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.

Not that any of them are all that great.

The hot air balloon above is inflating. Get it? Get it?! Sorry. I’m tired.

There are only so many ways our government can eliminate the deficit and eventually pay off its gigantic debt. The least painful—and the one federal officials were desperately hoping for when they enacted the stimulus—is to grow the economy. With the economy growing, they get more tax revenues without having to change any laws.

Two, less optimum solutions are to raise taxes or spend less. Both of those make voters angry. Spending cuts sound good until you realize it means your kid’s classroom goes from 25 students to 30 students. Raising taxes never plays well, even when you purport to target the highest-income households.

That leaves inflation. No politician has to vote for it. It’s hard for rivals to point to interest rates and say, “Congressman Smith did this!” Inflation is simply the easiest way to pay off the deficit without alienating your constituents. Yeah, it’s weak, but when push comes to shove, you’ve got to believe inflation is going to rise before Congress successfully balances the budget.

So where does that leave you? And what can you do to make sure a devaluing dollar doesn’t decimate your portfolio? And for that matter, how can you stop Pop from excessive alliteration?

The myth of stocks as inflation-fighter.

One of the most common arguments in favor of investing in stocks is that they keep your portfolio from being silently eaten away by inflation. For your retirement money to keep its earning power, the yarn goes, you need assets whose returns will outpace inflation. Stocks are one, good answer.

Except they aren’t. In fact, stocks tend to do terrible when inflation is high. Take a look at this chart from Martin Capital Advisors.

In times of rapid inflation (the gray boxes), the S&P 500 (the green line) tended to drop, sometimes by a huge amount.

The point is, while stocks will probably outpace inflation over the long-term, holding stocks as a short-term panacea to what you might think is a coming bout of major inflation doesn’t make sense. Indeed, it seems misleading that the two issues ever got combined. Yes, inflation is an enemy to your portfolio. Yes, stocks—even at a conservative 5% growth rate—outpace the average inflation rate of about 3% over the longterm. But the two aren’t built to counteract each other.

What about commodities?

It would seem that commodities—such as oil, natural gas, and, I don’t know, timber—would be better inflation hedges. After all, if prices go up, the prices on the raw goods we need to make things should go up, too. The problem, of course, is that a ton of things, in addition to inflation expectations, influence commodities prices. Let’s take oil for example. This chart is from Inflation Data:

You’ll notice that the 1979 high for oil (in 2010 dollars) wasn’t topped again until 2008. Of course, inflation didn’t go down over that long time period. Quite the contrary. There were just a few hurricanes and a couple major oil crises that jostled the price of oil around, even as inflation made its inevitable climb upward.

Other commodities face similar circumstances. But even if they didn’t, keep in mind: Commodities reflect inflation expectations. So if you’re thinking about buying some oil ETFs right now in expectation of high inflation, you’re already late to the game. Even if inflation does rise rapidly, if it doesn’t keep up with the lofty inflation expectations the market has set for it, commodity prices could still drop.

And I’m tempted to skip gold, but what the hell…

Not that some reasonable people aren’t making arguments for gold investments. It’s just I feel like it’s unfair to keep beating up on this one. One last chart, also from Inflation Data:

Similar to the oil chart, you’ll see that even though the price of gold, currently at about $1,200 an ounce, has surged this year, it’s still nowhere close to the $2,251 peak it reached in 1980 in today’s dollars.

If anything, gold is a crisis hedge. If the U.S. government collapsed and the world collectively decided to revert to a medieval trading system in which precious metals of limited industrial use became the currency du jour, then gold might be a good investment. When I write about this, a common counterattack is to say that the dollar itself only has value by fiat (i.e., because the U.S. government says it does).

They’re absolutely correct, but that’s the whole point. The dollar has the fiat, both from the government and (implicitly) from investors who flock to it in the face of danger. Gold has an implicit fiat from a limited number of investors and practically no governments. And…oh forget it. If you’re going to buy gold, at least don’t listen to Glenn Beck and buy coins through Goldline.

TIPS: An imperfect option, but the closest to perfect you’ll get.

Treasury Inflation-Protected Securities are Treasury bonds created by the U.S. government whose principal also adjusts with the Consumer Price Index. As many people point out, CPI is an imperfect measure of inflation. Even putting aside the specious, government-lies-about-everything arguments for a moment, there is no possible way that what you spend money on will track CPI exactly. If you, for example, have to spend a lot of money on healthcare, whose cost is rising several times faster than CPI, your personal inflation rate will be higher.

However, TIPS, and their less-mentioned cousins, I Savings Bonds, will at least track inflation loosely, without the wild, speculative swings that stocks, commodities, and gold fall subject to.

Right now, a 10-year TIPS bond yields 1.09% after that periodic inflation adjustment. Given that regular Treasury bonds of that length yield less than 3% right now, that implies investors think inflation over the next decade will actually be extremely low.

And best of all, TIPS can easily be bought straight from the U.S. government. One word of warning though, if you buy them this way, make sure you hold them until they mature. Selling individual bonds is expensive, and bond prices will move around as interest rates move. If you think you’ll sell before the maturity date, try a TIPS mutual fund or ETF instead, though they won’t track inflation as exactly.

Anyway, I’m sure there are good arguments in favor of some of the traditional inflation “hedges” investors have used over the years, and throwing a few charts out there does not a Ph.D. dissertation make. How would you challenge some of the arguments I’ve laid out here?

Jimmy Stewart is dead.

There’s a great scene in It’s a Wonderful Life when the bank of the protagonist, Jimmy Stewart, suffers a bank run. Fearing that Stewart’s bank might be going under, many of its customers come running, asking to withdraw all their savings, lest they be the ones left holding the bag when the bank doesn’t open. Sure enough, the bank gets down to its last few dollars before closing time arrives, but the bank makes it.

Bank runs were a fact of life toward the beginning of the last century—a problem that was supposed to be solved by FDIC insurance. But just a couple years ago, we were treated to some similar behavior. When IndyMac failed, customers waited hours in the heat to withdraw their deposits. A few of them had deposits in excess of $100,000, which was the FDIC limit at that time. A lot didn’t, but were just as worried.

