Are you irrational about money? I know I am. I spent my working life saving for my retirement, but now that I'm retired, I can't switch gears and start spending what I've saved. I will drive across town to buy wine on sale and then spend more for a glass at a restaurant than I just spent on that bottle. I think the dollar in my savings account is worth a lot more than the dollar in my checking account, and I regard the dollar bill in my pocket as practically worthless. I'm weird, and that's normal.
In fact, the vast majority of Americans are quirky about their money, so much so that an entire school of study about it — behavioral economics — has sprung up in the past two decades, its practitioners winning three Nobel Prizes along the way. Behavioral economists document our financial foibles and then propose ways we can psych ourselves into sounder money management.
Some of our quirks are harmless (keeping that dollar in my pocket out of my savings account costs me only a few pennies of interest a year). But some of our all-too-human behaviors can really hurt our bottom line.
Here are a few of the most common idiosyncrasies these economists have discovered and ways we can protect ourselves from ourselves.
Quirk: We get financial advice from amateurs
Ken Robertson is an Austin, Texas, retirement plan consultant who used to administer 401(k) plans for large companies. He noticed a particular behavior among employees in the plans: workers seeking money advice from colleagues they perceived as most skilled — even if the skill had nothing to do with money. At one Las Vegas hotel, the employees all respected the talents of the sushi chef and sought him out for retirement investment advice. At a large supermarket chain, butchers were typically deemed to be among the most skilled workers on-site, and employees often turned to them for retirement guidance.
Fix: Talk to experts
Robertson and his colleagues used that information to bolster retirement savings. They targeted the sushi chef and the butchers for lessons on how bigger contributions built savings, knowing that other employees would ask for their advice. It worked — retirement-savings contributions went up company-wide, though individual workers might have done better to get true expert assistance or learn to manage their accounts themselves.
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Quirk: We think we know more about finance than we do
When it's plausible that another person knows something about finances, we overestimate our ability to judge the quality of his or her advice. Harvard professor David Laibson, a behavioral-finance expert, laments that many people will buy high-fee mutual funds and insurance products from financial advisers without ever really understanding how much they are paying or what the impact will be on their savings. It's why near-retirees still pack those “free” retirement seminars at restaurants, even though the advice is often dubious.
Fix: Get informed
Get educated about your finances so you don't have to rely on any single “expert.” There's a wealth of good free info online. One place to start is research firm Morningstar's Investing Classroom. Several investment firms, including TD Ameritrade, Charles Schwab and Vanguard, offer educational materials and calculators that can help with investing. If you want professional help, shop for a financial adviser who is a certified financial planner or is a certified public accountant with a personal finance specialist designation. Use an adviser who discloses fees and has fiduciary responsibility to put your interests first. Have a 401(k) at work? The company that operates it for your employer may also provide retirement-planning advice.