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Question: Why aren’t Americans wired to save?

Dan Ariely: So, first of all, it's kind of interesting that savings patterns have changed since the market tragedy of 2008, but if we talk about early on what was happening in the U.S., the reason for not saving is the same reason for not doing all kinds of other things, right? We don't exercise, we don't eat healthy, we have unprotected sex. I mean, there's lots of things like it and the big issue is that we have one thing we want now, and another thing that we want in the future, and when we focus on this tradeoff between not and the future, it's very hard to focus on the future.

So, think about eating healthy. You vow to be on a diet, you go to a restaurant, and the waiter comes with a chocolate soufflé, right? You have a long-term wish to be good, but you have this short-term desire to consume this chocolate soufflé, and the short-term desire often wins. We have a long-term desire not to procrastinate. I mean, there are lots of things like it.

So, that's the basic story of lots of things that we delay. Now, money actually becomes even more difficult than other things because it's very hard to imagine what the benefits are to saving. So, imagine that you see a new bicycle, a new pair of shoes, or something today. You know exactly what you are giving up if you are not buying it, what are you gaining in the future if you are not getting it. So, you are giving up the bicycle today, what is it in the future? What will happen if you send another $1,000 to your retirement fund? What difference will it make? It is very, very hard to figure out.

And on top of that, I also think that the banks have been doing a very bad job. So, when you know, you don't go to these every time, the experts ask you two stupid questions. The first stupid question is, how much of your salary now will you need at retirement? How are you supposed to have an answer for this? Ah, this question, I know the answer very well. What's the right answer for this? It's very hard to figure out.

The second stupid question is, what's your risk attitude? And we actually know that depending on what is on people's mind at the moment, they can have high risk attitude and low risk attitude. Nobody really knows what the risk attitude is. What does it really mean? So, if I started talking to you about how you felt in the last market turmoil and how was it to feel one day when you're portfolio went down by 10% and you lost all of this money. And then I ask you what's your risk attitude, you'll tell me a very different answer then if I ask you to tell me how much you enjoyed the Bahamas and how much do you want a beach house and so on.

So, people in the financial industry ask us these two stupid questions, and then they go ahead and spend millions and millions of dollars optimizing based on these ridiculous questions. And I'll tell you a kind of a sad story. Some time ago, I was invited to the announcement of the Fidelity My Plan Calculator, and they basically had this unveiling about this calculator and so on. And it's an unbelievably simple thing. You basically have seven or five questions, I can't remember, they ask you and then they tell you at the end they tell you need to save $4.2 million dollars. Now, I can't save $4.2 million dollars. It's just not going not happen and nobody in that industry is helping me figure out what will happen if it's less. What happen if it's 3.5, what happens if it's 2.1? Nobody is helping me doing any of those things. So in fact, the industry is also not helping us. I think of saving as running a marathon with nobody tells you what the end point is and how far you have been going. So, lots and lots of things make it difficult.

Question: Are American saving habits different from those in other countries?

Dan Ariely: So, the question is, are Americans different than other people? And I think in some sense we are and in some sense we aren't. I don't think we are different people: we are wired the same way, we're very similar. In fact, most of the research we do, we show that people are the same everywhere. There are really small differences.

Where we are different is in the social norms. So, if you grew up in another country and your parents tell you, "Little Johnny," or a different name, depending on the country, "When you get a paycheck, you save 30% of it. You save 25% of it." Parents tell you what to do. There's almost a rule of what to do. That's not clear of the right approach. It's not clear of the right number to save. But parents tell you what you are supposed to be doing.

In the U.S., I think there is an ideology of not telling kids what to do. Nobody to tell you who to marry, not tell you what job to pick. You're your own person. You have the freedom to choose, including the freedom to fail in magnificent ways. And I think that's the big difference. In other countries there is basically a social norm about saving that is passed from generation to generation. In the U.S. there isn't.

Now, one other interesting thing that is happening is what's happening now in terms of savings and saving rates are increasing up, now quite dramatically. And part of it is because people have lost trust. I mean, who would you trust right now? Which bank would you trust? Which investment would you trust? Do you really want to put your money; do you want to suffer more of these losses that we just had? You know, these volatility that we see is just unexplainable by any rational standards. Nobody has any clue about how to explain this, and nobody wants to experience that. So, we hold more money back, we don't necessarily want to invest in the market and by default, people are saving more.