Every time news of bank stress tests or yet another failing bank come out, I see stories about how to check up on your bank’s stability, as if having an average or below-average rated bank is an awful thing. I’ve seen arguments made on both sides. How much should you care about the stability of the financial institutions you use?

FDIC limits and your liquid accounts

You probably know that the Federal Deposit Insurance Corporation protects up to $250,000-worth of deposits you make with each financial institution. Congress recently made permanent the higher, $250k limit, as up until the financial crisis, the limit was set at $100,000.

Easy message here: Don’t keep more than $250,000 in checking accounts, CDs, and savings accounts with one bank. Honestly, unless you were close to or in retirement and have a great need for really safe savings, I don’t see why you’d have that much at a bank anyway.

But (maybe) a more surprising message, as long as you have less than $250,000 in cash to park, look for unstable banks. They’re the ones that need your money the most and will pay you the best rates to get it. According to a recent search of the best 1-year CD rates at Bankrate.com, nine of the 12 banks with the top offered savings rates came from banks rated three stars or fewer in stability.

Those banks are afraid of going under, but you don’t need to be afraid of those banks. If you have less than $250,000, even the tiniest increase in yield you get from going with a less stable bank is worth it, because with FDIC insurance backing you up, that two-star bank is no less safe than the five-star bank. Obviously, make sure that the bank you put your money is, in fact, covered. And if you’re especially worried, you can use this FDIC tool to make sure you’re not over the limit.

No one should own a money market fund right now.

The chances of your money market fund “breaking the buck” and losing money are very low. But it is a risk, and there have been a couple high-profile cases of money market funds going under in the last couple years. Money market funds are meant to be short-term savings vehicles, that offer a low yield but never lose value. To achieve that, the firm you put the money with is supposed to invest in safe, short-term bonds. The problem, as the funds that did lose value found out, is that humans aren’t always good predictors of what bonds are “safe”.

But let me say it again: I don’t think your money market fund is likely to lose money. But I also think it’s silly to own one right now.

In this regard, I am a hypocrite. I have thousands of dollars in Vanguard’s money market fund, earning 0.12%. Imagine if David Bach tried to sell The Latte Factor using that rate. “If she just skipped her $5 per day latte, in 20 years at 0.12% compound interest, her savings would become more than $28,000!” Not quite as compelling as a million dollars, eh. And just for context, according to Crane Data, the top yield for a money market fund right now is 0.26%.

And yet, because it’s Vanguard and because a mutual fund is an “investment”, I’m for some reason keeping this stash sitting there, when I could get a much better rate at a money market account. How much better? Well, according to Bankrate, I could get a money market account at Sallie Mae with an annual yield of 1.39%, which is more than ten times higher than what I get with Vanguard. What’s more, it would be FDIC-insured. Lower risk, higher return. Sorry, Vanguard, it’s time to transfer those funds.

The confusion over brokerage account insurance

Bernie Madoff was the most high-profile case, but there have been several accounts of brokers running investment scams that resulted in their investors losing billions of dollars.

Of the kinds of accounts I’m going to write about today, this is where I think you need to be the most careful. Yes, brokerage accounts are “insured”. But in these cases, you run the highest risk of having assets beyond the insurance limit.

First, it’s important to note that the Securities Investor Protection Corporation, which covers your brokerage accounts, isn’t a federal agency. It’s a nonprofit, funded by the securities broker-dealers who are its members. Its sole responsibility is to facilitate the transfer of customers’ assets from one broker to another in case the broker goes bankrupt. So if you owned 100 shares of Bank of America at Broker X, which went bankrupt, SIPC would make sure those 100 shares made its way to Broker Z.

SIPC’s insurance limits only come into play when those 100 shares end up missing, which sometimes happens with bad record keeping, but, in this digital age, most often happens when a broker ends up being corrupt. For individuals, SIPC will replace up to $500,000-worth of securities, including up to $250,000-worth of cash. That sounds like a lot, and indeed, it’s above the FDIC limits. But whereas you’re unlikely to have more than $250,000 at a bank, you’re very likely to have more than $500,000 at a brokerage if you’re well into saving for retirement.

Spreading your investments between brokerages is probably not worth the effort. If you handle your investments yourself with a well-known brokerage like Vanguard or Fidelity, I probably wouldn’t even worry about it. But if you have a financial advisor who invests directly for you, run the simple checks listed here to make sure he or she actually buys the securities he says he’s buying.

Or what’s going to feel like a double-dip anyway.

Don’t read too much into that. I’m not making a prediction. But there are plenty of people who are. Nouriel Roubini, that guy who just happened to predict the first financial collapse, says it’s likely we’ll have a double dip, in which GDP drops again after going up for a time, or at least a long, slow recovery.

Plenty of other economists disagree. But as I’ve mentioned before, what’s going to matter to you is not what happens to the economy at large but what happens in your personal economy. If you lose your job, the recession was terrible. If you didn’t, it wasn’t so bad. Yeah, it’s a sad, selfish demarcation line. But I bet it’s the truth.

However, it is becoming clear that even if there’s no double-dip, the unemployment rate is going to be staying very high for a long time. And no one is predicting a strong, sustained rebound in the stock market either. You’re still vulnerable to a crummy economy’s effects even if you’ve made it this far unscathed. Here’s how to prepare for the long slog to recovery.

1. Keep your emergency fund high.

Hopefully, you’ve been socking away cash in a money market account or money market fund, just in case unemployment strikes. When the economy started to add jobs again, it was probably tempting to cut that one-year emergency fund back to six months. Big mistake.

For one, let’s put the job “growth” in perspective. In June, the economy lost 125,000 jobs, not counting seasonal farm workers. The unemployment rate did edge down to 9.5%, but that was due to thousands of workers giving up—not because they were finding jobs. Take a look at this chart, via Ezra Klein and the Brookings Institution. The “job gap” is how many jobs it would take to return to the employment level before the recession started.

In what Brookings calls a “more optimistic” scenario, it takes five years to get back to where we were. In other words, losing a job is going to remain unusually likely and unusually painful for a very long time.

