans Hispanics, the least educated and those living in rural areas. So I national literacy should not be taken for granted and actually, if you ask me, I think we are at the crises level. You might ask yourself if financial literacy is so important and if so many people are so bad at it. What are you doing wrong? One simple answer is that even well educated people often don't attain as part of their formal education, much of a basic
financial literacy. What about parents? Are they supposed to teach their kids, the basics, maybe but money being what it is? A topic that makes a lot of people uncomfortable, you can see how out of parents, especially if they are not actually would read somehow never get around to teaching their kids. Some people argue that financial, Education is the answer. Anyway, they say the main problem. Is it too many financial instruments are either too complicated or inherently exploitive? We got into this debate in an earlier the sort of economics. Radio here is the legal scholar Lauren Willis on why it be better to design more user friendly financial instruments than to expect We want to learn more about personal finance is sort of like saying. While we should start
she everybody to be their own doktor teaching everyone to be their own mechanic? Terribly inefficient to do that not only is inefficient, but it it has a sort of culture of blaming the consumer. You know you're, the one who didn't figure this all out you didn't go to the classes, are didn't pay attention or whatever and that's not gonna help. In the long run. Anna Maria lucidity does not share that view. At George Washington, she founded a research centre called the global financial literacy excellent centre. Its mission is pretty obvious and part of that mission it turned out was to teach financial literacy to a bunch of pro football players whose circumstances she points out.
Quite atypical, they are very young and they get all of the money that people earn a lifetime early in life. That's right as lucidity writes a career lasting six years, the median links, will provide and nfl player with more earnings and an average college graduate will get in an entire lifetime, plus a modest pension, but they just couldn't translate. That sum of money, the lump sum they had into the stream of money that could support themselves throughout life. There are a lot of ways to blow a sudden fortune. Friends and fair,
He may come out you with their palms open your approach by all sorts of advisers with all sorts of brilliant investment schemes. There are taxes to pay upper income bracket taxes by the way which shrink your net income by a lot. And, of course, it's a lot more exciting to spend money today than to save it for tomorrow who Saudi inspired by her current football students decided together some data on hold your players she and her colleagues looked at a cohort of NFL players. Who'd been drafted in the late ninety nine, these early, two thousands to assess their long term financial outcomes. So we look at them. See rather than other measure or financial distress, because these are the things we can check and which studies data and
we find we found that more or less twelve year into retirement. Fifteen percent declare bankruptcy, birthright fifteen percent. These guys who'd already earned a career, is worth of income went bankrupt, a rate that similar or even higher than the overall population of men in their age group. Even though the NFL retirees it obviously earn a lot more money. The Saudi also found that the risk didn't even decline for the players who earn the most to me. They experience of DNA fan is a good example of the effect of fight now shall illiteracy, the NFL Bankruptcy Data reinforce Lusaka. These earlier findings about financial illiteracy. So what's to be done, because it's pretty obvious that many people have no idea how to handle their personal finances. Even people who think should know even
exceedingly well educated people like this guy, I must say I had a view. Lackadaisical attitude about personal finance. Until I was about forty years old, it's Harold, Pollack, I'm a professor. Social Service administration at the University of Chicago Public works with University of Chicago institutions like the crime lab and the Centre for Health Administration study, I have a doctorate in public policy, but I'm really applied it to finance, but then something happened. My mother in law died suddenly, and a brother in law Vincent had to move into our home he's intellectually disabled, and he was three hundred and four He pounds had many really The challenges Pollux wife had to quit her job to take care of her brother and Pollack began to worry about their financial health. I remember one day we had to buy a lazy boy type cheer just because he was so big that dough I'm sure, didn't work for him and it was like nine hundred dollars for this chair and I just remember
thinking like I'm just gonna, go through all my money, became obsessed with personal finance. He began looking at it. Literature. On investing one of the four things I learned was that the conversation among real experts was actually a lot simpler than that frustration that you'd get if you watched her name, tv or red brochures from financial services firms. The people Pollack calls real experts, academics, typically, who done real empirical studies till the very different story than investment professionals I started to joke around that. The fundamental problem that the industry face was that the best advice so was available for free The library pollack started. Writing about these ideas on a blog called the reality based community for one piece. He was interviewing. The financial journalists, Helene Owen about a book she'd written, called pound foolish, exposing the dark side of the personal finance industry and I
to her? Isn't the industry's fundamental problem that the best advice for most people would fit in? Ex cardinal available for free at the library and behind it. I called in the conversation moved on except Then I started getting emails from people and comments, on my blog say: hey where's the index card, but there was no index card. I was speaking metaphorically. So of course I was kind of stock, but I had planted a flag, and I felt I had to honour that so I just reached into my kitchen drawer and I pulled out my daughter's for by six index card. You know what she was using for school and I screwed down and maybe two minutes. Nine rules and I took a picture with my phone and I posted it on the web. Coming up on economics, radio, Harold Pollux index card catches fire on a variety of websites, point which I had never heard of actually life hacker, which I also had never heard of. Also a credit card rewards programmes as good as they seem.
