And sadly, they’re on the bleeding edge of research.

You might have heard about all those little tweaks government officials have thought about implementing in order to make you healthier and save more. You could have companies automatically enroll employees in a 401(k) plan, rather than have them opt in, for example. Companies that have implemented that little change have seen 401(k) participation jump to 93% from 76%.

But, of course, the very best behavioral economic “parlor tricks” aren’t all used for good. In fact, it’s often the marketing departments of consumer goods companies that implement new research the fastest. Here are a few to look out for.

“On sale”, “50% off”, and anchoring

I got painfully close to buying a web marketer’s extremely expensive online course just a few weeks ago. I didn’t end up buying, and this isn’t a commentary on the quality of that course—who knows, it might have been worth $1,000. But a few moments after my decision not to buy, I went back to see how he almost got me. After all, I don’t even know the guy. I don’t have any friends who took the course and could recommend it. And yet, I almost bit.

One clever strategy the marketer employed was to set his course price extremely high in the beginning, but offer a seemingly steep discount promotion after a couple weeks. The course started at $1,000, but by the next month, it dropped to $500. Since I, and his other targets, already thought of his course as a $1,000 investment. Five hundred seemed like a great deal.

The technique is called anchoring, and it’s one of the older tricks in the book. You give the target a “reference point”, and then negotiate around that reference point to achieve your desired effect.

To better understand the trick, imagine what my feelings would have been had he started his pricing at $250 and later e-mailed to say the price had increased to $500. I would have laughed in his face.

Drip pricing: Pile on the little charges after the decision to buy

Ever bought a car? Maybe you negotiated hard down from the sticker price (probably already facing anchoring bias). But after the dealer shook your hand and said “We have a deal”, the extra charges started to pile up. Water-proof seat treatments, a delivery charge, rust-proofing…you name it. The charges didn’t seem big relative to the overall purchase, but they probably added up to several hundred dollars.

You see, the best time to hit someone with nasty surprises like that is after they’ve already decided to buy. Once that decision is made, the target starts to think as if he already owns the car. Even though no money or product has been exchanged yet, it’s hard to back away from that decision in the face of new information.

In the U.K., the Office of Fair Trading, which is in the business of consumer protection, played several marketing tricks on students, to see which they were most likely to fall for. Hitting them with a shipping fee first and then a handling fee was the most likely to confuse them as to what was a good deal.

So why don’t we get it? Two things could be going on. First, even though you don’t own the product, once you make the decision to buy, you start to feel some of the pleasure that goes along with owning it. That sporty red car feels like yours, even though you haven’t bought it yet. So making a decision later not to buy it can be a painful loss.

But second, we also tend to have trouble with “complex pricing.” Unless it’s added up for us, we don’t make the connection that a $500 purchase—with $15 S&H, a $40 warranty, and a $50 required battery charger—is actually a $595 purchase.

Creating a sense of urgency

This was also something the guy with the $1,000 course employed. “This course becomes unavailable at midnight. I’ll probably never sell it again, but if I do, the price will only go up.”

Of course, that was a few days before he cut the price in half, but putting that aside…

Loss aversion also extends to a perceived lack of availability or exclusivity of a product. On T.V., you’ve probably seen dozens of products “not available in stores.” The Nintendo Wii stayed hard to buy for years after its debut (though Nintendo would argue that was because they couldn’t keep up, not because they wanted to create a sense of urgency to buy).

Right now, it’s very in vogue for tech start-ups to only allow a small number of subscribers to try a product at first, before expanding to the general populace. Remember when Gmail was available by invite only? Somehow, I doubt they did that just to avoid a stress on their massive servers.

Unfortunately, I don’t think it’s ever going to be possible to completely avoid this marketing tricks. Sometimes, it might not even be advisable. I remember when I got my early-adopter Gmail account. It actually felt really good to have something that other people had so much trouble getting. And while ephemeral, that nice feeling still has value.

But next time you’re faced with an experienced salesman or see an ad on television, try to picture the training and thought that went into that advertisement. I guarantee you that any company worth its salt is using all of the great behavioral knowledge we’ve developed in the last couple decades to squeeze your wallet.

You can’t keep a kid from his marshmallow.

Back in the ’60s, it was apparently O.K. to torture little kids. Just kidding, but one study came close.

Here’s the gist. Stanford economists took four-year olds one at a time and put them in a room with a single marshmallow sitting on a table. The experimenter told them that he had to leave for a short errand, but if they waited without eating the marshmallow, they would get an extra one upon his return.

Seventy percent of the kids caved, on average lasting 3 minutes before eating it. The rest of the kids were visibly frustrated as they tried to wait. Some turned away from the table so they wouldn’t see the marshmallow. Some covered their eyes. Decades later, the researchers asked the kids (now adults) for their SAT scores. The patient kids scored better.

Since then, the study’s been replicated a number of ways. But just a few years ago, scientists took it to a new level. To see exactly what was going on, they scanned testers’ brains while they weighed decisions to see what areas showed the most activity. Researchers from the National Bureau of Economic Research asked 14 participants to choose between receiving money at an earlier or later date. For example, they could take $27.10 today or $31.25 in a month. While they thought about what to take, they were put in an fMRI machine to see which regions of their brains were activated.

When they considered one of the immediate cash payments, their brains’ limbic system, which is generally stimulated in emotional situations, was active. On the other hand, the areas of the brain that control reason showed intense activity when they considered the far off payment.

When the emotional and rational parts of the brain square off, guess which one is liable to win?

Controlling impulses

Luckily, there’s a way to even the score. Earlier this year, scientists in Germany published a paper on a similar test. Similar questions about present or future rewards. Same fMRI machines to see which parts of the brain were being activated.

Except this time, the scientists asked the subjects to think about their future selves as they considered the future rewards. What will you do with the money? Where will you be living? What kind of job will you have? By making the subjects think ahead, their brains showed activity in locations of the brain normally associated with autobiography and emotion (in addition to the expected, rational areas).

What’s more, they became much more likely to choose the far-off, and rationally superior, offer.

Recently, some behavioral economists have floated a related idea to get workers to save more in their retirement accounts. Every time they open the account to see their balances, they see a digitally-altered photo of themselves in retirement. So a 27-year old would see an estimate of what he’d look like as a 65-year-old man. Maybe by making them think forward to that future self they’d be more willing to sacrifice his current wants for the guy in the photo.