Another thing to be wary of: Congress is suspicious of unemployment benefits. For the last few weeks, the Senate refused to extend benefits, dropping the maximum 99 weeks you could collect down to 26. It looks like they’re going to extend them at least until November. But next time, its passage will be even tougher. So, you would be well advised to keep that emergency fund high or even build it up further if you can.

2. Shed unnecessary contracts and expenses.

Contracts are the enemy of a crisis. Two-year cell phone agreements, DSL and satellite television contracts, adjustable-rate mortgages, you name it. Anything that locks in a monthly payment should be shunned like the plague.

I recently wrote that I could move into a cheaper apartment if I needed to cut my expenses. Well, actually that’s not true. Not for another 12 months at least. In fact, cable TV, which in my case came with no contract, was a relatively innocuous expense. If you do lose your job, you don’t want to be in a situation with high fixed expenses, which can’t be downshifted if you’re in trouble. Flexibility is your friend.

How do you cope if you’re already locked in? Well, don’t sign up again—that’s a given. Rather than giving into the temptation to upgrade your phone and lock in another two-year contract, stick with your old one as long as you can and stay month-to-month. Choose cable TV over satellite—you probably can’t get satellite TV for much cheaper anyway.

And in the case of a lease, check your local tenant laws to see what happens if you have to break it. Some states make it very difficult for a landlord to pursue a tenant who gives notice and leaves. And an understanding landlord would rather have you pay what you can and get out than face a tenant who can’t pay and plans to squat through a long eviction process.

3. Become the most important person at work.

You don’t have to literally be the guy who has all the passwords to have all the power. A knee-jerk reaction to turbulence at work is to put your head down and hope you avoid the axe. What you should really do is be visible. Be the one who offers business-growing suggestions at meetings or in a quick e-mail to the boss.

Exceed your sales targets if your a salesman. Finish the project early if you’re a coder. If your company has to cut costs, they will spare the workers who gave them measurable, revenue-generating achievements, not the ones who simply stayed from 9 to 7 instead of from 9 to 5. Coincidentally, if your company doesn’t fire anybody, measurable achievements that you can bring up at review time are also likely to get you a raise.

4. Network now.

There’s not a worse feeling than losing your job and not knowing where to go. I’ve spoken to dozens of people who hadn’t maintained their professional networks other than with a LinkedIn or Facebook account before getting their walking papers. (I am running out of cliched synonyms for “getting fired.” Sorry.)

It’s a sad fact that making connections and getting a new job are much easier when you already have one. So take advantage of that, um, advantage by attending networking events and setting up lunches or coffees with mentors, both outside your company and within it. I once had a boss whose wife asked him every Friday what he had done that week to prepare for his next job. Awesome wife.

5. Invest with caution.

One of the mantras I used to write, but now cringe at, is this: “Buy more stocks when the market crashes. They’re on sale!” That’s about as much of a truism as it is that your local Lexus dealer put a car “on sale” by slashing its price to $35,000 from $40,000. Still seems pretty overpriced to me.

This isn’t a point about market-timing, just about us, “good” investors’ natural tendency to take contrarianism to an unhealthy extreme. Yeah, stocks are a better deal than they were in 2007, but that doesn’t make them such a good deal that you should make an outsized bet on their performance now. Don’t try to make up for losses by taking extra risk with your retirement money.

But I’m actually more concerned right now with people taking extra risk with their short-term savings. Savings rates are abysmal right now. My Vanguard money market fund is paying 0.11%. Money market accounts are paying better, but not by much. This brings the temptation to “chase yield”—by putting money in higher yield, but higher risk investments.

Truth be told, I would be O.K. with my money market funds and money market accounts paying 0% interest—though that would mean I was lazy about finding a better option. My emergency fund is about liquidity and having the money when I need it, not about what that money earns. Peace of mind is its own form of interest.

So good luck out there. The recession is no doubt over, but your personal economy—or, dare I say, your pop economy—is still at risk.

Be sure to check out this week’s Carnival of Personal Finance at NerdWallet. Your’s truly was an editor’s pick.

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?

Psychologists say it’s not a time management problem. So what’s going on?

My college memories rapidly faded after graduation, but one of my most vivid, enduring memories is of one of my former roommates, who was a chronic procrastinator. Sure, he waited until the last minute on take-home tests, 10-page papers and studying. But my absolute favorite was the night before move-out. It was around 1 AM, and we had to be out of our dorm by 12 PM the next day. The roommate had just popped open a bottle of some form of alcohol and hadn’t even begun packing. My other roommates and I looked at each other in disbelief and reminded him that we had to move out in mere hours. His response: “I figure I have 11 hours to pack. That’s plenty of time!” I’m pretty sure that, like most mortals, he fell asleep somewhere around 4, and no, he did not make it out of the room on time.

Turns out my old roommate suffered from one of the most common side-effects and/or causes of procrastination: optimism. That is, he underestimated how long it would take him to pack and overestimated his ability to stay awake all night after drinking.

There are lots of psychological hang-ups and side effects that lead us to procrastinate (and probably to put off all those things that would improve your financial situation a ton). Here are a few of them.

You know that exercise where you “picture” where you want to be? That’s B.S.

Or, at least, so says a study published a couple years ago in Psychological Science.

You’ve probably been told to do this exercise dozens of times in self-help books. Envision who you want to be. Put pictures of people at the right weight up on the bulletin board. See yourself scoring the goal at the big game. Imagine that letter informing you of your perfect GMAT score.

But thinking in abstractions like that apparently leads us to procrastinate from doing the actual exercises, practice, and studying needed to achieve those goals. To prove that, the scientists mailed subjects two questionnaires. In one version, they led the questions with a full picture of La Parade, by Georges-Pierre Seurat, and described the painting as “a good example of neo-impressionism in which the artist was using order and colour to invoke emotion and harmony.” The second group of respondents got a small detail of a portion of the painting, and were told “this demonstrated the pointillist technique of using contrasting points of colour to build up an image.” In other words, the first spoke to the emotions and abstraction of the piece, while the second spoke to the actual methods Seurat used to paint it.

The survey had a bunch of questions, but the researchers were really only interested in how long it took each set of respondents to return the survey (they were asked to give it back in three weeks). The results were definitive. Those given the whole painting and abstract description took 20.5 days to return the questionnaire, while those given the detail returned it in 12.5 days.

