STUMP » Articles » Financial Advice Book: The Behavior Gap and Emotions around Money » 22 February 2015, 07:28

Before I get to this weekend’s book, I want to point to yet another challenging of Dave Ramsey.

I’m not going to quote it, because first, I don’t agree with it, and second, this is not unique with respect to financial advisors taking issue with Ramsey.

I would never follow Ramsey’s advice because I don’t need it, and I will never need it, just like I don’t need coaching to get over math anxiety. It’s not that I would never go deep into debt or become bankrupt, but that if I do, the reason I will has nothing to do with what Ramsey is trying to help with.

Now, the book for this week is The Behavior Gap by Carl Richards, and while I don’t need his advice for myself, I do need his tactics for dealing with people who are doing stupid things with their money.

I am not sure how much it would have helped with my friends during the dot-com years, when I told them to sell at least some of their employee stock, or exercise some of their options, because Richards obviously was unsuccessful himself in telling people what to do:

A friend of mine worked at Oracle during the tech run-up in late 1999 and early 2000. The two of us were having lunch one day, and he told me he wanted to buy two snowmobiles. He didn’t have the cash because all his money was tied up in Oracle stock — which had climbed sharply. He would not sell any of the stock bcause he didn’t want to pay the 20 percent capital gains tax. The subsequent drop in the stock’s value (it fell something like 50 percent) took care of that problem for him.

I had similar discussions. I had pointed out that if one had all one’s investments in one company, including one’s job, this was an incredible concentration of risk. I asked them please, please, diversify. Which they did by buying tech mutual funds. Great.

Anyway, I really like this book as it deals with the main problems people have with money — when their animal natures overrule any rationality, and they end up buying high and selling low.

I have seen this when looking at policyholder transactions historically, seeing policyholders react to market falls or whatever hot financial news, and thereby screwing both themselves and the insurance company that is supposed to be protecting against this stuff. It’s amazing how they keep doing that.

It’s also amazing the policyholder behavior models I’ve seen given how I’ve seen people actually behave.

Anyway, back to Carl Richards. I first came across his website when I saw his napkin sketches promoted at a financial advisor website. There’s nothing terribly special about these sketches, but here is one key one from the book (and his site):

I absolutely agree with Richards in terms of point of view on money. It’s not complicated — but as Richards says, simple is not the same as easy.

The reality is that there is no secret. Just boring stuff like spending less than you earn, setting some money aside for a rainy day, paying down debt, and steering clear of large losses. That’s it.

Simple. Boring. But certainly not easy.

Well, it can be easy for some (like me), but lots of people do have trouble with it. That’s who Dave Ramsey is for. He sets up concrete steps that are progressively harder and harder to achieve, but one builds up discipline thereby.

I am doing something like this in my own life — I’m female, fat, and forty (aw naw, gallbladder, simmer down). I’m woefully out of shape. But every time I start an exercise routine, I overdo it, injure myself, and then I can’t exercise.

So I’ve been building up in stages. In my first stage, all I did was the 7-minute workout, and now I’ve worked up to my second stage, which is adding 30 minutes of walking to the routine. I feel really good once I’ve done this routine, but I do not let myself to do more… yet. I’ve been trying to pay more attention to how my body feels in terms of energy level, hunger, etc. It’s a long term project.

Anyway, there is no specific financial plan in this book. But the point is to get your head right about money issues — there’s no “One Secret Trick” that will easily wipe away your problems around money.

Or perhaps you’re like me, with no specific money problems, but a person who is often called upon to give advice re: money. And getting exasperated with people stuck with all sorts of cognitive/emotional biases: stuck on sunk costs, or anchoring to specific numbers, or being distorted by endowment effects.

I got an email from Richards some weeks back indicating he should have a new book out soon, which gets more into specifics of what should be a part of a financial plan — the second step after realizing the part emotions play with respect to money. The excerpt I saw indicates it’s a good follow-on to The Behavior Gap — The One-Page Financial Plan.