Now, the interesting question is whether we will develop habits of savings. And I am actually quite optimistic about this because if you think of people as making decisions actively, every time we think about the cup of coffee, we say, "How much will I enjoy the cup of coffee, what else could I not do in the future because I buy this cup of coffee? These are incredibly hard decisions. So, people don't do them and instead they rely on habits. These habits fuel our decisions even when the underlying causes are irrelevant.

So the one question about now is whether people would start saving, whether we would get in the habit because of this, mostly because of the fear of putting money in the stock market, and actually they will keep on doing it even when it's not necessarily the greatest strategy in the world, but will develop a habit for doing so. And this will happen for the depression era and I think it will happen now again.

Question: Will the recession change our saving habits?

Dan Ariely: Well, I'm not sure on anything, but I think in the financial domain, we suffered the great blow to our trust and to our relationship with the financial system. Look, we had a very long run of about 25 years. If you think about people who are my age, we never saw a market that was not just getting better all the time. All of a sudden, we got the big lesson about what could actually be happening. So, I think there will be a lesson that will stay with us for a long, long time.

There is another question here, which is what will happen to consumption? There is something economists call "positional goods." Positional good is something you don't care about how much you have, you just want more than the other guy. And as an example, think about sea lions. Sea lions want to be big because if they are big, they get more females. So, imagine in all the sea lions, everybody is trying to get a little bit bigger than the other person, the other sea lion, and in the process, all the sea lions becoming so big that they then die at an early age from all kinds of diseases. And you can see a metaphor for American consumption.

We don't really want a huge house, but we want the house to be slightly bigger than our neighbors, and a car that is bigger than our neighbor’s, and they're going on vacation that's slightly more expensive, and this escalation happens that things got out of hand.

Recently, I went to one of my kids' birthday parties. And you know, all the kids are there and there's this float and a clown, and this, and sushi for the adults and wine and cake and all kinds of stuff is happening. One of the parents came to me and said, “You know, I think we should scale down. I think we should all, the parents, agree to go down to have a simple, fun birthday parties.”

Now, this is exactly the problem. The problem is that the kids don't care what party they have, right? They want cake and they want to run around. Nothing else matters. But in this escalation, all the kids want parties like their friends. So, if all the friends have an amazing, expensive party, they all want the same thing. If we all got to scale down as a coordinated effort, all the kids would have been just as happy.

And I think that's actually an interesting case of whether there will be kind of social mechanisms that will organize people to scale down back. Scaling down individually is very hard. Imagine that if you go to a place where everybody is dressed nicely, and you are the only one who doesn't dress nicely. Everybody goes on vacations to a great place and you go to the Jersey shore. It's very hard to do these things without an organized mechanism, but it looks to me like there might be some organized mechanisms.

Topic: Money talk

Dan Ariely: Another interesting thing that is happening in American society is that people are starting to talk about money. I don't know how you feel about this, but for a long time, nobody was talking about money. It was a secret. And it's kind of very interesting because we do lots of stuff to portray to people about how much money we have, the clothes we wear and the cars we have and the house -- they all kind of depict to other people, signal how much money we make, but we don't talk about it specifically.

And now, there's much more discussion about it. People are willing to say, what are you doing with your money?" What are you saving? What is happening? And I'm actually quite optimistic that these discussions might actually continue because these discussions are about social norms. And once you break the social norm and create a new social norm, all of a sudden it can stay with us for a long time.

Question: How can we teach ourselves to avoid that big spending mistake?

Dan Ariely: So, there are lots of psychological problems with money. Money is a wonderful invention. It lets us save, it lets us specialize, right? I couldn't be a professor if there wasn't any money. Every day I would have to raise chicken and bread and broccoli and go ahead and spend all my time trading. So, money is a wonderful mechanism.