And keep that blood sugar high

Another interesting finding: Being hungry makes you likely to opt for instant gratification.

Researchers at the University of South Dakota told 65 college students not to eat the morning of an experiment. After bringing them in, they gave some of the students a sugary soda to drink. The others got a diet soda, with aspartame as a sweetener. The researchers also monitored the subjects’ glucose levels throughout the experiment.

Each of the college students was given a series of questions that weighed instant gratification against a future award. “Would you prefer $120 now or $450 in a month?” To make sure the students took the questions seriously, at the end, they rolled dice and were awarded one of the rewards they had chosen.

Here’s what they found: Before drinking the soda, both groups were just as likely to choose instant gratification. But after drinking the soda, the ones given the sugary stuff were much more likely than the other group to choose the delayed prizes.

The researchers think that the experiment links our desire for money with our primitive desire for food. When our blood sugar is low, our brain sends a signal that the body needs satisfaction now. While we’re most likely never at a loss for food, until it’s satisfied, it’s looking for a substitute.

Sounds like a good reason to make important decisions on a full stomach.

And the dangers of “Fake it ’til you make it”

We’ve all cheated in some way or another. Maybe you tricked your little sister into a bad trade at Monopoly. Maybe you copied an answer off the test next to you. Hopefully, those minor indiscretions never evolved into major betrayals at work or in relationships later on. But psychologists and economists have recently run a multitude of tests to help determine what makes us cheat and how to stop it.

The results are pretty surprising and, at times, counterintuitive. Our propensity to cheat doesn’t seem to have to do with getting caught. It doesn’t even seem to do with how much you gain by cheating. Instead, our sense of self and our peers heavily influence how honest we are.

Wearing a knock off makes you less honest.

I don’t wear knock-offs. Mainly that’s because I don’t wear expensive designer brands. Mainly that’s because I am a man. (Apologies to men who wear expensive designer brands. Blatant stereotyping, I know.)

It turns out that my avoidance of knock-off brands is a good thing. And all you people out there who think getting a knock-off makes you “frugal” might want to think twice, if a recent study by Duke professor Dan Ariely, and Harvard professors Francesca Gino and Michael Norton is to be believed. You might recognize Ariely as the author of Predictably Irrational and The Upside of Irrationality—two of the best known books in the pop economics field.

The researchers gave a group of women pairs of expensive Chloe sunglasses. They told half of the group that they were knock offs and the other half that they were real. In truth, they were all the real deal. While wearing the glasses, the testers performed a series of mathematical puzzles in a short amount of time. After the time was up, they were asked to grade themselves, but unbeknownst to them, the professors were monitoring their performance and how honest they were in the self-scoring.

Of the people who thought they were wearing authentic Chloe sunglasses, 30% cheated. But among the people who thought they wore fakes, a full 70% inflated their scores. The researchers found similar findings when asking them to perform other tasks. What’s more, when the researchers asked them to rate others on how often they thought various methods of cheating went on, the people who thought they were wearing fakes had a more cynical view.

Why do the ones who think they’re wearing fakes cheat more? Ariely & Co. think that the faking gets internalized. Those who wear fakes feel phony themselves, and thus are more apt to cheat and think others are cheaters. That’s quite a price to pay for being frugal, though I guess real frugalists wouldn’t care to fake designer duds.

We’re likely to cheat, but only a little.

In another Ariely study, 791 students were asked to take a series of tests and then grade themselves. They earned more money the more they got right.

Sadly, most students did cheat. But only five cheated the maximum amount possible. The others just gave themselves a little boost during the scoring. The results didn’t change no matter how high a chance the students had of getting “caught”. Whether they were asked to turn it into an instructor, just speak their answers to the instructor, or take the money from the jar themselves, the students cheated the same amount.

Tactics that did reduce cheating? Asking the testers before the experiment to write down as many of the Ten Commandments as they could remember or to read and sign an honor code.

Another surprising deterrent: Increasing the amount the students gained by cheating. If the student got an extra 10 or 50 cents for each “correct” question, cheating was high. But if they increased the reward to $2.50 or $5, cheating dropped to zero.

In my mind, this could indicate that the students didn’t really care about the money. They just didn’t want to look stupid. Increasing the financial rewards for cheating could have just made the students take the self-grading more seriously and outweigh their aversion to looking dumb. I wonder how the test would turn out without any financial incentive…but I digress.

You’re more likely to cheat if your peers do.

What if we throw one more wrench into the mix? In another version, Ariely had students from Carnegie Mellon and the University of Pittsburgh take the test. But he also hired an actor, who after just 30 seconds would stand up, say he answered all the questions correctly, and ask what he could do. The instructor would give him all the money and tell him he could go.

In other words, the students were witness to another supposed student who cheated in a very transparent way and got away with it. But how that affected their own honesty varied. If the actor was wearing a Carnegie Mellon sweatshirt, the University of Pittsburgh students would actually become more honest, having witnessed someone outside their peer group cheat. If the actor was wearing a University of Pittsburgh sweatshirt, the students would become less honest.

The message there: If you associate with cheaters, you’re more likely to become a cheater yourself.

Check out the video below to see Ariely talk about some of these experiments and others he’s run on cheating. The stuff on dishonesty begins at the 4:15 mark. It’s part of the TED series of talks, which I’m a huge fan of. I promise that the entire 15 minutes is worth watching.

Note to self: If you ever sign up to do tests in an academic study, you are never being tested on what you think the test is on. And there’s always someone watching.

Live happier, feel more relaxed, and restore your mental health.

Have you ever taken a two-week vacation, come back to work, and felt stressed before the next weekend arrived? Me too. And it wasn’t because the vacation was miserable. Quite the contrary.

Still, scientists and economists have long wondered why certain experiences that should leave us with lasting feelings of happiness and satisfaction wear off quickly and others stick with us for decades. You can’t get a better vacation by spending more money—jetting off longer distances to ritzier destinations. So what does maximize your vacation dollar and day?