The message that the researchers concluded for procrastinators was simple: Focus on the details. Creating a list of little, specific tasks—like to complete one practice test on Wednesday and sign up for a Kaplan course on Thursday—is much more effective than simply putting a picture of Harvard Business School on your desk.

It helps to set a self-imposed deadline. It helps more if someone else sets it for you.

I go into and out of phases where I create lists of tasks that I plan to accomplish the next day. Invariably, the list is extremely effective for the first few days that I use it. Then one or two tasks will slip to subsequent days. And then the whole system will fall apart, and I’ll stop making lists for a few months.

It turns out that my pattern isn’t unique. Procrastinators do benefit from making self-imposed deadlines to accomplish certain items—at least, they do better than if they don’t set the deadlines at all, according to researchers. But, predictably, when it’s only ourselves we have to disappoint, we don’t perform as well.

I’ve thought about signing up for Stickk.com for a while, which was founded by a couple Yale professors. The website basically lets you set up a monstrous (or not-so-monstrous) incentive to stick to a goal. For me, it might be something like “Write two blog posts per week for PopEconomics.com”. If I hit it, nothing happens. If I don’t, some sizable monetary penalty hits my credit card and is donated to charity or to whatever third-party referee I designate. To motivate myself, I think I’d have to set a penalty of at least $1,000. Probably more. Dangerous? Yes. Possible to spur dangerously high productivity? I hope so.

The three basic types of procrastinators

This didn’t come from an economic study, but from a pair of psychologists writing for Psychology Today. It’s probably based on some study or another, but I can’t find it offhand. Still, its assertions are intriguing.

It turns out that we procrastinate for three, basic reasons: because we want the euphoric rush of performing on deadline, because we hate failure, and because we have trouble making decisions. If anything, I think I suffer from the second problem. No attempt, no possibility of failure. Though I notice I’ve become better at that as I’ve gotten older. I definitely don’t procrastinate because I “like” panicking and working like mad as a serious deadline approaches. And while I have trouble making decisions sometimes, often I think I don’t begin a task because I don’t understand or take the time to break down all of the steps needed to complete that task (see the second heading).

Anyway, you can thank that inability to make a decision for this morning’s post, which I am writing past midnight on a work day. And I am happy to say that I’ve just started making “To-Do” lists again. Let’s see how long this lasts.

I was remiss in not mentioning earlier that this post was featured in the Carnival of Personal Finance at Suburban Dollar. Thanks Kyle!

First, a word from your host.

Welcome to the 261st edition of the Carnival of Personal Finance! I’m thrilled to be the host, especially since I owe so much to the carnival for getting this blog off the ground. For those unfamiliar, a blog carnival is where writers from around the blogosphere can showcase their best work for the previous week. The carnival hops from blog to blog every week, and this time around, I’m the host.

We received 67 entries this time around, and all but a couple made it in here. I read each and every one of them—Yes, that takes a long time—And tried to leave comments and/or constructive criticism where I thought it was warranted.

When I hit my third hour putting this together, I started to wonder: Is there nothing new under the sun? So many posts submitted this week—and indeed, in the archives of so many of the blogs I was introduced to—delved into the same topics, with the same tone, and the same tendency to exploit SEO opportunities. I yearned for fresh perspectives or explorations of topics that weren’t just the old yarns about index funds, frugality tips, and savings accounts. I know that’s extremely difficult, and it’s easy for me to say given that I post just a couple times per week on average, and that you guys in most cases post every day. But our readers deserve better!

So anyway, to those of you who actually read the carnival, I throw down this gauntlet. Next week, write a personal finance post that contains content you can’t find on any other personal finance blog you know. I guarantee you that you’ll have a higher chance of attracting readers, getting an Editor’s Pick, and convincing people that they should be subscribing to your blog in addition to the well-established stalwarts that we all look up to. Success is not imitating Get Rich Slowly, Consumerism Commentary, The Simple Dollar, or all those others who’ve been able to make this into a living. It’s standing on their shoulders and delivering a product that goes beyond them.

So, soap box away. Let the carnival begin. As a little gift to my editor’s picks, I’ve taken my favorite images from Pop Economics and adapted them to fit their themes.

Editor’s Picks

These blogs delivered fresh, well-written, and thought-provoking stories this week. They’re well-deserved Editor’s Picks.

Jim from Bargaineering presents Is Goldline a Scam?. I’m thrilled to say this is a post I entirely disagree with yet still think should be an Editor’s Pick. Jim takes a look at popular gold coin seller Goldline and asks if they’re a scam. He concludes that they aren’t, and I guess I agree, but there’s no question that they’re modeled in such a way to take maximum advantage of the public’s general ignorance of the most cost effective ways to buy gold. They also employ familiar TV pitchmen to gain trust. Fraud? Maybe not. In the same way that it wasn’t against the rules of Monopoly when my friend traded “St. Charles” for “Boardwalk” with his 7-year-old sister because she liked the color purple.

RJ Weiss from Gen Y Wealth presents How Would Your Life Change if your Income Doubled?. This is a short, sweet exercise that I read and immediately identified with. RJ finds that the proper, more life-changing question was “How would your life change if your time doubled?” Given the popularity of the Four Hour Work Week and endless other take-your-time-back books, I think this theme will be a calling card of younger generations.

Sun from The Sun’s Financial Diary presents Can I Really Diversify My Lending Club Loan Portfolio?. This is one I didn’t expect to like very much but ended up liking a whole lot. It takes a popular, “new” asset class—lending club loans—and treats it as if it were any other serious investment. I’ve never thought of loans I made to friends as “bonds” with a need to diversify. Then again, if I were involved in the Lending Club, I’d probably have to start thinking that way.

Budgeting

Miss T from Prairie Eco-Thrifter presents Make Your Budget Work with 9 Key Steps. A basic list of advice if you’re just setting out to make a budget. I agree that it’s important to give yourself leeway sometimes. Psychologists have shown that your willpower is like a muscle. Try to deny yourself everything at once, and it’ll give out.

Jeff from Sustainable Life Blog presents Control. A quick trip into the author’s loss of control of his finances and how he got it back.