All the research suggests that these reward from just make you spend more money. And how closely should you watch your investments? Don't peak as I mentioned earlier before, settling into my writing career. I thought about becoming either a psychologist for financial adviser, but I didn't mention
The book I was working on before for economics was a perfect hybrid of those two things. It was about the psychology of money. The working title was money makes me happy, except when it doesn't that book got put in a drawer once for economic started happening, but I still think it's estimating sentiment is pretty solid. Basically, money is one of those rare topics a bit like sex, maybe religion, that people have strong feelings about and you have a hard time discussing. As a result, a lot of us stumble through life, knowing we should know more than we do about personal financed, but were to intimidate. It or embarrassed, or something to do much about it. Harold, Pollack, public policy, scholar at Lena resume Chicago tapped into the sentiment when he dashed off and next card with nine easy rules about personal finance. It got nearly
half a million hits on Pollux Blog, the Washington Post picked it up all oh boy, going, which I had never heard of actually life hacker, which I also had never heard of your bunch of these websites that actually have big fat wings that I'm too old to be in the target demographic for really really grabbed it. The card was transit. It into Romanian, which is good you know I. I hope the people in Romania find it useful. I am not sure that they have for one case there. I suspect there we have to modify it a little bit. It was, You don't you started showing up all over the place. If there was a guy who plagiarize that I the Youtube video of some sort of a life coach who just wrote out in his own. It was word for word exactly what I wrote and he spoke it as if he had made it up and that all the financial advise you're ever going to need written on this index cards. It was hilarious to listen to us here. She has a great voice, but he added
quickly stolen the idea there was just something about it for a lot of people where you all of us, facing this very intimidating task. How do I save retirement word when best, my money? How do I deal with all these questions about budgeting and went by? house and all this kind of stuff. Oh, I just have to cut these nine rules on this card. Pollack, never pretended that he D, read some amazing new rules of financial behaviour. When my colleagues at the business school saw this and they saw what these rules work, they were just like you're kidding, but that didn't stop him from turning his index card into a book. Co authored with the journalists, Helene Owen, it is called yes, the index card, why personal finance doesn't, have to be complicated of courses, kind of ironic that I say out. You know here's this index car, that's what you need, and then people single. Why is there a book in to me It's a little bit like you know it.