Let’s get one obvious point out of the way. To enjoy a vacation, you have to take it. And too few of us do. According to Ipsos/Reuters, only 57% of Americans use all their vacation. Compare that to France, where workers get 37 days of vacation on average and 89% use all of it. We’re not the worst— South Koreans, Australians, South Africans and the Japanese are all even less likely to use their vacation time.

Not taking a vacation you’re entitled to is like leaving money on the table. Someone who makes $50,000 per year and doesn’t take the two-weeks he’s due is effectively taking a $2,000 pay cut. I hope doing the math would make him feel less bad about taking it.

Let’s say you’ve gotten over that though and are ready to plan the big escape. How can you make it the best you and your family could ask for?

Plan far in advance.

No, not because you can often get the best hotel rates and air fares that way—though that’s true too. Planning ahead gives you the psychic benefits of a vacation earlier, which results in a real increase in happiness even before you step on the plane.

A survey of 1,500 Netherlanders, which happened to catch 1,000 before vacations, found that their happiness markedly increased in the weeks leading up to their departure. A separate study found that the effect was particularly acute in the two weeks right before the vacation.

So while last minute junkets can be refreshing, keep in mind that the cost of your spontaneity is the two weeks-plus of anticipation that provides some, if not most, of your vacation enjoyment! Those same Dutchmen, after returning home, only took one week to return to their pre-vacation levels of mood, tension, energy, and satisfaction.

I’ve personally planned vacations more than a year in advance. And I tend to put reminders of it in places where I’ll run across them daily. I archive most of my Gmail messages, but the airplane itinerary will sit in the Inbox at the top of the list. I’ll have at least one guidebook sitting on a visible shelf. For one vacation, I actually had a sticker on a globe sitting next to the bed right up until we left.

Research each destination and activity thoroughly.

This is, in part, related to the “placebo effect” of expensive wine I wrote about a few months ago. If you’re told a wine is expensive or is going to taste great, when you actually put the glass to your lips, it will taste better, all else being equal.

Think about how you can apply that principle to a vacation. Instead of just doing a lot of research on Orlando and Disney World, put some time into researching the drive out there. Will you be driving through historic Seminole country? Figure out where you’ll stop for lunch beforehand and find reviews touting the food.

Again, this isn’t so much about making sure you have an interesting drive and eat good food—though that’s good too. It’s because adding that research, heightens the anticipation and primes your imagination to add value to each of those experiences. A grove of trees alongside a highway simply carries more meaning if you know that American Indian tribes used the land as a hunting ground a few hundred years ago.

Focus your dollars toward the end of the trip.

Economists and psychologists have studied something called the “peak-end rule” for about a decade now. It turns out, that our lasting memory of the experience—long after the experience has actually ended—is marked by the experience’s most intense moments and its final moments.

Daniel Kahneman and Donald Redelmeier tested colonoscopy patients and found that by lessening the pain at the very end of that rather painful experience, the patients had an overall higher satisfaction with the entire procedure.

So, a pleasant and relaxing vacation on the beach might not be the way to go—unless you find intensely pleasurable moments in there somewhere. Not going to expand on that.

It might even make sense to shorten your time away if it means you would be able to take part in an incredible experience that you really want to do. Five days at the beach, including a bout of hanggliding, will ultimately be more memorable and deliver more lasting happiness than seven days without any intense experience.

Break up the vacation with real life.

Finally, and especially if you’re taking a long vacation, it’s best to break up the vacation’s most pleasurable moments with “real life”—whether it be work, a boring drive, or pretty much anything a bit less pleasurable.

This probably seems counterintuitive. And frankly, even though I have no reason to doubt the science behind it, I find nothing more irritating than when work intrudes on my Sunday afternoon.

However, humans have this unfortunate tendency to adapt to all circumstances, whether they be positive or negative. You eventually get used to the crummy apartment with the leaking sink and dingy windows, but you also get used to the plush beach chairs and cool, tropical breezes. So just as your misery is deadened over time, so will your pleasure.

Maybe I’ll take my BlackBerry to Europe after all.

We’ve feared losses for 40 million years.

How hard is it to learn to be a good investor? I’ve written a lot about the behavioral quirks that cause us to make major mistakes when we put our money in stocks and bonds, even though we know that we’d do a lot better to make different decisions. Losses hurt more than gains feel good. Walking inside your boss’s office for a review actually triggers an adrenal response—you’re ready to sock your boss in the face or fly out the door as he tells you how well you’re filling out Excel spreadsheets.

Of course, none of these emotional and hormonal responses actually help you do anything. You know that having cold, sweaty hands isn’t going to help you explain your position to your boss effectively, in the same way you know that getting a free ice cream cone should make you just as happy as dropping one on the floor makes you sad. So why do we do it?

Monkeys fear losses too.

One of the unique traits of the human species is our use of money. If you’re a cattle rancher, you don’t have to drive 100 heads of steer to your Realtor’s office to buy a house. We’ve created a fungible, easily divisible medium of exchange that makes it much more convenient.

That old invention makes it that much harder to run economic or scientific tests to understand why we treat money the way we do. Animal testing—putting aside ethical issues—is much easier with medicines. The guinea pig was cured or it wasn’t. And after studying side effects for a while, we can move on to human testing.

But what if you could teach a monkey to value and use money? Then you could run all sorts of experiments to see how deep our ridiculously unprofitable predilections run.

M. Keith Chen, a behavioral economist at the Yale School of Management, has done just this. His community of Capuchin monkeys has learned to value coins. They can exchange coins for orange peels or apple slices. Chen can change the prices of the prizes every so often to see how the monkeys react.

In 2006, Chen ran experiments to see just how mad a monkey gets when prices go up versus how happy he gets when they drop. To do this, he faced the monkeys with two trainers, with different colored clothing. The first trainer would show a monkey two apple slices, but when the monkey traded in his token, he would either pay the monkey the promised two slices or just one—averaging out to 1.5 slices per payment.

The second trainer would show a monkey one slice. But when the monkey paid a token, he would either give the monkey the one, promised slice or would unexpectedly deliver two slices—again averaging out to 1.5 slices.

Rationally, the choice between the two trainers should have been a wash. But the monkeys preferred the trainer who gave them unexpected gains two-and-a-half times more than the one that gave them unexpected losses.

So, think you can get over loss aversion? Our ancestors might have felt this way for 40 million years. Good luck!

