Why We Make Bad Decisions About Money (And What We Can Do About It)
Even the smartest people make irrational choices, says Daniel Kahneman, a Nobel prize-winning psychologist. Here's why -- and what you can do about it.
Megan Erickson is an Associate Editor at Big Think. Prior to Big Think, she taught reading and writing to ninth and tenth graders in NYC public schools and tutored students of all ages at the Stuyvesant Writing Center, which she helped launch. In her spare time, she worked in the communications department at the Center for Constitutional Rights and served as a mentor at the Urban Assembly, where she designed and led an extracurricular civics course on grassroots community action. She’s written on education, small business, and the arts for CNNMoney, Fortune Small Business, and The Huffington Post. Megan received her master’s degree in Education from Teachers College. You can reach her at firstname.lastname@example.org.
What's the Big Idea?
Why does it feel better to be paid hourly than to receive a salary? Why are we willing to gamble, even when we know there's a house advantage? Why would anyone buy stock in Blockbuster or Borders? (Respected financier Bill Ackman owned 10.6 million shares of the latter on the eve of the company's bankruptcy.)
If you've ever looked back at a rash decision you made and wondered what was I thinking? take heart: you're not stupid and you're not alone. Even the smartest people make irrational choices, says Daniel Kahneman, a Nobel prize-winning psychologist. "There is no question... this is the way we live" -- especially regarding money. So what can we do about it? It all comes down to mental accounting.
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"We all keep our money in different mental accounts for which we have different rules," he explains. "People... spend their spending money, but then there is a hierarchy of the accounts that they will touch." For instance, most of us are more willing to spend money that we're saving for a vacation than to spend money allotted for a child's college education. So far so good.
More foolishly, when we invest in the stock market, we see each stock we buy as a mental account that we should sell as soon as it's a winner. This means that investors end up selling their winners and hanging on to their losers, which, in the long run, makes them poorer than if they'd just kept the winners.
There are two major reasons for these recurring patterns of behavior. First, people often see their choices narrowly, attacking a problem as if it is singular and unique -- as if this is the only time they will ever encounter this specific situation. Usually, "it's a better idea to look at problems as they will recur throughout your life, and then you look at the policy that you’re to adopt for a class of problems," says Kahneman. So instead of saving and borrowing at the same time, treat your whole portfolio of assets holistically.
Another mental trap we can fall into is hazy generalizing. We all have an abstract awareness of the fact that we're being charged compound interest on our credit cards, but taking the time to actually do the math and integrate the interest into one's budget can be a deciding factor between having an empty bank account at the end of the month, and having savings. "Numerate people" -- people who make data-driven decisions -- "have a significant advantage over those who are not."
So do people who are able to frame things broadly and keep their emotions in check, according to Kahneman. We're not machines. We all have thoughts, feelings, and personal circumstances swimming around in our heads all the time, whether we're at work or at the bank or in the middle of a negotiation.
Gains and losses can take on an entirely different meaning depending on the weather, whether you got in a fight with your partner earlier that morning, what's on the news. "Most of us tend to respond to gains and to losses, to changes that happen in our lives," says Kahenman, but you're always better off trying to maintain a sense of perspective.
The attitude that leads to the best decisions? "You win a few, you lose a few." Keep that in mind the next time a hair-splitting, nail-biting choice comes your way.
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If you want to know what makes a Canadian lynx a Canadian lynx a team of DNA sequencers has figured that out.
- A team at UMass Amherst recently sequenced the genome of the Canadian lynx.
- It's part of a project intending to sequence the genome of every vertebrate in the world.
- Conservationists interested in the Canadian lynx have a new tool to work with.
If you want to know what makes a Canadian lynx a Canadian lynx, I can now—as of this month—point you directly to the DNA of a Canadian lynx, and say, "That's what makes a lynx a lynx." The genome was sequenced by a team at UMass Amherst, and it's one of 15 animals whose genomes have been sequenced by the Vertebrate Genomes Project, whose stated goal is to sequence the genome of all 66,000 vertebrate species in the world.
Sequencing the genome of a particular species of an animal is important in terms of preserving genetic diversity. Future generations don't necessarily have to worry about our memory of the Canadian Lynx warping the way hearsay warped perception a long time ago.
Artwork: Guillaume le Clerc / Wikimedia Commons
13th-century fantastical depiction of an elephant.
It is easy to see how one can look at 66,000 genomic sequences stored away as being the analogous equivalent of the Svalbard Global Seed Vault. It is a potential tool for future conservationists.
But what are the practicalities of sequencing the genome of a lynx beyond engaging with broad bioethical questions? As the animal's habitat shrinks and Earth warms, the Canadian lynx is demonstrating less genetic diversity. Cross-breeding with bobcats in some portions of the lynx's habitat also represents a challenge to the lynx's genetic makeup. The two themselves are also linked: warming climates could drive Canadian lynxes to cross-breed with bobcats.
John Organ, chief of the U.S. Geological Survey's Cooperative Fish and Wildlife units, said to MassLive that the results of the sequencing "can help us look at land conservation strategies to help maintain lynx on the landscape."
What does DNA have to do with land conservation strategies? Consider the fact that the food found in a landscape, the toxins found in a landscape, or the exposure to drugs can have an impact on genetic activity. That potential change can be transmitted down the generative line. If you know exactly how a lynx's DNA is impacted by something, then the environment they occupy can be fine-tuned to meet the needs of the lynx and any other creature that happens to inhabit that particular portion of the earth.
Given that the Trump administration is considering withdrawing protection for the Canadian lynx, a move that caught scientists by surprise, it is worth having as much information on hand as possible for those who have an interest in preserving the health of this creature—all the way down to the building blocks of a lynx's life.
The exploding popularity of the keto diet puts a less used veggie into the spotlight.
- The cauliflower is a vegetable of choice if you're on the keto diet.
- The plant is low in carbs and can replace potatoes, rice and pasta.
- It can be eaten both raw and cooked for different benefits.
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