Money is also very difficult to think about. So, we think about money as the opportunity cost of money. So, we at some point went to a Toyota dealership and we asked people, what will you not be able to do in the future if you bought this Toyota? Now, you would expect people to have an answer. But people were kind of shocked by the question. They never thought about it before. So, the most we got was people said, "Well, if I can't buy this Toyota, if I buy this Toyota, I can't buy a Honda." So, they were making a substitution from the same product in the same time, but in reality, this is not a substitution. They are substituting something in the future. In the future, I will have to give up two weeks of vacation and 70 lattes’ and 1,700 books. I don't know what exactly the translation is but when we do consume something now, something else has to give at some point. What is this thing? What is this value of price? Very hard to think about it.

So, that's a huge psychological barrier. We're actually trying to develop an iPhone app, now that the Droid is out, we’ll do it for that as well, if we ever learn how to program on this thing. But the idea is that to make money concrete. So, you can do this app, and it's not out there, but you can do the app. And you say, "I like vacation in the Bahamas, shoes, lattes, and books." And now, when you are tempted to buy something, that thing translates in terms of the things you are interested in.

So, it says, "Hey, this particular item is like half a day in the Bahamas, two shoes, and one latte. Which one of those is better?" Now, in reality, we think that comparing everything to money is great, but the reality is that it is very hard to think about money. It is so general. It's so abstract that we don't really know what we are giving up and what we are gaining.

So, if I gave you now, $10 as a gift, how happy would you be? Would you be happy, is the marginal $10, the best use of $10 you can use? Of course not. If I have you a CD, you know exactly what you are getting and you will have a value for it. So, money has lots of problems with it.

Topic: Don’t let money fool you

Dan Ariely: So, you know, with money we really fool ourselves. We are our biggest enemies with money and there are some things we can do about it. Automatic deductions are a wonderful thing. But ideally, you should wait until the end of the month, you can see how much extra money you had, and you should put that in your savings account. We don't do that too well, and if we did that, we would never save. So, what we do, is we take money out of our pocket into the saving account at the beginning of the month, take it outside of our control and as a consequence, we spend less and we save more.

This is, by the way, a very good trick. When you say, "If I rely on my own decision-making at every moment I will fail many, many times. If I think once very hard and create a standard of what I want to do and create an automatic execution that will take out the money every month from my bank account, then there's a good chance I will behave better. Not because I'm making good decisions, but because it is making it for me."

So, I think automatic deductions are one, thinking about money in concrete terms. So, when you come to think about buying something, usually we compare within categories. For example, you go to a restaurant, you look at the wine list, and you never say to yourself, "My goodness, for the difference between these two bottles of wine, I could buy three gallons of milk." We just don’t think like this. We compare wine to wine and milk to milk, and beer to beer but in fact, that's how we want to think.

Now, it’s very hard to do it in an extensive way, but when you see something, you could say, what else could I get if I couldn't get this? And which one of those is giving me the greatest pleasure. Now, it's not always that we need to save more and spend less; I think the question is, are we allocating our money correctly across into different categories? Money is a great way to get happiness. Right? Lots of wonderful things you can do with money. The question is, are we really optimizing on that? So, if you think about getting lattes and getting cable. Which one of those is actually giving you a greater happiness, and if you have to cut on one of those, which one would you cut? So, I think thinking in terms of concrete terms would help us a great deal.

Topic: The pain of paying

Dan Ariely: There's another idea called the pain of paying. This was proposed by George Lowenstein and Jon Elster. And here is the idea. Imagine that I own the restaurant, and imagine that I discovered that people come and they eat 50 bites and they pay $50. And one day, I offer you a great deal. I say, "You know what? Today it will be half price." Fifty cents per bite and moreover I will only charge you for the bites you take." And you're going to sit down and you're going to eat and I'm going to sit there with your wallet and every bite you take I'm going to take 50 cents from your wallet and transfer it to my cash register.

Now, it's going to be a very efficient way to eat because you're not going to spend much money. Cheaper plus in the bites you eat. But how much fun will eating be? Not very fun, right? Why? Because it turns out that the satisfaction of eating and consuming, or enjoying and paying, actually makes things less happy.