Monkeys also treat risk the same way we do.

Another fun monkey experiment: The capuchins were presented with two sets of trainers. In the first set, both trainers promised the monkeys one piece of food (by showing it to them).

But in fact, the first trainer always paid out two pieces, and the second trainer would pay out one piece half the time and three pieces half the time. Again, statistically, the trainers were a wash, but the monkeys preferred the one with the guaranteed, two-piece payment more than the risky guy.

In the second set, monkeys were always promised three pieces of food. But the first trainer would consistently pay out two pieces and the second trainer either paid out one piece or three pieces. In other words, the monkeys could take a guaranteed, one-piece loss or roll the dice (and risk losing two pieces). This time, the monkeys preferred to take the risk.

What do those experiments show? That when we have a choice between guaranteed gains or taking a risk for an even larger gain, we’d prefer the bird in the hand. But when we might take a guaranteed loss or can take a risk to possibly lose nothing, we’re willing to take the risk.

Monkeys overvalue what they own.

Why is it so hard to get a trade going in Monopoly? I noticed this especially when I was younger. After the board was bought up, the players would start to offer trades. Thing is, the offers would always be ridiculously lopsided. “I’ll trade you Boardwalk for North Carolina, Atlantic, Ventnor, and St. Charles.” And the response: “No way, I’ll give you Atlantic and $100 for Boardwalk.” And so on.

Economists calls this the “endowment effect.” We value things more if we own them. In one famous experiment, humans were asked to buy and sell coffee mugs. In each and every case, they wanted more for the mug than they, themselves, would be willing to pay for it.

Sadly, it doesn’t look like evolution has gotten us over this one either. Chen gave one group of his monkeys one kind of good and the other group another kind.

The monkeys preferred each type of good equally. So you would expect the monkeys to end up trading about half of the food with each other. Instead, almost no trades were conducted at all. “Yeah, I like apple slices as much as I like orange peels. But this is my orange peel.”

So next time you find yourself thinking you can overcome the behavioral biases that cause us to handle money so irrationally, think back to the monkeys. We’ve been fighting this for 40 million years. Think you’re going to be the one to overcome it?

Make more money without leaving a bad taste in your boss’s mouth.

Ready to make more money? As I’ve written before, getting a bigger salary matters more than your asset allocation. It matters more than avoiding ATM fees. Heck, it matters more than your savings rate. If you can get a 20% bump today, you put yourself on the path to a huge difference in wealth 20 years down the road.

And the benefits just multiply. As you negotiate for raises, you’ll get better at it. You’ll get better in other kinds of negotiations too. Worst case scenario: You get shot down. But that’s not any worse a position than you’re in now. If you don’t ask, the answer will always be “No.”

In part one, I explained why “now” is a great time to ask for a raise. The economic environment is bad, but not so much that you’ve lost all negotiating power.

However, let’s not abandon tact. Getting a raise is a lot different from negotiating a job offer. Before you start a new job, you can take an offer or walk, and presumably still have a salary at your old place. But when you ask for a raise, you’re putting at stake a carefully cultivated relationship that you’ll probably have to live with no matter what happens.

That changes the power dynamic a lot. The key to a successful wage negotiation is to get more money without making your manager unhappy. If you don’t get more money, you lose. But if you do get more money, and leave your boss feeling like he or she was forced into it, you still lose! He might grow resentful or doubt your respect for the company. If you threaten to walk, he might think you’re not dedicated and are just a mercenary looking for any chance to jump ship for more pay.

Walking this line, while still maintaining a position of power, is crucial.

But before we get into the actual conversation, let’s do a quick review of where power comes from in a negotiation. According to a rather famous power framework, there are five kinds, listed here in no particular order:

1. Reward power: You have this when you can help your boss’s cause, and he knows it.

2. Coercive power: You have this when you can hurt your boss, and he knows it.

3. Expert power: You have this when your boss thinks you have some sort of special knowledge or expertise.

4. Legitimate power: You have this when your boss thinks you have the law on your side in influencing him.

5. Referent power: You have this when your boss likes you, thinks you can make him happy, or gets some sort of other pleasure from having you around.

I’ve seen and heard of all types being used in a raise negotiation, but as you can guess, flexing some of those muscles is not ideal.

Take legitimate power, for example. Sure, if you have a good case of being discriminated against because of your race or gender, you can probably get your boss or boss’s boss to increase your salary. Or how about coercive power? Walk up to your boss with a competing job offer, and he’s threatened with losing a valued employee and the thousands of dollars and hundreds of man hours that come with recruiting someone new.

But using either of these is a mistake. In the first instance, while totally a strong reason to ask for a raise, you’re still left at a workplace that apparently has biased coworkers—now who have additional reasons to resent you. In the second, you’re left with a boss who will forever remember the time you coerced him into giving you a raise. Guess who’s getting the ax once it’s time to cut expenses.

So when it’s time to ask for a raise, you’re best served by focusing on the three remaining ways of exerting influence: showing how you can help your company, displaying unique expertise or attributes that are impossible to replace, and generally, being a decent guy or gal to work with. Let’s tackle all three.

Setting the stage.

In part one, I went over how to decide when to ask. In short, you want to have just finished a great, memorable accomplishment, but also be in a time of the year when your boss actually has the power to grant a raise.

Assuming you’re in such a blessed position, set an appointment with your boss during a time of the week or month when he or she is facing the least stress and time pressure. You don’t want him to have an easy excuse to wait until a project closes or a report is put together. Hopefully, he should be able to get on the phone that evening or the next day with HR or the relevant office to get a raise approved.

Don’t just waltz into his office and ambush him with a request—ask for 30 minutes at least a day or two ahead of time, and if asked, say you’d like to talk about your performance on your last couple projects. A smart boss will know exactly where this conversation will go.

Get all your research on salaries in your field together. Type up a single page of bullet points you want to mention, noting your past accomplishments with measurable ways you’ve added to the bottom line and bring two copies (only give it to him if he asks). Remember to bring a notebook.

It’s important to have at least a general idea of where the conversation might go before you walk into the office. Is he going to mention budget issues? Is he going to mention the nice raise you got last year? How likely is it that he gives you the most dreaded response in raise negotiations possible? (More on that later, but hint: The dreaded response isn’t “No.”)

