Monday, September 28, 2015

Irrationally Yours

I love reading Dan Ariely’s blog where he answers reader questions about human behaviour. His answers are very entertaining in addition to giving insight into our irrational responses and giving us ways to compensate for our irrationality. Ariely has collected many of his best questions and answers into a wonderful book, Irrationally Yours. Not much of the book is directly related to personal finance, but understanding your own irrationality is important in investing.

On the subject of deciding whether your financial advisor’s services are worth the cost, Ariely recommends imagining sending a cheque every month instead of having the money taken away without your notice. Picturing yourself in the painful position of having to write that cheque, you’re in a better position to “ask yourself if you would pay your financial advisor directly for these services.”

When Ariely answers a question about making sure people have enough retirement savings, he makes a joke with a commentary on American lifestyles. “There are basically two [approaches]. The first is to get people to save more money, and to start saving at a younger age. The second approach is to get people to die at a younger age. ... By allowing citizens to smoke. By subsidizing sugary and fatty foods. By limiting access to preventive health care, etc. When we think about retirement savings in these terms, it seems we’re already doing the most we can on this front.”

On the subject of sticking to a financial plan, Ariely recommends trying to limit your opportunities to make changes. This reduces the odds you’ll make an impulsive choice when you’re being irrational. “You can ask your financial advisor to prevent you from making any changes unless you have slept on the decision for seventy-two hours.” Another approach is “not looking at your portfolio very often.”

Here’s some advice for a situation I’ve been in a few times. A man finds himself “walking behind a woman at night in a somewhat unsafe pace, going in the same direction.” He “can feel the doubt and worry in her mind.” Ariely’s recommendation: “Simply pick up your cell phone, call your mother, and talk to her in a slightly loud voice. In a world of suspicion, nobody who calls his mother at night could be considered a negative individual.”

When asked about clearing your mind by taking a run, Ariely makes it clear what he thinks of running in a way I found amusing. “I suspect that running while thinking about work is a recipe for designing products and experiences that enhance agony, misery, and pain.”

I highly recommend this book to all my readers, but especially those who insist that they don’t act irrationally.

5 comments:

  1. I love Dan Ariely!

    When I worked down at MIT, I went to the Muddy Charles and asked about the "MIT Brew" that he created for the experiment detailed in "Predictably Irrational". They had no idea what I was talking about =).

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    1. @John: Ariely's experiments sound like fun, but it must be doubly fun to put one over on people putting balsamic vinegar in beer.

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  2. Great review and a book I must pick up. Thanks for this Michael!

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  3. Hey Michael,
    I just started my own site and would appreciate if you had time to drop by and leave a comment. Here is my latest post on 'The Simple Retiree'
    http://thesimpleretiree.com/what-to-do-with-your-retirement-life/
    It's still a work in progress and I have much to work on. This site is not just about the financial side of retirement but a lot of the other aspects too.Thanks, Peter!

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