Here's another example. Imagine you go on a cruise to Alaska and you can either pay six months in advance, or the moment you get off the ship. It's much more reasonable, economically, to pay the moment you get off the ship. But how much would you enjoy the last day of the cruise? It will be kind of miserable knowing that tomorrow you have to pay all of this money. We can think about how we reduce the pain in paying. So, for example, credit cards are wonderful mechanisms to reduce the pain of paying. If you go to a restaurant and you are paying cash, you would feel much worse than if you were paying with credit card. Why? You know the price, there's no surprise, but if you're paying cash, you feel a bit more guilt. It's a bit more difficult. It's more painful to part with your money. With a credit card, eh -- it's another time.

So, you can think about this a good or bad. If you want to spend more money in restaurants, use credit cards more than cash. If you want to spend less, use cash more than credit cards. But in general, we can think about how to use the pain of paying and how much of it do we want. And I think we have like a range. Credit cards have very little pain of paying, debit cards have a little bit more because you feel like today, at least it is coming out of your checking account, and cash has much more.

But you can even do better than cash. Imagine if you had envelopes and your envelopes were telling you how much money you have in each category for the rest of the month. You had an envelope for coffee, you had an envelope for restaurants and you had an envelope for grocery. Now, when you take month out, you also see how much what you have left is shrinking, and that will actually increase the pain of paying more.

Now, I don't think we should go around life and being miserable all the time and feel the pain of paying. It's a question of what categories we want to spend more on and what categories we want feel that we are spending too much on and we want to cut down.

Topic: The “drop in the bucket” problem

Dan Ariely: So, part of the problem is the "drop in the bucket" problem. Right? So if I don't have money for health insurance, which is $5,000, what will $5.00 today be. And that's a problem of procrastination. Its $5.00 today and today and today and today, and the problem is, we can't envision to ourselves how this money would accumulate. We have to see where it's coming from. And I think we need visualizing tools. I think actually the banks role is to help us think about money better, and sadly, nobody is doing it because everybody wants us to spend more and more.

I was actually getting a little bit optimistic when the recession hit because banks were becoming interested in getting people to be more responsible. But sadly, I don't see this happening these days. There are a couple of startups, there are a couple of ideas kind of forming around, and I hope there will be some progress, but if you think about a person who is facing this dilemma, it's not humanly possible for him to think about the compound interest and the long term ramification of a latte a day, we need help in that and I hope that software will provide this help.

I also think that the iPhone is a wonderful idea for that. If you think about it, we all have good intentions. Even you friend who is spending the $5.00 on the lattes, they have good intensions for the long term, only in the short term, it's very hard to act on these good intentions. And I find this interesting because it can be with us when we have long term plans and when we have short term failing. And if you think about the phone as a time machine in this case, I think it could help you.

Topic: Taking the outside perspective

Dan Ariely: I'll tell you one more application. This is the first app we're going to have out, we'll have it up, I hope in two weeks if Apple approves. And you go on the iPhone and you pick four people that you admire, that you respect and you pick them from your address book. And then when you're tempted with something, you say what you are tempted with and then you pick one of those people and you say, what will they have told me to do? Now, what's the idea here? The idea is that when we are in a situation, it's very hard for us to take the outside perspective. But if you say, what would your mother tell you to do? And then you click, "I'm tempted to buy coffee; I'm picking my mother -- what would my mother tell me. I think my mother would tell me "No." And then it also sends it to your mother to verify. Now, you don't have to wait for your mother to verify to figure it out, the idea is to give people the outside perspective, to get them to think a little bit about, as advisors to themselves.

What we find, not in this app, but in general in experiments, is when people take the role of advisors, they become more rational. They see the long term more than the short term, they are less committed to the emotion of the moment, and they can do better.

Now, will w have one solution? No, I don't think so. I think we will have lots of solutions, but I think we are at the start of developing some software, some pre-commitment devices, some more awareness, and I'm actually optimistic that we will become better and better at this.

Topic: The problem with loans

Dan Ariely: There is another question about how people decide what loans to pay first. So, we're assuming right now in this discussion that people have money and it's a question of saving versus spending, what happens to people who have lots of loans?