Practice how you’ll respond to each of his doubts. Sure, times are tough, but you’ve greatly helped the company’s budget woes by shaving 10% off project expenses this year. Yes, you got a raise last year, and you’re thankful, but since then, you’ve increased your sales lead production by 20%.

Ready for an uncomfortable, yet extremely profitable, conversation? Let’s walk into the office.

Remind your boss that he likes you.

Well-liked employees get raises. It’s as simple as that. Of course, your performance matters the most. But deep down—on a much deeper level than the part of the brain that’s concerned with company performance—your boss is attuned to the psychic rewards you give him with your respect, loyalty, and friendship.

The first part of your talk will probably contain the moments with the highest tension, when your boss is waiting for you to begin what he’s probably convinced himself will be an uncomfortable conversation. So it’s critical to get the tone right from the outset. You’re not in his office because you think he’s slighted you (even if you do actually think that). You’re in his office because you have a challenge that, together, you can both overcome.

“But wait,” you object, “aren’t we adversaries?” There’s no doubt that you are. You want more money. Your boss wants to keep costs low. But projecting an image that you don’t view him as the bad guy changes the conversation from “who will win” to “how can we win together.”

Researchers from Cornell and Cal State-Long Beach have found that bargainers who view a negotiation to be a threat are more likely to be hard-nosed and less likely to be creative than those who see it as a “challenge”.

The challenge, in this case, is that you’re a kick-ass employee who is concerned that you’re not being compensated for your awesome contributions to the company. So as you start to slide from the small talk to the crux of the issue, make sure you say things such as “There’s one problem I was hoping we could solve together” or “Something’s concerning me and I was hoping you could help me think through it”. You don’t want to use language like “You’re underpaying me” or “My results aren’t being appreciated.” That automatically sets an adversarial tone, and even if you win, in the long-run, you lose your boss’s good will.

Bringing out your evidence

As you (hopefully) did when you first got offered your job, follow your boss’s lead. Ask him how he or she thinks you’re doing or how you did on that last, amazing project. Let him make the case for a raise for you.

Assuming he or she “forgets” one or two major accomplishments, reference your list to give the high-impact, measurable goals you accomplished and detailed earlier. Make sure you give the team as a whole respect too—you don’t want to make a group effort seem like it was solely your individual accomplishment. That’ll just make your boss skeptical.

Whatever you do, don’t make it personal. You don’t want a raise because your rent just went up. You want a raise because you’re contributing more to the company. You’re not upset at your boss for not appreciating your effort. You’re showing your boss a way he can keep one of his top performers happy.

Your boss will see that you’re reading from a list and might ask for a copy. And it’s extremely important you give it to him (or that he write down your accomplishments). Because even though you’re trying to convince your boss to give you a raise, you’re also helping him build a case to his boss that his payroll budget should be increased to accomodate you.

Don’t bring out the PayScale or GlassDoor data you discovered. At least, not yet. That sets the tone that you’re threatening to leave and can put your boss on the defensive.

Time to get down to the numbers.

“And that’s why, I’d like you to consider raising my pay,” you finish breathlessly. Congratulations, you’re in the midst of a heart-pounding conversation that will be more important to your earning power than any other you have over the next 12 months. Just being in this position is more than most of your colleagues can probably say.

What now? For one, let your boss speak first. Let him propose how much the raise should be. He might come up with a figure that’s even higher than what you hoped for.

But let’s say, he doesn’t. Step one: Don’t fall into the trap of anchoring bias. Anchoring is our tendency to rely on an initial piece of information given (“How about a 3% raise?”) to make subsequent decisions and guesses. “Oh crap,” you might think. “If he’s thinking 3%, maybe I should only ask for 6%.” Bam. All your research that says you should really be looking for a 15% to 20% bump goes out the window.

In truth, you should meet whatever your boss says with a look of disappointment. Career coach Jack Chapman calls such a tactic “The Flinch”. Here’s a video of him demonstrating it:

When I first saw this video (thanks Get Rich Slowly!), I thought it was the most awkward thing I had ever seen. You repeat the salary or raise offer slowly, and then just sit silently, while your employer is left to surmise your extreme disappoint at what he thought was a generous offer.

But it turns out, Chapman’s on to something. You see, in tests of negotiation tactics, professors from the University of Pennsylvania and Ben Gurion found that expressions of anger and disappointment immediately make the other party in the negotiation more likely to make concessions and raise their offers. Not sure about you, but I’d keep it professional and hold off on the anger. That leaves the appearance of disappointment as one way to turn the odds in your favor.

Your goal in the ultimate offer will be to push as close to the top of that salary range you discovered at GlassDoor as you can. Pull out that research if your boss seems to be clueless as to what the market for people with your skill set is.

If you win a raise, awesome. Make sure you get information on timing, and recap the meeting in an e-mail when you get back to your desk.

But what if you don’t get an immediate yes? I’m willing to bet that if you’re a top performer, your boss won’t say “No.” Instead you’ll get the most dreaded response in the history of raise negotiations…

“Yes, I agree you deserve a raise. No, I can’t give it to you now.”

Could any response be more cruel? Your research worked. You made your case well. Your boss agrees. And yet, he or she cops out and defers to budget or timing issues to put your well-deserved raise on semi-permanent hiatus.

To me, this is even worse than “No.” If you get a “No,” you can naturally ask how you can change the answer into “Yes.” What metrics does he want you to achieve? What does an employee who deserves a raise look like? When can we revisit the discussion?

But either through genuine budget issues or a desire not to hurt your feelings, your boss has punted. What now?

This has happened to me before. In fact, I was foolish enough to leave the meeting feeling really good about how it went. My boss thinks I should be promoted! And I did get promoted…five months later.

Step number one: Ask for a specific timeline for the raise. If not now, when? As in “The Flinch”, the key emotion for you to project is disappointment, not happiness that your boss apparently acknowledges your worth.

Whatever timeline he proposes, make him feel that your raise needs to be addressed more urgently. Ask, “Is there any way we can make it happen sooner?” or “Is there any way I can help you with HR or payroll to process things more quickly?” Don’t come to the point of threatening to leave, but such questions will automatically make your boss dream of situations where his top employee starts fishing around for a new job.