Since you could say all of the religion comes down to the ten commandments, but a lot of us seem to need some commentary on those need to know how to execute those or, depending on your religious faith. You I sometimes refer to the book, the mid rush to our index card for your jewish listeners and for our non jewish listeners amid rush is rabbinic commentary or teaching on a biblical text, not quite economical passage but revered nonetheless, and that's kind of what Pollack was going for with the index card book. Ok, so what's in it Let's start with rule number one rule number one strive to save ten twenty percent of your income, because well If you're, not save me any money than everything else is a lot harder one of them. It thinks is once you start to save this money, it really reduces. Stress in your life. So amazingly fast
I must say that my original card said you should save twenty percent of your income and that's really hard. I got a boy. Of emails that were essentially the following form. No dear professor Pollack, I'm a twenty eight year old, single mom, and I were is a cashier. You have just told me too, twenty percent of my money you and me responses to all of those aims It was you know what you're totally I totally see where you're coming from at this stage in your life, you and not saved twenty percent of Europe's gross income? and you know when you're at that stage you? How can you, man, your credit card how can you say something? How can you start getting yourself on? budget you're doing that you're doing really well. So I think there My original card was really good for middle class people. Like me, it wasn't quite as good for people that word prince stages in their life, and so I have to I brought to some humility via you know, by the
our job. The that inadvertently attracted rule number two. Rule number two pay your credit card balance in full every month, how import is this one. You know this may be the most important single rule on the card for lotta people. If you're carrying a credit card balance ever Dollar, that you paid down on that you're, getting a risk free tax, free return, that usually more than fifteen percent, because that's roughly how much you are paying the credit card company for the privilege, using their money. Unless your name is Warren Buffett, huge snuck gonna get the kind of investment from anything else that you're doing and credit cards and other forms of high interest loans. Are
just a really serious trap for a lot of people. One problem is that credit card companies are savvy and they can make you feel like you're doing a great job just by paying off what they call the monthly minimum. You are doing a great job for them because they are collecting all that interest from you. Pollock warns us to beware of any deal that offers to help you smooth out your cash flow. So if you belong to a German, they say you can pay five hundred dollars up front for the year or you can make twelve equal fifty dollar payments. If you choose that payment plan, the cost of your membership is now six hundred dollars. Therefore, whenever PA the boy, you try to use cash as much as you can and you pay off your credit card and either way. One of the things that I recommend to people is based If we ignore your credit card reward programme, all the research suggests that these reward programmes to make you spend more money rule
number three rule number three max out your for one k and other tax advantage. Savings accounts a tipping. For. One k is retirement plan run by your employer, but there are a lot of options, including for self him Lloyd people. There are several reasons why are for a one carrier? Equivalent is just the foundation of your saving. First while very often your employer will kick in a matching contribution, and that is free money. You can also set up you're forward. Kay contributions to be automatic sing? You never have to touch the money. There are other tax advantage savings vehicles, so, for example, where there are two things that people can do to save money for their kids college that have tremendous tax advantages, one is called an essay. I won't go into the details, but the second account is called the fight. Ninety nine. In the five point, nine actually allows you feel a little bit more money or you have a large family that wants to contribute. You can, if you put an up to,
Fourteen thousand dollars a year that fourteen thousand dollar ceiling, actually just went up to fifteen thousand, is the amount you can give her parent per child without setting off. What's called the gift, tax Pollack works hard to not bring politics into his financial advice, but as soon as you get into tax advance savings plans you're getting into politics, because these tax breaks don't just happen. In Washington, had to draw up a plan that was meant to reward some kind of behaviour in the case of four one case and five, twenty nine, that is, saving for retirement and college respectively, but the tax code is full of breaks, many of which some people argue tend to help. Well off people become even better off the whole mortgage interest deduction, for instance, so it is forced to do if you think the tax code is on,
bear full, unless you ve got some friends on the house, Ways Means Committee or the Senate Finance Committee. There are the people who read the tax code. Maybe the best advice is to simply work hard to exploit the existing tax breaks. Sure you can complain that the tax code favours rich people or you could say, pay using the tax code to my advantage could help me become rich or moving on to rule number four never buy.