Career

Revanche from A Gai Shan Life presents Updating your resume is like banking your savings. I was surprised how few submissions on careers there were this month given that unemployment is probably the number-one financial topic on people’s minds right now. But this post is an excellent reminder that keeping the resume up-to-date is essential to preparing in case you do lose a job.

Tech Guy from Technical Certifications presents Are Technical Certifications Worth It?. Great question that I’ve always wondered about. I’d like to see someone look at PayScale data or some more industry data to see how salaries change once the certifications are earned.

Credit

Mr. Credit Card from Ask Mr. Credit Card presents Do Good Earn Membership Rewards Points. This is about an American Express card that combines membership rewards with charitable giving.

David from Credit Card Offers IQ presents U.S. Bank Offers No Fee 0% Balance Transfer Cards, and says, “No fee 0% balance transfer offers are back through U.S. Bank.”

Kris Bickell from Debt Tips presents 7 Simple Tips To Protect Yourself From Credit Repair Scams. Offers some alternatives to paying someone to get you out of debt.

Money Beagle from Money Beagle presents Do You Select Credit Or Debit?. Argues convincingly that paying by credit beats paying by debit. I would add, and many others have said, that using credit also gives you an effectively free loan between the time you charge and the time you pay the card off.

Tim Chen from NerdWallet presents What You Need to Know to Save Money with Hilton HHonors.

Debt

Danielle Liss from DanielleLiss.com presents The Danielle Deficit: June 2010 Update. She has more than $100,000 in debt. An update on her progress to paying it off.

mamamortgage from Goodbye Mortgage presents So what’s with the crazy-ass goal?. This Australian couple is trying to pay off their second mortgage in one year. No word on what they’re going to call their blog next year.

Jason from Live Real, Now presents Keep Your Friends Out of Debt. Suggests alternatives if your friends are always trying to drag you out to an expensive night on the town.

Finance

Tom @ Canadian Finance Blog from Canadian Finance Blog presents Retirement Income Planning: Where Will Your Retirement Income Come From?. I don’t know much about Canadian retirement income, but if you live in the country, this is a little inventory of the sources you can expect to draw from.

CPF from Christian Finances presents ING Direct ATM Location Finder App. Releases the bit of news described in the title.

Stephen Popick from DINKS Finance presents Reading the Tea Leaves. What the financial reform bill Congress just passed means to you.

vh from Funny about Money presents Interchange Legislation: How Would You Vote?. I don’t think I’d ever headline a story with the words “interchange legislation”—eyes glaze over—but this post is really great. All too often banks, merchants, and interest groups try to get you involved in calling your congressman to thwart evil bills that would raise your costs. But often, when you read the fine print, it’s really a case of the bank protecting itself. In this particular case the author reads the fine print for you.

The Smarter Wallet from The Smarter Wallet presents Is Your Bank Safe? Check Bank Ratings. I’m sure this is a topic in the back of everyone’s mind, and this story shows a few ways to see how at-risk your bank is of failing. Though one, peculiar thing: Toward the end of the story, the author recommends some banks on “solid footing”. But using one of the tools mentioned for judging that (Bankrate), it looks like one (ING) is rated “below peer group” and another (Dollar Savings Direct) is “lowest rated.” I feel like if you’re going to claim banks are on solid financial footing, you should show why that is.

Frugality

Kim at MMI from Blogging for Change presents To buy or not to buy: Kitchen Gadgets. Breaks down a list of kitchen gadgets and why the author did or didn’t buy it. I personally love my garlic slicer, but find it’s such a pain to wash (no dishwasher here, folks) that I never use it.

Jaime Tardy from Eventual Millionaire presents 5 Tips for the Money Saving Mom. There’s stuff for non-moms in here too, but it’s good to see a story that focuses its audience.

Kevin from Financially Poor presents Don’t Miss Out On Easy Savings. Nice story with tips on using coupons to save on groceries. It’s part of a three-part (I think) series, and I really think the parts are better read altogether rather than with just this alone.

Miss Bankrupt from Miss Bankrupt presents Things You Should Not Buy From a Garage Sale. Glad that even frugality blogs can draw the line somewhere.

Investing

Clint from Accumulating Money presents Commodity Index Funds. A quick overview of what’s certainly a hot type asset class right now.

2 Cents from Balance Junkie presents Are Money Market Funds a Good Place to Park Your Cash?. His answer is “no.” And I happen to agree with him. You’ll have to click through to see why.

Consumer Boomer from Consumer Boomer presents Investing with an Online Discount Brokerage. Explains how discount brokerages work.

Dividend Growth Investor from Dividend Growth Investor presents Dividend Investing Works in All Markets . The article sets itself up in contrast to a different blog’s take on dividend investing, but I don’t really see the conflict. When stock prices go up and dividend payments stay the same, dividend yields go down. Maybe the underlying point is that stock prices don’t matter unless you’re trying to buy or trying to sell. Dividend investors aren’t necessarily trying to do either of those things, which is what makes that method of investing relatively stable.

D4L from Dividends Value presents Managing Risk With Dividend Stocks. One of the more well-written posts I received this month. Even if you run a deep analysis on a company and find that it’s good to invest in, how do you deal with the outside risk that something unpredictable ruins your analysis, a la BP?

FMF from Free Money Finance presents Avoid the Ring of Fire Countries. Initially impressed that a wealth management advisor wrote such a comprehensive and nuanced guest post for a PF blog. Later disappointed that the advisor has printed the exact same post on at least three blogs and his own website. We need new content people! Though it’s a good post on the complex topic of how to look at a country’s debt level when investing in it.

Craig/FFB from Free From Broke presents Choices For Your 401(k) When You Leave Your Job. Awesome lists of pros and cons for the various options you’ll have for your 401k when you leave your job. I bet all-too-many people just leave their 401ks where they are, even if it’s filled with high fees and lousy investment options.

Sean from Grow Money presents Advantages of Index Funds. Guest post on what index funds are and their benefits.

Alexg from Magic Formula Pro presents Calculating Return On Capital. It does what it says. Oh man, I wish this had been more about hardcore “magic formula” investing. That would be one I could sink my teeth into.