And finally, ask to revisit the issue at least a month before whatever timeframe your boss gives you. The last thing you want to happen is to remind him of your discussion in six months, only to have him say that he’ll “start the paperwork” or some other nonsense that takes even more time. Make sure to document the conversation in an e-mail.

Of course, if the boss’s promises never materialize, it might be time to walk. You could come back with another offer for leverage—a prime example of “coercive power”—but even if he caves, that’s liable to sour your relationship.

Whatever the outcome, you at least gave it a shot, which is more than 3/4 of employees can say in this economic environment. And just having the practice will pay dividends. I can’t remember where I read it originally, but when it comes to dealing with awkwardness, there’s one piece of advice I live by: Your success directly correlates to the number of uncomfortable conversations you’re willing to have.

This post was an Editor’s Pick at the Carnival of Personal Finance at Live Real, Now. Thanks Jason!

That is, if the Joneses haven’t already been foreclosed upon.

The Joneses are those folks with the nice house, big cars, kids in private schools, and other detritus of suburban bling that are, in fact, financed and not true indicators of wealth. “Keeping up” with them would no doubt put you in debt, as was chronicled most famously in The Millionaire Next Door.

This post isn’t really about that. What I’d like to write about today are a few of the other ways the Joneses influence your behavior, because, let’s face it, you look to Mr. Jones and Mrs. Jones not only as exemplars of what cars to buy, but of what kinds of people to be. And following such a route can have interesting effects on your life beyond your finances.

Are you a Scrooge or a post-nightmare Scrooge?

I’m tired of everyone using “Scrooge” to describe a stingy money hoarder. Did everyone forget his ultimate redemption? It’s called a “dynamic character”, people.

But anyway, the post-nightmare Scrooge was quite generous. Last summer, a trio of researchers published a study that set out to discover if how generous you are is in part determined by how generous you think your social group is.

To do that, they struck a deal with a local public radio station, which relied on donors to stay on the air. When the membership of one of the station’s donors lapsed, the researchers sent a survey in the mail along with the usual renewal form. In addition to getting demographic data, the surveys asked the donors how much they thought others gave to the station. It turned out that if someone thought other donors gave a lot of money, he or she was more likely to give a lot of money himself.

The researchers didn’t stop there. To bolster the field testing, the economists conducted another study in a lab using everyone’s favorite test subjects: bribed undergraduate students!

The undergrads were given one of two versions of this scenario:

Imagine that since you arrived in City A, you have been listening to a local public radio station and that this station is currently having its on-air fund drive. You have been listening to the campaign for a few hours each day for the past
three days and have decided that you would like to become a contributing member of the station. You called the radio station and made your contribution of $25. During your conversation with a volunteer on the phone, you were told that another station member had contributed $10 [or $50] this year.

So basically, they were either told another donor had given more than they did ($50) or less than they did ($10).

The undergrads were then asked two questions: 1. How much do you think an average station listener would contribute? and 2. How much would you give in a subsequent year?

If undergrads were given the scenario where the “other donor” contributed $50, they guessed an average donor gave $21. The undergrads with the stingy scenario ($10) guessed the average was $15.05.

Which scenario they got also influenced how much they said they’d give in the next year, students who heard the generous story said they’d give $25.40 on average, but students who heard the stingy story would only give $20.99.

Of course, what works in a lab doesn’t always work in real life. Did the undergrads playing a game act differently than a real donor with real money would? Were the undergrads more generous because they knew they were being watched? But by combining the lab experiment with the real-world radio station survey, it’s easy to see why the researchers surmised their results would be helpful to fundraisers. Next time your alma mater starts telling you about how much your classmates give, you’ll know that they might be trying give a little bump to your contribution.

Yes, Mr. Jones did give you that ulcer.

A study published last summer found that people who feel they’ve accomplished less than their neighbors are more likely to get a whole litany of health problems, including heart disease, diabetes, ulcers, and high blood pressure.

To complete the study, which is here, researchers from the University of Chicago asked 3,005 57- to 85-year olds to rate their overall health and tick off their various health problems. They were also asked to rank their financial position relative to their social circle.

It turns out, those who thought they were worse-off than their friends were 22% more likely to rate themselves as being in poor health, with a particular affinity to heart disease. Genevieve Pham-Kanter, the primary author of the study, theorizes that worrying about your lack of success as compared to your neighbors or friends increases the level of stress hormones in your body, which leads to the various diseases.

One upside: The study also found that people who felt they ranked very highly, as compared to their social group, were less likely than the average person to report diabetes, ulcers, and hypertension.

And, of course, looking over the fence doesn’t make you happy.

Quite the contrary. European economists found that people who pay attention to what their coworkers make are also less likely to be happy. In their study, the more obsessed the employees were, the more likely they were to rank low on scales like “satisfaction with life as a whole” or “feeling of depression during the past week”.

What’s more, people who compared themselves to friends and family were twice as depressed as people who just compared themselves to coworkers. The economists reasoned that people could envision making as much as a coworker one day, whereas they might not be able to do that with friends or family who have different careers.

And a finding that was especially surprising to me—the poor tend to care more about their coworkers’ earnings than the rich. As if they already didn’t have it bad enough.

Little tweaks vs. titanic decisions

I enjoy personal finance blogs a lot. Admittedly, some of the time, what they cover can get a bit redundant. A lot redundant. Mind-numbingly redundant. But hey, the best personal finance advice is timeless. It’s the clever repackaging that makes or breaks someone new who steps into the field.

But of all the disorders that personal finance blogs suffer from, there’s one that’s the worst. And I’m sad to say, I suffer from it too. About 90% of what I’ve written about investing, real estate, the economy, and everything else doesn’t matter nearly as much as how much you earn. It’s not even close. The decision to add gold to a portfolio—which I derided in March—will ultimately only affect a small percentage of your wealth. Refinancing a mortgage when interest rates are only 5% instead of 8% will save you a few thousand dollars until you sell the home. And on, and on. Meanwhile, increasing your income by 10% will affect your savings by a huge amount for the rest of your career.

I haven’t found any research to back this up—which is unlike me—but I’m pretty sure that we focus so heavily on frugality and investing because it’s relatively easy to draw connections between what you do and what you gain. You don’t buy a flat-screen T.V., so you save $800. You move from a mutual fund with a 1% expense ratio to one with a 0.25% expense ratio, so you save $2,000 per year or whatever.