So we recently did this study that asks the question of how do people decide what loans to pay first? And sadly what we found out was that people paid the small loans fore they paid the big loans. So, imagine you have six loans, small to huge. People want to close loans and because of that, they try to pay off the small loans, but that's not the right strategy. The right strategy, of course, is to pay the loan with the highest interest rate. People make this mistake and it costs them lots and lots of money, it's a very expensive mistake because interest rates accumulate and become very, very expensive very quickly.

We also find in our experiments that too many people these days, when they have cash, they keep too much cash in reserve. And it actually looks like a two stage process. People decide how much cash to keep, for a rainy day, and then the rest they allocate between loans, and over time, they learn a little bit about how to allocate the loans so that they pay first the high interest rate, they don't learn perfectly, but a little bit. But they still keep too much in cash and interestingly these two mistakes are connected. The people who keep more cash also tend to be more mistaken in how they allocate loans. And this, I think is a couple of really big mistakes. First of all, people should figure out very quickly how to pay loans fast and they should do it well because it's so expensive to have loans.

The second thing is I think at this time in history, when we are so uncertain about everything and everybody gives us advice about keep six month’s salary in cash. This is good advice to some people, but it's not good advice to people who have loans. Because, if you have loans, the first thing you want to do is say, "Okay, look I have a credit card, if I really need to borrow, I have this emergency money that I can get, but for now there is no reason for me to keep cash at zero percent interest rate and at the same time, pay all of this money out. So, I think people need to figure out quickly how to pay loans and how much cash they should really keep.

Question: What has been your biggest spending mistake?

Dan Ariely: So, now I was a grad student forever, basically. I was in grad school for almost seven years. I got two PhD's in the process, but I was a grad student for a long time and I got used to the lifestyle of a grad student. When I finished and I moved to Boston -- when we moved to Boston, the biggest mistake I did was I was so used to living on a PhD student salary, that I couldn't stomach the idea of getting an apartment in a size that would actually be good for us. So, the problem was that we moved from North Carolina to Cambridge and for the first few months, we couldn’t believe these were the prices of houses. Right? We were used to paying North Carolina prices. They were taking us to all these things, and it was like, for sure they are hiding something. These they've got for tourists, right? Tourist traps. It took us two months to realize what the prices really were of houses and we couldn't afford something that would be reasonable for us, but I couldn't bring myself to that. I couldn't bring myself to that and we ended up buying an apartment that was too small. It was great for us when we were a couple, but very quickly, we had the kids and then we had to move. And this was of course the transaction costs of moving apartments. It was very high. So, if I could only have stomach early on to buy a bigger place, we wouldn't have had to do this double move.

And the other thing that has happened recently, is look, I have to say that the financial recession has been very good for my field. Right? For a long time, we would say, "Oh, people are irrational, they make mistakes." And people would say, "Oh, I see, I see, this undergrads that make mistakes, professional people who get paid a lot of money in a competitive environment of the market place will never make this mistake. So, all of a sudden, we were vindicated and we had a hay day. My book is doing well, right? People invite me to give talks. Life is quite good on this side. It's no consolation for everything but at least somebody is benefiting from this.

When the recession hit, for the first time in ten years we decided to go on vacation. Now, we've gone on vacation before, but we always go to see family. We go to see my family in Israel, and my wife's family in India, and we don't really do vacation, vacation with just us. So, we decided to go on vacation. And we decided just when the recession kind of hit. And the reality is that, vacations became cheaper. We couldn't have gone to a great vacation and do it, but we also felt very guilty spending the money. The uncertainty, the questions about it, all of it was very confusing and we really felt bad about it.

Now, the reality is, we were doing okay. We have a long time until retirement, whatever we lost in the stock market doesn't really come to play for another 30 years, we are tenured professors and the thought that we would lose our job is very low. All the people in the world were relatively secure in our jobs, but nevertheless, we felt bad about it, and we downgraded our vacation to a big degree, and it was great. I mean, we had a great time, but we should have done the other thing. We just felt really guilty with this economic recession and spending money on vacation.

Question: How can we teach people to save energy?