ElizabethG (Modern Gal) from Modern Gal presents What To Do When Rates are So Low?. Lower safe yields tempt investors to go with higher risky ones. Probably a mistake, here’s why.

Darren from MORE than Finances presents The Rule of 72 – How It Helps, And How It Doesn’t. Runs through the math on how to calculate how long it will take your money to double. I’ve always found this stuff kind of silly. I mean, you can’t set your interest rate or return, so in real life, your money doubles when it doubles and not a second before.

Paul Williams from Provident Planning presents Investing Basics: What Is a Mutual Fund?. A primer on the primary investment vehicle most of us use.

Squirrelers from Squirrelers presents Diversification vs. Investing in What You Know. Investing 100% of your portfolio in company stock is risky, not just because of the things the author mentions in this post, but because now, you have two major assets tied to your employer: your investments and your future earning power.

Money Management

The Financial Blogger from The Financial Blogger presents I’m a Techno Retarded Blogger. TFB discovers Google Docs, Google Reader, and Skype.

Steven from Hundred Goals presents Feeling a Little Like John Kerry. Steven admits his struggles in sticking to his financial plans. Nice post that has feeling, though I think it would have added a ton to the post if he could detail in what ways he recently deviated from his plan.

Kim Snider from Kimmunications from Kim Snider presents Creating Cash Flow to Cover Retirement Expenses. Covers a lot of ground on the first steps you need to take once it’s finally time to withdraw from your retirement accounts. It makes one assertion that I made early in my blogging life and now disagree with (that a 5% chance of running out of money in retirement is too high when you’re planning). Why do I disagree now? It assumes that you set your retirement plan right when you retire and will never adjust if conditions warrant it. Fact of the matter is, if you create a plan that gives you even a 10% chance of failure, and you just happen to fall into that 10%, you’ll have latitude to cut back before spending your last dollar. Retirement calculators don’t factor in human’s abilities to adapt. Creating a plan that has a 100% success rate just means you have a high probability of spending much less than you could have.

Marie from Moneymonk presents You can’t tell who’s Rich anymore. Credit can make anyone look rich, albeit temporarily. Though as long as they do make those debt payments, I guess you could argue that all they’re really doing is taking an advance on their future happiness. I.E. I’d rather be happy now with that trip to Hawaii than happy later with that trip + what I saved by not making interest payments. If, say, I was about to go in for a heart operation that would require I stay hooked up to a machine for the rest of my life, I might decide that it’s work taking a happiness advance. (Of course, the author is talking more about people just taking on debt willy nilly.)

Real Estate

Kristia from Family Balance Sheet presents What Does A Beach House REALLY Cost?. Talks about a flyer that claims you can own a beach house for a couple thousand a year. A couple holes in the flyer’s claim right off the bat. 1) If you rent out the house every month, as the flyer seems to use in its math, then you really don’t have a beach house, right? The renters do. 2) You have to pay taxes on rental income.

Mike from Money Smarts presents The Stripper With Dirty Feet – A Tenant From Hell Story. This will make anyone think twice before becoming a landlord.

PT from PT Money presents Stated Income Mortgage: No More Liar Loans Available. Good riddance. But if you have a legitimate reason you can’t show your income, what are your options? PT takes a look.

B from Wealth Junkies presents Walking Away From Your House – Cut Losses and Save Money. This didn’t provide the comment bait I expected from reading the headline. It addresses the decision to walk away from the home purely as a financial (rather than moral) issue. That’s probably the way it should be viewed anyway.

Cheapskate Sandy from Yes, I Am Cheap presents Real Life: Foreclosure Easier Than Loan Modification?. A nice, detailed story about someone with a ton of debt and no clear way out. (P.S. Double your font size!)

Saving

Ace from Ace of Wealth presents My Comcast journey and 6 tips to save money on cable. You could have done better! In my experience, cable companies don’t start rolling out the deals until you say, “Please cancel my service.”

Austin from Foreigner’s Finances presents The Foreigner’s Finances Podcast – Ep. 1 with Forest from FrugalZeitgeist.com. Not gonna lie, I didn’t listen to the entire 30-minute podcast. But Austin does this the right way by providing an outline of where his interview with an ex-pat from Cairo goes. The podcast covers how the guy got a visa, his blog, and money issues in Egypt.

Carmen Nesenson from Go Banking Rates presents 3 Reasons Your Free Savings Account May Actually Be Costing You. Quick post on the fees that can hit your savings account if you’re not careful.

Paula Wethington from Monroe on a budget presents Determining the phone and wireless plan for you. This tics off the questions you should be asking yourself when it’s time to renew your cell phone contract or get a new one for a child.

jacq from Single Mom Rich Mom presents PF Catfight Update: 1 week down, 3 to go. Jacq’s in a competition with a couple other PF blogs to cut her expenses for the month. The thing I love about competitions like this is that they always inspire innovative ways to save money. This one is no exception.

Jim from Wanderlust Journey presents Bing Travel’s Cabin Class Search FAIL. Jim points out a potential error in how Bing displays its results for “first class” travel. If a search engine tells you it has a first class seat for $200, be suspicious.

Taxes

Ryan Ayres from The Financial Student presents Who is This FICA Person?. Explains the FICA tax. I wish someone helped me decode the taxes deducted from my paycheck when I started my first job. Alas.

Manny from Personal Dividends presents IRS Notice – What to do if You Receive One. I always feel a little hesitant when blogs try to tackle legal subjects like this, but the blog is purportedly written by a tax accountant. So maybe higher quality advice than you’d get elsewhere.

Other

J. Money from Budgets Are Sexy presents Should People Be Penalized For Their Unhealthy Habits?. Love the topic. A tangential question: Should we set up penalties for ourselves if we don’t reach certain goals? So if you overeat, why not find a way to penalize yourself $100 even if your insurer won’t? Might lead to some healthier habits.

Donna Freedman from Surviving And Thriving presents Got an honest face? You have a bright future in sneak-thievery. Nice reminder of how being trusting with your stuff can result in losing said stuff.