In the meantime, the steps you’d take to earn more money, like asking for a raise or promotion or taking the first steps to starting a side business, are either uncomfortable or don’t have a direct link to the end result. I know how to cut my expenses by 20%. Move to a cheaper place. Cut travel. Don’t eat out. Easy peasy, Japanesey (quoting the Shawshank Redemption).

And yet, how would I increase my income by 20%? Blank page. Vague idea of starting a personal economics blog that rises to must-read. Freelancing as a…? I’ve had a blank page for a while and am just getting off my ass to change that. I think it’s extremely important that you do it too.

Your job as an investment.

Imagine your investment portfolio. You’ve been reading personal finance stuff for a while. So you’re probably in a bunch of low-cost index funds that own literally hundreds of stocks. You would laugh at me and leave derisive comments if I said you should stick it all into one equity.

But that’s basically the approach most of us take to our jobs. We have one source of income. If the job disappears, the income disappears. Sometimes, you get lucky, and sink your skills into a company like Google or an SAS, which rarely has layoffs and compensates employees well. Other people don’t get lucky, and sink their skills into a BP, automaker, or, more recently, a cash-strapped public government. They’re finding out the drawbacks of undiversified income right now.

This idea of viewing yourself as a valuable investment isn’t new. Moshe Milevsky, a finance professor at York University in Canada, has been telling people to include themselves in their investment portfolios for a while and invest in other assets accordingly.

Think of it this way. Imagine being a mortgage broker in 2004. Pretty sweet gig, right? You get commissions based on every mortgage you arrange and get even bigger payments if it’s an expensive house or if you push the buyers into adjustable mortgages. Real estate is brisk, and you’re making more than $100,000 per year.

Fast forward to 2009, and you’re making nothing. Maybe $40,000, if your job included a base salary. Your firm has likely cut down on the number of brokers it employs. You might be out of a job.

Now imagine being a tenured economics professor in 2004. Nice job, nice hours, and making $70,000 to $100,000, depending on your tenure and what university you’re at. Now fast forward to 2009, and you’re making…the same. Maybe a little more if you got a cost of living adjustment. You still have a job, because that’s the deal. No peaks or valleys in income.

Milevsky would argue that the unstable but high potential broker income is “stock-like” while the professor income is bond-like. His book, Are You a Stock or a Bond?, is a fascinating look at the subject. The general summary: Young people should treat their future earnings potential as part of their portfolios. In a high risk profession? Balance that with more conservative investments. Are you a tenured professor? Take a risk on stocks.

So how do you protect and grow the most valuable piece of your wealth?

1. Diversify. — As mentioned above, the only way to truly diversify your earnings power is to have more than one source you can draw on for money. Sure, at its most advanced stage, this can take the form of a side business. But anything you can do to generate income, such as freelancing or transforming a fun hobby into a fun hobby for profit, helps to keep your income from going to zero.

Easier said than done, I know. Luckily, Ramit Sethi one of the best bloggers on the subject of earning more money, happens to be running a series on starting a freelancing business, right now.

2. Increase your earnings. — This is something I’m going to address at much greater length soon. But just keep this word of advice: Your success will increase in direct proportion to the number of uncomfortable conversations you’re willing to have.

We introverts (extroverts can skip to the next point) have a tendency to sit at our desks and hope our hard work will get noticed. That does happen every once in a while, but simple asking for a raise or a promotion after a success at work will bring the raises and promotions much more quickly. And even if asking doesn’t bring it immediately, it at least opens the conversation with your boss about what you can do to advance. That’s much better than stabbing in the dark.

3. Reduce your risk. — Although I know quite a few commission-based salespeople who didn’t follow this advice, that mortgage broker I referenced above could have smoothed out his income. Earnings made in one year don’t have to be spent in the same year. If you have a job in a volatile industry, keep on hand at least a year’s worth of living expenses in an emergency fund. On top of that, especially if you have dependents, consider getting disability insurance. Your work probably only gives you coverage for a few years. Meanwhile, a disability could cripple your most valuable financial asset for your entire life.

Anyway, something to think about.

Something to look forward to.

When I surveyed you all a couple months ago, one of the most common write-in requests was for ideas on how to make more money. This stumped me for a little bit—how could I teach earnings lessons in a way that wouldn’t repeat the great content already out there and fit in with my research-driven, psychological approach to other financial topics?

Well, after surveying the latest research on the subject, I think there’s a ton to contribute. And in the end, it’s not just stuff that will grow your income, it’s stuff that will help you achieve any goal you might have, financial or otherwise. I’m just starting to outline it, but I’m pretty sure it’s going to take the form of an e-book and comic book, with not only traditional comics but moving picture animations. My artists and I are already putting our heads together on how to best put this together.

Will it cost money? Not sure yet. “Make it free!” you say. “This ain’t a charity!” I shoot back. But hey, I’m going to make sure it’s great. More on this soon…

Thanks, as always, for stopping by.

Oscar Wilde died broke, why not you?

Ok, bad example. Wilde was an extremely gifted poet and playwright, but he had a lot of personal problems confounding him before his death. This post is about a question that’s a little more clear cut than that: Does being smart make you better with money?

Yeah, it’s wide-ranging, and you think you might know the answer off the top of your head. My automatic answer was, “Yes! Of course.” Smart people are better at math, which would make them see through to the consequences of their decisions more clearly, right?

I dug up an old Yahoo! Answers user who posited the same question. The winning answer had a bunch of mumbo jumbo about common sense versus book smarts and something called a “social IQ.” So the Web 1.0 unscientific survey of anonymous web users named “species456″, “Father Christmas”, and “Ratz” says intelligence and money aren’t correlated at all.

I was hoping to find the definitive economic analysis that would allow Pop to smack Ratz back to the, um, sewer, but (sigh), things are never that clear cut. So without further ado, let’s get to how smarts affect wealth.

Smart people take more risks but show more patience.

I recently tripped upon a paper published last year by several German economists who studied whether someone’s IQ plays a factor in how likely they are to take risks or show patience when presented with financial problems. It turns out that it does, even when you control for things like age, experience, and wealth.