Dan Ariely: Energy. So, let's rewind the clock for a second and think about what happened when the gas prices reached $4.00. It was incredible. It was amazing how concerned people were. In fact, I was on a radio show with somebody who bought an Escalade, you know, a Cadillac Escalade, one of these huge cars -- eight month earlier. He bought this car when the price of gasoline was $3.20, and he was back at the dealership when the price hit $4.00 to trade it in. And he bought it for $74,000, they were offering $35,000, or something like that.

Now, this is a huge loss that he was going to -- now, on that day, everybody was afraid of big cars and everybody wanted to turn them back, and nobody wanted to buy them. It was the worst time from a supply and demand perspective to sell a gas guzzler. And I said "Wait. Don't do it. It's the wrong thing." How many years will you have to drive from a financial perspective, how many years will you have to drive with this to justify it? Now, it's true that the price of gasoline increased by 80 cents since you bought the car, but it was very expensive when you bought it, and you decided to buy it. Now, just to be clear, I don't want people to drive gas guzzlers and so on, but this guy was going to lose a tremendous amount of money, not to mention he was going to buy a new car for this.

The question was, why were people so concerned? Now, I went back home and I looked at my personal finances and I discovered that the way that gasoline prices affected my personal life in terms of how much I was spending a year on it was really quite marginal compared to how much my healthcare cost has increased, but nobody seems to care. Nobody seems to be shouting over this. And even the gas, even energy prices at home, gas and electricity have gone up dramatically, but it was the pump that go people so up roared. Now why?

I think there are two reasons, one is that we all have this ideology of gas should cost $1.00 per gallon from whenever in the past. And the second thing is we see it all the time, do you even know how much a kilowatt hour is costing you? It's hard to tell because we don't see it. But you stand next to the pump, you fill it up, there's nothing else to do and you're watching these number go up.

So, two things are happening. You know how much it costs and you buy multiple units every time. Imagine the same thing would happen to bread. Last year when there was the oil crises, bread increased dramatically, my bakery basically had to put out a sign that said, "I'm sorry, but the price of wheat has increased more than 200% recently." But when we buy bread, we don't really remember how much it cost last time and we don't buy 12 loaves or 15 loaves at a time.

So, what is the lesson from this about energy consumption. I think it's about saliency. That energy consumption when something is salient is going to be very painful to us; guilt invoking and we are going to try to do things to overcome it. Energy consumption that is hidden and we don't see is not going to matter so much. So, now the question is, what do we do with electricity at home? How do we get people to think more carefully?

Now, you can imagine you can use the same metaphor. You can imagine you can get people a gauge in their home that shows them every moment how much energy they're using. You can imagine that when they are using another instrument at home, it shows them how much they could have used and how much they are using right now and how much the difference is costing them, or even worse, would cost them at retirement with compound interest.

So, linking these financial element to energy consumption I think has a huge role if you think about a display instrument that could teach us about what we are using, how much it costs us, how much it is saving, and therefore change our decisions. So, do you know how much money you would save if you changed your light bulb to compact florescent light bubs? How much would you save if you decreased your temperature of your house in the winter by one degree, or increase it by one degree? We just don't know these numbers, but I think displays could make it a memorable change in terms of attention, and also help us translate it in terms of concrete ways on what you can get.

Look, if you keep on doing this this way, you could get two days in the Bahamas next time you go on vacation.

Recorded on November 18, 2009

 

 

 

Question: Why aren’t Americans wired to save?

 

Dan Ariely: So, first of all, it's kind of interesting that savings patterns have changed since the market tragedy of 2008, but if we talk about early on what was happening in the U.S., the reason for not saving is the same reason for not doing all kinds of other things, right?  We don't exercise, we don't eat healthy, we have unprotected sex.  I mean, there's lots of things like it and the big issue is that we have one thing we want now, and another thing that we want in the future, and when we focus on this tradeoff between not and the future, it's very hard to focus on the future. 

 

So, think about eating healthy.  You vow to be on a diet, you go to a restaurant, and the waiter comes with a chocolate soufflé, right?  You have a long-term wish to be good, but you have this short-term desire to consume this chocolate soufflé, and the short-term desire often wins.  We have a long-term desire not to procrastinate.  I mean, there are lots of things like it. 