Nathan from ComplexSearch presents How to Financially Survive a Divorce. Hope I never have to think about this, but nice set of tips. I wish it linked to more divorce resources. Assuming you’re not a lawyer, I’m sure you were reading some good literature from which you got some of those tips!

pkamp3 from Don’t Quit Your Day Job… presents Ed-uflation. The cost of college is rising really fast. There’s room for a good post as to what we can do about it.

Jeff Rose from Good Financial Cents presents What is a Term Life Insurance Policy?. Well written primer on term life policies and how they work.

My Dollar Plan from My Dollar Plan presents How Much Does a Funeral Cost?. A lot. From my experience funeral planning, it seemed like it was a lot like planning a wedding, except everyone is sad and miserable. Bad recipe for making financial decisions.

Andy from Saving to Invest presents Making Money From the BP Oil Spill – Ambulance Chasing Lawyers, Adwords Advertising and T-Shirts. How people are making money from the BP oil spill. Is it bad that I read this as a “Creative ways to make money” story rather than an outrage story?

Helen from Science and Money presents The Persistance of Memory. [sic] When I read stories like this, I wonder why we even bother trying to protect our id information. There are way too many holes for thieves to exploit.

Neal Frankle from Wealth Pilgrim presents Smart Retirement Income Planning When the Market is Terrible. This makes some good points about the need to make adjustments to your retirement plan in the face of some crummy investment years. I totally disagree with the point about immediate annuities and with the linked-to article about why they’re bad. You’re setting up a straw man by making your example live for only 15 extra years. In support of annuities, I could easily say, “What if he lived for 30 years?” But anyway, I agree that you might as well hedge the possibilities by putting part in an immediate annuity and keeping part in regular investments. Immediate annuities are beneficial if for no other reason than that studies show people with annuities are happier, and people who rely on volatile investments for income worry more. Even if you end up on the unlucky end of an annuity bet, to me, the price of calm at the end of my life would be worth it. Anyway, thought provoking nonetheless.

First, a quick announcement. I’ll be hosting the Carnival of Personal Finance next Monday! Many followers of this blog probably discovered me through the Carnival, and I’m really proud to be giving back a little bit by hosting this week. I have a newfound respect for the people who’ve put it together and will try my best to make this carnival excellent. To that end, I hope you can help too by blogging about it, tweeting it, facebooking it and doing whatever you can to promote it. I’ve never solicited such publicity before, but this time, it’s really about all the great posts the carnival will feature, rather than about Pop Ec. But on to our regularly scheduled programming…

What happens when making mistakes becomes a capital offense?

Longtime White House reporter and columnist Helen Thomas resigned earlier this week. In case you haven’t paid attention to the case, she told a website catering to the Jewish population that Jews should “get the hell out of Palestine.” I don’t really want to talk about the statement, whether or not it was bigoted, and whether she deserved to lose her job over it.

However, I was disturbed by the piling on of criticism from seemingly every pundit and retired politico who could get a reporter on the phone. Ari Fleischer, Bush’s first press secretary, e-mailed journalists who might have missed her comments to call for her firing. This is a guy who currently runs a sports marketing business. Clearly, Thomas had built up some enemies during her time in the White House press room.

Thomas apologized almost immediately, but it was too late.

So how is this relevant to investing, economics, and all that other stuff you read about here?

Thomas was wrong. And instead of acknowledging it, correcting it, and moving on, we forced her to retire.

Reuters blogger Felix Salmon had a great piece on this trend earlier this week. The long and the short of it was this: “It’s still unacceptable, in public discourse, to be wrong in one’s opinions. I find that sad.” He went on to describe an interview with atheism promoter Christopher Hitchens, who refused to directly admit that he has ever been wrong or could be wrong in any of his opinions.

Having to be right is a plague

I’m fairly sure that I’ve made at least one error in every blog post I’ve written since starting Pop Economics this January. Some of them are easy: I wrote about how mortgage rates would go up in March in one particularly bold (and wrong) post. Some errors are more slight: I change my mind on whether active or passive investment strategies are superior almost every other week. So at least half of those posts are wrong.

I know none of those errors are incendiary like Thomas’ comments, but imagine if at least some of you decided to take off for another blog after discovering that I had made a mistake or flip-flopped on a position. I’d have a serious problem on my hands. Indeed, it’d be tempting not to admit any errors at all.

Investors are overconfident.

I know I make mistakes. And that’s why I didn’t put all my money into ETFs that bet Treasury bond yields will go up, even though I was almost certain that would be the case in March. It’s why I write about value investing with passion, yet don’t commit more than 5% of my own portfolio on betting that the market is over or undervalued.

I’d say my most confident evaluations of any given stock’s true value have only a 55% chance or so of being right. And I bet Warren Buffett would say his most confident evaluations wouldn’t be that much higher. (Incidentally, I’ve probably just made a mistake even in that modest calculation of my chances.)

But your average investor has a worse overconfidence problem than I do. Economists have repeatedly demonstrated that we put way too much belief in our predictions and abilities. In a famous 1981 survey of Swedes, 91% said they were above-average drivers.

An article in MIT’s Sloan Management Review describes a survey conducted of professionals in various industries. Each were given a 10-question quiz on their own industries that asked them to give high and low estimates in response to certain questions, such as “How many patents were issued in the U.S. in 1992?” (The survey was conducted in the mid ’90s.) The right answer was 96,727. So a respondent could give any range that encompassed that figure and be correct.

They were told to give ranges that gave them about a 90% of getting the question right. But when the quizzes were evaluated, the professionals tended to miss more than 60% of the questions asked. Their overconfidence caused them to set ranges much too tight.

And they’re slow to change direction after being proven wrong.

Investors have extremely peculiar views on profits and losses. If you bought BP at $60 and watched it drop to $30, somehow you tell yourself that the loss doesn’t “count” unless you “lock it in” by selling. So maybe you hold on, hoping it will recover a bit.

Economist Tyler Cower writes that we tend to place a greater value on something because we own it. In other words, a share of BP at $30 per share seems more valuable when it’s registering in your ETrade account than when it’s just running through the ticker on CNBC. It reminds me of playing Monopoly games when I was younger. When you asked a kid under the age of 12 to part with even his most insignificant properties, say Oriental, he would ask for a ridiculous sum in return. And so no one would trade with anyone, and I’m pretty sure that game is still ongoing.