They also individual stocks and rule number five by inexpensive, well diversified index, mutual funds and exchange traded funds. We actually spend our previous episode going over this idea in some detail bottom line. Most people who picks stocks reliving do a worse job than a monkey with a dark board and they charge you a lot more than a monkey. Would how much enough to fund their beautiful off, this is, and homes and boats, even though again, your investment returns will likely be worse than if you just bought as Harold Pollack Notes, some low cost diversified index funds. This is a completely easy one: there's just a ton of wood. Sure that suggest that people chase after shiny objects and the stocks that by aren't particularly well chosen and the stocks there
so more often saw them at the wrong times. So you know why do you want to get into that? We also spoke last week with Jack Bogle, the founder Vanguard, the world's largest universe of low cost index funds. Here's how Bogle summarizes the he'll of what Pollack is preaching. You want to capitalize on the magic of compounding returns without succumbing to the tyranny of compound, in course, but that tyranny of compounding costs can be hard to resist, because the people who sell investment advice, I really that selling it they make. You believe that they alone no the secrets to the investing universe. They do it in tv commercials like this one understand
a complex global issues, one whose Pollux advice do not heed the siren call of slick fancy, expensive investment advisers for what it's worth is had become quite standard advice and its backed up by acres of research. That research also suggests that, for the average investor diversification is a good idea, a few different types of stock index funds, growth value, international, etc, and also some bond funds, Maybe some other less sexy investments you want to have the right send a job here: investments in stocks and then the other classes that you invest in of the stock market drops twenty percent. You should be buying stocks after that, not because you think the markets, undervalued or anything like that, but just because the percentage of your portfolio, that is in style is now below where you wanted to be idle:
The idea of a little balance in your I said: allocation Jack, Bogle again for the youngest investors and when you first start obviously should be honoured stocks, but as you build up a little assets, maybe by the time you're, twenty, five or thirty you're, probably gonna wanna be fifteen twenty percent on funds and eighty five percent and stock funds. And as you get older, probably want more in Bonn funds and lessen stock funds because he your loss is going to be greater than the other, a large amount of money. Obviously it can be really hard for the average person to take in and execute all this investment advice on their own. So you might consider hiring a financial advisor but Pollock says
just any financial adviser rule number six make your financial adviser commit to the fiduciary standard. The fiduciary standard is a federal requirement designed to ensure that financial advisers don't sell clients, products that are better for themselves than the clients. It basically says all the advice, you're giving me in all the products at your offering me are designed to maximize my own financial well be you're not being paid by anybody except me, I understand in a transparent way your financial incentives and, if you dont, have the fiduciary it's a little bit like walking under the Ford Lot and saying: do you think I need a new car? yeah? Do you think I should keep driving the old one for another couple years? There was a wonderful study, and by summer researchers at Harvard what just send out actors who had different kinds of retirement, age They would go into storefront financial firms
They would you say, hey here's. What we're doing tell us if we should do something different in some of them. Had Craig investments that we're gonna say all in the stock in their employer. Some of them had absolutely excellent investments that have been nine by financial professionals in low cost index funds, and things like that. The ones that had excellent investments the majority of the financial advisers. They talk to recommended They actually not do that that they do something that is essentially more expensive. Imitation on that this is not meant to besmirch. The reputation of all financial advisers is also worth noting that sometimes it may be the advisers who try to keep their clients on the right track. So we get paid a percentage of assets. Very writ, holds, writes about investing, but also runs an asset management firm, so the more assets we gather.