 

So, that's the basic story of lots of things that we delay.  Now, money actually becomes even more difficult than other things because it's very hard to imagine what the benefits are to saving.  So, imagine that you see a new bicycle, a new pair of shoes, or something today.  You know exactly what you are giving up if you are not buying it, what are you gaining in the future if you are not getting it.  So, you are giving up the bicycle today, what is it in the future?  What will happen if you send another $1,000 to your retirement fund?  What difference will it make?  It is very, very hard to figure out. 

 

And on top of that, I also think that the banks have been doing a very bad job.  So, when you know, you don't go to these every time, the experts ask you two stupid questions.  The first stupid question is, how much of your salary now will you need at retirement?  How are you supposed to have an answer for this?  Ah, this question, I know the answer very well.  What's the right answer for this?  It's very hard to figure out. 

 

The second stupid question is, what's your risk attitude?  And we actually know that depending on what is on people's mind at the moment, they can have high risk attitude and low risk attitude.  Nobody really knows what the risk attitude is.  What does it really mean?  So, if I started talking to you about how you felt in the last market turmoil and how was it to feel one day when you're portfolio went down by 10% and you lost all of this money.  And then I ask you what's your risk attitude, you'll tell me a very different answer then if I ask you to tell me how much you enjoyed the Bahamas and how much do you want a beach house and so on. 

 

So, people in the financial industry ask us these two stupid questions, and then they go ahead and spend millions and millions of dollars optimizing based on these ridiculous questions.  And I'll tell you a kind of a sad story.  Some time ago, I was invited to the announcement of the Fidelity My Plan Calculator, and they basically had this unveiling about this calculator and so on.  And it's an unbelievably simple thing.  You basically have seven or five questions, I can't remember, they ask you and then they tell you at the end they tell you need to save $4.2 million dollars.  Now, I can't save $4.2 million dollars.  It's just not going not happen and nobody in that industry is helping me figure out what will happen if it's less.  What happen if it's 3.5, what happens if it's 2.1?  Nobody is helping me doing any of those things.  So in fact, the industry is also not helping us.  I think of saving as running a marathon with nobody tells you what the end point is and how far you have been going.  So, lots and lots of things make it difficult. 

 

 

Question: Are American saving habits different from those in other countries?

 

So, the question is, are Americans different than other people?  And I think in some sense we are and in some sense we aren't.  I don't think we are different people: we are wired the same way, we're very similar.  In fact, most of the research we do, we show that people are the same everywhere.  There are really small differences. 

 

Where we are different is in the social norms.  So, if you grew up in another country and your parents tell you, "Little Johnny," or a different name, depending on the country, "When you get a paycheck, you save 30% of it.  You save 25% of it."  Parents tell you what to do.  There's almost a rule of what to do.  That's not clear of the right approach.  It's not clear of the right number to save.  But parents tell you what you are supposed to be doing. 

 

In the U.S., I think there is an ideology of not telling kids what to do.  Nobody to tell you who to marry, not tell you what job to pick.  You're your own person.  You have the freedom to choose, including the freedom to fail in magnificent ways.  And I think that's the big difference.  In other countries there is basically a social norm about saving that is passed from generation to generation.  In the U.S. there isn't. 

 

Now, one other interesting thing that is happening is what's happening now in terms of savings and saving rates are increasing up, now quite dramatically.  And part of it is because people have lost trust.  I mean, who would you trust right now?  Which bank would you trust?  Which investment would you trust?  Do you really want to put your money; do you want to suffer more of these losses that we just had?  You know, these volatility that we see is just unexplainable by any rational standards.  Nobody has any clue about how to explain this, and nobody wants to experience that.  So, we hold more money back, we don't necessarily want to invest in the market and by default, people are saving more. 

 

Now, the interesting question is whether we will develop habits of savings.  And I am actually quite optimistic about this because if you think of people as making decisions actively, every time we think about the cup of coffee, we say, "How much will I enjoy the cup of coffee, what else could I not do in the future because I buy this cup of coffee?  These are incredibly hard decisions.  So, p

 

Big Think Interview with Da...

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