Clueless, No Cushion, Not Enough Self-Control: Challenges In Managing Personal Finances

On Friday, PBS Newshour aired a fascinating piece called “‘Sesame Street’ Tells You How to Get to Sunnier Days Financially.” The title is quite deceptive given the valuable and revealing information and research described in this piece. Newshour provides background by citing some earlier studies on the limited financial education of Americans, our extremely low rate of retirement savings, and the financial destruction that can be caused by a lack of self-control, a characteristic that seems to fundamentally drive and determine our future financial success. While we wring our hands about the way our governments handle finances, an on-going crisis in personal finances seems ready to undermine our future economic health.

CLUELESS

“Americans 50 or older were asked, suppose you had $100 in a savings account, and the interest rate was 2 percent per year. After five years, would you have more than $102, exactly $102, or less than $102? Two percent interest, five years. What portion of the country didn’t know that more was the blindingly right answer? Half.”

NO CUSHION

  • 29% of Americans save no money for retirement
  • More than a third of Americans have $1,000 or less in total savings

NOT ENOUGH SELF-CONTROL
An ongoing study of 1,000 random New Zealanders from birth to now their 30s – the 1,000 most studied people in the world – has demonstrated “…their self-control, or lack of it, by age 3, has almost perfectly predicted their future prosperity.” In fact:

“Self-control is clearly more important than the socioeconomic status of one’s family, the amount of money that one had growing up, and it’s more important than school grades, academic achievement, and it’s more important than scores on intelligence tests…

…the children who are of very little self-control are in deep financial trouble by their 30s. Those who are very high self-control are doing really well. They’re entrepreneurs. They have got retirement accounts. They own their own homes. And those who are average self-control are right in the middle.”

Dan Ariely, a professor of Psychology and Behavioral Economics and author of “The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home,” demonstrates the difficulty of exercising self-control in his own children. His 8-year old son is willing to do homework now in exchange for watching two television shows later, rather than one show now and homework later. His younger child SAYS she prefers to play for twenty minutes over ten minutes of play, but she is unwilling to earn the extra time by going to clean her room right now.

Given the most important patterns of self-control appear to be set by age three, it is not clear to me whether we can hope to modify this behavior…or how. In the Sesame Street episode, Elmo seems to get it. But after saving his money to buy a “stupendous ball,” Elmo gives up one his critical dollars to feed the voracious and insistent appetite of cookie monster. It seems we have a long road ahead, a road that only gets more challenging in the future. As Ariely puts it:

“There’s really kind of a very strong imbalance about how much we can tempt people and how much people can actually resist temptation…as technology develops, what is technology going to do? Technology is going to help them delay gratification or have more things to spend their money on now?”


Watch the full episode. See more PBS NewsHour.

2 thoughts on “Clueless, No Cushion, Not Enough Self-Control: Challenges In Managing Personal Finances

  1. Doctor,

    Do you really believe that over half of the people could not correctly answer that first question about 2%. Come on; some things are so totally unbelievable they should not be believed. On a more positive note, love your articles and beginning to respect T2108. However, I guess you need to be more explicit for me to understand your “switch (s) back to bearish…” as in your June 3 column, for I still can”t see the bearish in the May 31. Regards.

  2. Thanks for the comment. After I posted the article, I actually had some doubts about the methodology and potential cherry picking of data points. Note that the question about interest rates was focused on people over 50. Perhaps most of the people who got the question wrong were over 80 and no longer all that good at math. We don’t know. It would also be nice to know the distribution of financial position on the other two points. Regardless, I really found the commentary and research on self-control most compelling.
    On T2108, I will try to get more explicit where possible. I am trying to walk the fine line between laying out *likely* scenarios and claiming I have a crystal ball. On May 31st, I was looking forward to shorting into the rally at the time. That’s the bearish commentary. I guess technically you could say I was bullish on the way to bearish because I thought the market would go higher form that point. 🙂

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