And the better those assets perform the more revenue the firm sees riddles has instituted a clever incentive to address his clients, investing behaviour. If people may in a portfolio for three years and don't do anything foolish with it, and there is a constant temptation to do something foolish. We will discounts our fees in additional. Fifteen percent, as sort of a good reward for for good behaviour. The thinking is left to their own devices. After three years, people get bored and they'll start especially in a market light, we ve seen over the past few years, so they start looking for a little low. Find a little action in hay. Maybe we should rule out of this long term, conservative portfolio and start gabbling. An ip oaths and venture capital, and we wanted to scourge that behaviour. Or a moving on to the single biggest expenditure, most of us will ever think about rule number seven
by a home when you are financially ready. Ok, so, let's pull that apart, the buying a home peace and the financially ready. I think we should think of our home as something that we use and consume, and some it helps us with our life, not as the major pillar of our wealth, I think that we've been conditioned from birth to believe that you're, not a full adult until you own a home- and you have to be careful about that. You know your your home is the most leveraged undiversified investment, you ever gonna make in your life, and Oh you don't want to rush into buying a home, and you want to buy a home in a very sensible way, sensible, meaning what That means when you have a nice twenty percent down payment which lets you get, good terms on your loan. It means getting a sort of vanilla, ice cream, fixed rate, fifteen year, a thirty year alone, rather than too
I do something like an adjustable rate mortgage and it means buying a home that you can afford and still have a strategic reserve If you move in and your hot water heater breaks or Iraq who needs its way through your room for all the things that can happen to a home, buying a home also represents what economist call a commitment device that the way to lock yourself into a behavior? You need some help getting locked into. In this case, your mortgage payment is a forced savings plan. Pollock sees the value in the stinking, but the lock he says can be fairly flimsy. A home is a good commitment device. Although it's a less effective commitment device, then it wants as because of home equity loans, home equity loans used to be called second mortgages, there was a certain stigma getting them, they were not common and one of them aren't, we discovered in the air for closure crisis was there,
a lot of people they were trying to dip into their homes, equity and when their value of their home dropped boy that could really blow upon you. So, So if you gonna use it as a commitment device, you have actually commit to it and not try to dip into your home equity in various ways to that's by home. When you're, financially ready rule number rule number, eight insurance- make sure your protected, ah insurance. So many types so much pressure in fear. Honestly, that's a topic for or other episode some day may will get to that. But for now here's Pollux thumbnail take The purpose of insurance is to make sure that you are protected. If you have a life changing meant, don't need insurance for the five hundred dollar problem. When somebody it's a baseball through your kitchen window, You do need insurance when the tree falls and as a fifty thousand dollar problem. You know in your whole kitchen gets taken out. You need life insurance in case
the people that depend on you need you after you dine. You need liability insurance when you're driving you to make sure that your life wouldn't change. If there was some sort of an adverse event, one of the things that we advise people in general is get the largest deductible, that Can you want the homeowners insurance with the five thousand dollar deductible? If you can get it? First of all, it costs for then sure to honour all these smaller claims that you're gonna wanna being having to pay for that. But, secondly, the people who get the high deductible insurance are the people, who know that their pretty unlikely to use their insurance so you're, putting yourself an insurance pool, that's likely to be more favourable than the ones with the low deductibles, and so so. Insurance is important to guard against the big things, not the little things Pollux next rule he admits is in a different category than the others.
It is not actually about personal finance. Rule number nine do what you can to support the social safety net. Pollack has heard from a lot of people who don't like rule number nine. They said you giving all this sensible investment advice, and then he got up political army, but public thought it was essential to include this. For a few reasons, one is there's a lot of people who need help. Secondly, to the extent that my story is is a part of our book, it would not be fully on if I left off rule number nine used at the beginning of our conversation. I talked about how my brother Lump Vincent moved into our home and what a challenge that was because of his intellectual disability in his medical challenges, we would have absolutely gone bankrupt. His social security, Medicare and medicate that prevented our family. Losing everything taken care of him and we have to have each other's backs and what the social