First, the thousand or so participants were asked to take different modules of the Wechsler Adult Intelligence Scale test, one of the most popular tests to measure someone’s intelligence quotient (IQ). They also filled out a separate survey with demographic data: age, income, race, etc.

Next, the economists asked participants to participate in one of two paid experiments designed to measure risk aversion or impatience.

The risk aversion test took the form of a lottery. You could either take a guaranteed, safe payment or choose to participate in a lottery where you had a 50% chance of winning 300 Euros (you won nothing if you lost). The tester would “tempt” the subject with a safe payment of 0 Euros to start (I’d guess everyone would pick the lottery at that point), then with 10 Euros, then 20 Euros, and all the way up until someone could pick a safe payment of 190 Euros rather than take the risk. A completely rational person would take the bet until the safe offer hit 150 Euros (50% of 300).

For the patience test, economists told the subjects that they could either have 100 Euros now or a larger amount of Euros a year later. In a similar fashion to the risk aversion test, they tempted people with increasingly larger amounts until the subject said he’d take the delayed payment.

Anyway, to cut to the chase, here’s the graph of their results:

And in case you have trouble reading that (who wouldn’t?), the gray-enclosed line shows how risk-taking changes with increased intelligence and the white-enclosed line shows how impatience changes as people get smarter. It looks like smart people are both more willing to take risks and more willing to wait for a payout.

Smart people make more money, but aren’t necessarily more wealthy.

If I were to pick a favorite data set amongst all the data that the Bureau of Labor Statistics collects (and everyone does this, right?), it would, without a doubt, be the National Longitudinal Survey of Youth. The BLS has been following about 7,400 Americans who were born between 1957 and 1964 for nearly three decades (they started the surveys in 1979), asking them about their work histories, incomes, life events, and all that other fun stuff economists love to analyze. What makes it unique is its long-term look. They spoke to Joe Smith when he was 17, and caught up with him again each year until 1994. Now they only talk to Joe every couple years, but still, that’s a lot of data on one guy that you can harvest for all sorts of interesting experiments.

Well, a research scientist from Ohio State University named Jay Zagorsky decided to mine the data to see how well intelligence predicted how much money people ended up making and how wealthy they were.

Instead of an I.Q. test, the subjects took the Armed Forces Qualification Test, which the Department of Defense uses to judge the mental acuity of new recruits. Then, Zagorsky surveyed them on their incomes, total wealth and three measures of financial distress: if they had maxed-out credit cards, if they had missed a bill payment in the last five years, and if they’d ever declared bankruptcy.

Result numero uno: Smart people do make more money. In fact a one point increase in their IQ score (it’s still called IQ with this test, apparently), was associated with $202 to $616 more income per year. A normal IQ is around 100 whereas a really smart person has an IQ closer to 130—that’s a $6,000 to $18,500 per year difference in income on average.

But on the other two measures, the results were mixed. For one, smart people don’t report higher wealth than the less intelligent people. They apparently just save less of their larger incomes.

In those other measures of financial difficulty, the results were more strange. People of average intelligence were more likely to max out their credit cards than people of slightly better than average intelligence. But the most intelligent people were worse off than the better-than-average. Zagorsky concluded that it was best to have “slightly better than average intelligence.” I, for one, look forward to a follow-up study that explains the trend a little better.

It was slightly amusing to me that the OSU article on Zagorsky’s research ended with a quote noting that OSU professors don’t drive many Rolls Royces or Porsches. That was supposed to show anecdotally that smart people aren’t necessarily wealthy. I know about a thousand people who would argue that your wealth is inversely proportional to how many Porsches you buy. But that’s just me.

You probably watched T.V. A lot of T.V.

Sometimes I’m not totally sure why the government tracks all the things it tracks. Private universities get funding to study all sorts of strange issues, but it’s really the Labor Department that has incredible repositories of data, some of which never even get seen unless an economist or journalist or crazy person calls up and asks for it. But I’m extremely glad they do track it. Otherwise, I’d have nothing to write about.

But in case you missed it, a couple days ago the Bureau of Labor Statistics released their annual survey of how, exactly, Americans spend the 24 hours they have in a day. It’s effectively a life audit and just as interesting to me as how we spend our money. Here are the stats displayed in a very nice pie chart. The most interesting takeaways for me were these:

We watch a lot of T.V.

On average, we watched 2.82 hours of television every day. That’s a lot. Way more than we checked e-mail. In fact, it was way more than any other specific activity except working and sleeping. T.V. is one of those leisure activities that’s easy to do and yet gives us the least bang for our minutes. Socializing (clocking in at less than an hour in the survey) at least builds relationships that can contribute to many aspects of life aside from leisure. Television, on the other hand, is a mindless time suck. Unless you’re watching educational programming, you come away with nothing except a point of conversation at the water cooler.

Even before this survey came out, I found that I spent way too much time watching the tube to the detriment of productive leisure activities like this blog. Proud to say I finally canceled cable on Monday. Here’s one of my favorite videos on productivity with one of my favorite lines about the T.V. black hole. “Stop watching $#(*&$ Lost.”

We spend a lot of time buying stuff.

About 46 minutes of every day, actually. I’m not a shopper. So to me this is inconceivable. Though it’s unclear from my cursory read of the definitions, it doesn’t seem that this includes buying food (eating clocks in at an hour and 13 minutes). The number has stayed about the same since the recession started—it’s dropped a minute since 2007. And that says a lot about whether Americans have gotten rid of our conspicuous consumption culture. We haven’t.

That triple-action suck Dyson vacuum cleaner has apparently not reduced the amount of time we spend cleaning.

Household activities took up an hour and 48 minutes, which is about the same as last year. In 2003, the earliest data available, we also spent about an hour and 48 minutes cleaning. I suspect that 20 years from now, we’ll also spend an hour and 48 minutes cleaning.

Why do technological improvement not save us time? Apparently, as I mentioned in an earlier post on work, as technology gets better, our standard of cleanliness rises. In other words, that Dyson might just lead you to want a cleaner floor rather than achieve the cleanliness that you have now quicker.

One of the positives I drew from the BLS report was that we actually spend eight hours and 40 minutes sleeping. Which begs the question: Who are these people, and where do they get the time?