But a couple economists from Yale and Princeton have come up with another theory, which they’ve called “realization utility“. In short, they’ve determined that an investor derives more pleasure from actually selling a stock and reaping the profits than he does from simply seeing the stock price go up on his ETrade account (and vice versa for losses). The sale of the stock (and money in the account) serves as a validation that he or she made a right decision. And you could assume that the sale of a stock when it’s lost value would be a confirmation that he made a wrong decision. As long as he doesn’t sell, he doesn’t have to admit the problem.

It’s a dangerous wonderland to end up in — where not looking and not correcting seems superior to admitting a mistake. And while it’s definitely a culture that we’ve begun to build up in America — ok, maybe the Helen Thomas lead in was a bit of a stretch — I hope it’s not one that you’ll fall into when making important decisions with your money. Cause when it’s time to retire and sell that fund or stock for rent money, the landlord’s not going to much care that you held on to escape admitting a mistake.

Maybe you didn’t have a big enough carrot. Or strong enough stick.

If you made a resolution to lose weight this January, by now, that gym you signed a contract with is probably laughing all the way to the bank. You’re not alone. More than 88% of resolutions end in failure according to psychologist Richard Wiseman.

I recently read post about economist Richard Thaler’s Nudge over at Weakonomics the other day. One of Thaler’s recommendations is that employers switch to opt-out 401(k) plans from the current opt-in system. You see, employees who are given the chance to opt-in tend not to. It’s much easier to keep the status quo when you’re confused by what a 401(k) is let alone how to choose investments within it.

That’s why right now, 58% of mid-sized to large companies auto enroll their employees into the company 401(k), a dramatic increase from the 34% that did two years ago. You can quibble about the specifics: Auto-enrolled employees tend to save a small percentage of their income, and the default investment options aren’t sometimes appropriate. But all in all, auto enrollment has made a bunch of people much better off than they would have been had companies not tried it.

But here’s the real question: Why don’t most employees save for retirement without a nudge? After all, the consequences of not saving—working until you die—seem pretty severe. That in itself should get our butts moving.

You don’t care what happens tomorrow. You care what happens now.

If I were to create my dream brain, it would trigger pleasure any time I took an incremental step to achieving a long-term goal and pain whenever I took a step backward. With immediate consequences, I might better feel the reward that seems so perfectly clear with reason.

But alas. Retirement is more than a decade off. The perfect body is at least a hundred sessions at the gym away. My Pulitzer Prize in blogging will take about as many years to achieve as…well…it will take them to create a Pulitzer Prize in blogging. In the meantime, cupcakes taste good now. (Also, I will wring your neck if you take the $5 I spent on the oversized cupcake, compound it at 10% over 50 years, and explain to me that it really cost me $587. Compound interest. We get it.)

You can’t be afraid of consequences when you don’t understand how they feel.

Call this the “hand on the stove” theory. If you’ve never been burned, it’s hard to be afraid of that glowing red, spiral thingy. Likewise, you might not be afraid of retiring with no money because you don’t know what it’s like to be 65 with no nest egg. I mean, sure, you say you’re afraid, but you don’t feel it in the same way you get nervous when pulling food out of the oven.

Unfortunately, many of our resolutions are specifically designed to thwart consequences that we’ve never experienced before. You’ve never retired (until you have). You’ve never had cancer or diabetes. You might have never lost a job (“Gosh,” you say, while eating another bowl of ramen noodles. “So this is why I should have built that emergency fund.”). As long as consequences remain in the abstract, your brain treats the incentives to save money, stop smoking, and eat healthy as academic.

Your brain can only handle so much at once.

Why stop at getting fit? Why not get your financial house in order, start a side job, study for the GMAT, and give up coffee while you’re at it?

Problem is, your brain is like a puny muscle. It can only lift so much, before giving up and dropping everything. Marketing professors Baba Shiv of Stanford and Alexander Fedorikhin of Indiana University once ran an experiment with two groups of undergrads. One group was given a two-digit number to remember. The second group, seven digits. Then they were to walk down a hall, and at its end choose either a piece of cake or bowl of fruit to snack on. The seven-digit students chose the cake more than twice as often as the two-digit students.

Why? Well, Shiv and Fedorikhin think it’s because the seven-digit students were spending so much of their brainpower managing their long number that the brain couldn’t muster the energy to deny their natural impulse for the high-sugar, pleasurable food.

You get the message. Try to do it all, and you’ll end up doing nothing. It’ll take enough focus just to achieve one of your big goals. So better to get that done before tackling something else.

A solution: Make the incentives really BIG.

Steven Levitt, the Freakonomics guy, likes to posit solutions to social problems that go something like this: “Hey, do you really want to stop drunk driving? The solution would be simple. Have police immediately shoot dead anyone who fails a breathalyzer test.” Then he goes on to talk about how that’s not socially acceptable, etc., etc.

But he has a point. The incentive to not drive drunk would be both immediate (you get shot at the scene) and gigantic (you’re dead).

Another economist doesn’t quite take things that far, but he’s developed a tool to help people keep resolutions that certainly makes the consequences of failure big. A few Yale professors started an online service called StickK that lets users make “commitment contracts”. You hand over your credit card information and set a penalty (say, to lose $1,000), make a goal (say, to lose 30 pounds by June 30th) and designate a friend as referee to verify your progress. If you hit your goal, you lose nothing. If you don’t, your credit card gets charged and your friend or a charity gets the money.

I love this section from the FAQ:

Q: I know myself, and no amount of money could possibly make me change my behavior or reach my goals.
A: Never say “never.” Let´s imagine you can’t stop eating candy bars. Try committing to eat 3 or less candy bars a week, and penalize yourself $100 every time you go over. Essentially, that fourth candy bar will now cost you $100! Would you eat a $100 candy bar?

I’ve never tried something like StickK before. But as I find me and my colleagues tripping up on the same old resolutions year after year, it’s not so inconceivable to me that a system like that would work and be worth it. And so what if you fail and lose the money? I’d gladly pay $1,000 for a serious shot at avoiding cigarette-induced cancer…or ramen noodles.