safety net does with social insurance does. Is it allows us to protect each other against these risks there were. This crush any one of us if we had to they said alone, and I think it's really. Portent as individuals. We should do everything we can to be prudent investors and to see for ourselves and our families and to follow the Rules that I've laid out. But you know you cannot Gordon. Instead, we thing in life I dont particularly enjoy pay. My taxes unable fifteenth, but I do feel that the amount taxpayer had my back when I had a crisis- and you know I shouldn't doing the same thing for other people, as you may recall, Harold Pollux index card had nine rules but his an Helene Allans book called the index card has ten rule number. Ten, remember the index card. Ok, admittedly, this one, this kind of matter there near here. As you know, we hope that this court is helpful. You not taken I put it under fridge raider. It's a reminder
A lot of recent social science research suggests that reminders like these nudges, like these are pretty effective. Also, one reason people often fail to make good decisions, financial or otherwise is because those decisions are too complicated or intimidating. So simplicity is a thing to strive for and to value. Will a simplified choice always lead to optimal outcomes. Of course, not but will it generally produce a better outcome than either avoiding the problem or doing something really stupid? Yes, it will. Experience is also pretty valuable. I guess it goes without saying so. To conclude, this primer on personal finance maybe makes sense to hear a bit more from the most experienced investor. I know
Vanguard, founder Jack, Bogle. Eighty eight years old, might be the most blessing man than the United States of America moguls. Longevity was not preordained in nineteen sixty I had my first heartedly I was only three years old. Thirty one years old had non tennis court, and I almost died and I had disease that never undiscovered, who find discovered, years later in France, but I was a mystery mad and the doctors looked at me kind of funny and when I got a pacemaker inserted one doc who said to me, you know you really prominent. Have that much time left
So what I want you go up to the cape and just gonna walk out on the beaches every day. Take it easy enjoy the remaining time on this earth. Bobo did not follow that doctors advice a few decades later. He did need heart transplants The transplant took place twenty one years ago, and I think I broke a lot of records for anybody sixty five years of age who gets a transplant and not many sixty five year olds get twenty one x three years. So let's hear your quick advice for a primer on personal finances. Aside from investing in index funds, we know you're gonna, that we know you're going to advocate that. But it sounds like you. Ve got a personal philosophy in terms of personal finances, well yeah yeah, it's basically, I am pretty simple minimum avoid emotion,
and concentrate on the economics its invest for the long term and don't trade, the ups and downs. Markets are unpredictable and foolish in the short term used. That is someone who's successful at avoiding emotions. But you have to know the most people aren't whether we're talking bout, investing saving versus spending or politics or whatever. How did you either get to be? The kind of additional thinker that you are or how do you advise people move in that direction, because, plainly, it's not so easy for most people know innocent because it's not easy for me and when we one of These- fifty percent declines. I've based, I think, three of them in my career. It's not funny I get a knot in my stomach. A lifetime of experience. Sixty five years of experience in this field has taught me that emotions evil and therefore you really ought to fight to keep them out of the equation, because the day your most concerned
is the day, the market, its bottom and that's a day wanna, get out and the day wanna get in West Timor it's a new high or believe a buying the markets, new, high and selling out the markets by them, the very difficult way to make money. What about spending versus saving. And how would you council some one to think about that? Well, every family is different. Given the unequal distribution of income, twenty percent of the families can't possibly invest they're, trying to stay alive and I'll, keep the wolf from the door and keep the children fed and housing and warm so when you get up the scale of living you're able to afford more- and I think people should pay themselves first out of every paycheck time and a contribution to a pension blind and just keep putting away
look at it. Dont peak and when you open your envelope when you're aged sixty five and retired mission, earn. You have a good cardiologist weighting of you're, a faint faint with happiness, not with shock vain with happiness right. You won't believe it believe it coming up next time and for economic radio. What is the one thing that makes humans human Oh my gosh, I mean, as an economist, I would say, cooperative trade. Are you sure a bunch of biologists have been. Exploring whether other animals engage in cooperative trade well if that works eat. My has obviously I was really excited. I was hoping for this market effect, you're, saying that homo economic This is really that the idea that is probably more fully present
in animals other than humans and yeah you should leave out the homo part and animal economics also, what does make you this human, that's next time and for economic? Three for Economics, radio is produced by W and my c studios and W productions. This episode was produced by Gregory Zawoiski. Our staff also includes Some hockenberry merit Jacob Stephanie, Tam MAX Miller, Harry Huggins, Anne Frank Terror, as we had help on this episode from SAM Bear. Most of them In this episode, composed by Luis Gara, you can subscribe, differ economics, radio on Apple podcast sticker or what You get your part guess. You should also check out our archive at free economics, dot com weakens dream or download every episode we ve ever made. You can also read the transcripts find links to the underlying academic research. You can also find us on Twitter, Facebook or via email at radio.
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Transcript generated on 2021-01-21.