Why are many smart people clueless about investing/personal finance?

[Midpack]

Triggered by another thread, this phenomena has always puzzled me to no end. It's been noted here countless times, but the "why" has not often been discussed.

While I had some employees who unfortunately may not have been capable of handling money for themselves, many with HS educations could. But even more, I have some technically accomplished friends who are almost clueless about investing, retirement planning and even personal finance. Among them (most without pensions):

• An attorney
• A small IT company owner
• Several engineers
• Several doctors, medical specialists
• An accounting manager (this one really amazes me)
• A small business owner

I know them well, and it's obvious from the questions they ask me, especially since I retired early, how naive they are about money. Some of them contribute 10% to a 401k and invest in target funds, and then assume all will take care of itself. They've never even estimated a portfolio goal or annual spending. One just sends his money to his guy at EJ and knows little else, couldn't tell me what it was invested in, but wondered if I had any "hot stocks" for him. Another has been paying Mass Mutual 1% per year for well over 20 years to manage his money! I met with his MM advisor, a nice guy who was clearly just parroting MM recommendations without much underlying knowledge of his own - charging 1% per year!

I want to just shake them and ask WTH, but I know better than to provide investing advice to family and friends, especially when they haven't even asked.

I have never understood how otherwise very smart people can be so uninterested in their own financial security

 

[Brett_Cameron]

I think this area of knowledge/expertise is almost totally ignored by our education systems at all levels and that parents, in general, do not teach their kids about finances. I know from my upbringing and education that my parents never talked about managing personal finances. I did have one uncle who, after I had opened my first checking account, pointed out the sheer stupidity of placing my signature on the check register index booklet.

 

[hlfo718]

Add another one to the list, employees of financial services firm. I have worked in a few large and small fin'l serv firms and really shocked to see how many have no clue or interest in their 401k investments. I currently work for a small firm where half of the staff are clueless, one of them is the COO with an MBA!

 

[MichaelB]

I have never understood how otherwise very smart people can be so uninterested in their own financial security

I know exactly what you mean. We have watched friends and family make terrible, foolish financial choices, without fully understanding the consequences. Don't know why. It sure isn't lack of intelligence. Must be a gene or something, and I sure am glad for mine.

 

[SumDay]

Without revealing too much, I work for a company that deals with retirement issues. Years ago, one of my favorite actuaries turned in his notice. He was close to 60, so we all assumed he was retiring. Nope, he was going to start a new firm. No way could he retire, the wife spent too much, and he had <$50K saved. At the time we had a great 401(k) match, and an even more lucrative stock purchase plan. He barely took advantage of either. That was very illuminating and motivational for me.

I think part of the problem is that it really isn't something that can't be taught in a semester. There are so many moving parts, and people just don't have the attention span to take responsibility for their own finances. They assume Social Security is far better than it is, and are too busy making big fat car and mortgage payments and paying for their kids to attend Ivy League schools.

And then there are many who barely make enough to pay daycare and the light bill - how do they get smarter? If you barely eek through high school, how do you get a better paying job? They're the ones that really worry me.

JMHO, of course.

Great discussion, Midpack.

 

[bUU]

• An attorney
• A small IT company owner
• Several engineers
• Several doctors, medical specialists
• An accounting manager (this one really amazes me)
• A small business owner

As I alluded to elsewhere, I believe the answer is evident from turning it around: Why are many smart people clueless about the laws they are expected to comply with and the laws that protect them?

Why are so many smart people clueless about the IT that they rely on so much?

Why are so many smart people clueless about health, nutrition, fitness, etc.?

I have to admit that I didn't understand why an accounting manager is clueless about investing/personal finance, and then I talked with our company comptroller. After her explanation, I understand that it is a bit like expecting a physician to be an expert on health insurance.

 

[yakers]

I think this area of knowledge/expertise is almost totally ignored by our education systems at all levels and that parents, in general, do not teach their kids about finances. ...

Its worse that not being educated, in my experience about the worst class for finance management skills are the educators. Remarkable how bad most 403b programs are. Teachers just have no interest and insight into financial matters. Fortunately most have a DB retirement system or they would be in trouble or teaching until they die.

 

[DeborahB]

I worked in IT and was the only one I knew of who looked at the (pitiful) investments we were offered in the 401K and tracked what was happening. I'm also the only one who maxed out her 401K and Roth IRA for years. I lived well on half my salary. The others "couldn't afford it". I'm the one who left at 62... IT is generally well-paid.

I do have an MBA... and a studio art degree before that... and at one point had a series 7 license (stockbroker) and worked as a financial planner a long time ago for a couple of years. But you don't need that to figure out that your funds in the 401k aren't doing well.

I think people really don't have good math or finance skills for the most part - I mean, they may be good at math but they don't know how to use it to analyze investments. A fault of our educational system - which was designed when defined benefit plans were common and people stayed in the same job for years.

 

[brewer12345]

I think this area of knowledge/expertise is almost totally ignored by our education systems at all levels and that parents, in general, do not teach their kids about finances. I know from my upbringing and education that my parents never talked about managing personal finances. I did have one uncle who, after I had opened my first checking account, pointed out the sheer stupidity of placing my signature on the check register index booklet.

I think this is it. The apalling lack of financial education for even the basics is really widespread. When I bail on the day job I really want to get involved in hound rescue again and I want to figure out how to help with the basics of financial education for kids and adults.

DW's parents are both PhDs (public health for one, sociology for the other). Neither has any clue about money (one borrowed from a 401k to buy a luxury car, the other took the proceeds of a disastrous rental property investment and rolled it into a variable annuty). Somehow they managed to do OK, and now I help by giving them advice and managing some of their assets.

On the flip side, most of the other funployees at my current gig are very, very good at participating in 401k, etc. I am amazed at how high participation in the plan is and how much people seem to contribute. But they are also about the most conservative bunch I have ever seen. When I joined this organization I looked over the 401k plan and was shocked to realize that something like 70% of all the assets in the plan were invested in the stable value account.

 

[SumDay]

I want to figure out how to help with the basics of financial education for kids and adults.

Brewer12345, when you figure that out, let me know. I also have dreams of doing this in my retirement years. I've thought about facilitating a Dave Ramsey Financial Peace University course, just to see if I have the patience to not slap the participants when they report the stupid stuff they do.

 

[Lcountz]

"Why are so many smart people clueless about the IT that they rely on so much?

Why are so many smart people clueless about health, nutrition, fitness, etc.?"

Because....they all know who the Kardashians are and how many times they've been married, and who is being "kicked off the island"...and what the latest expensive gadget is they can own for "only a hundred dollars a month-that's less than cable!!!"

And they BUY things based on the monthly payment, and lastly, they do the "no money down" and then chase depreciation for the rest of their lives.


That's what I think!

 

[Midpack]

When I bail on the day job...I want to figure out how to help with the basics of financial education for kids and adults.

Brewer12345, when you figure that out, let me know. I also have dreams of doing this in my retirement years.

+2. I'd love to do that too, so if you figure it out...

I considered looking into a career with a local broker, but all of them require disclosing all our holdings and transferring them in house - that ain't happening. I am also concerned about inevitably being blamed by some customers expecting positive returns in down markets, I assume that happens a lot.

 

[brewer12345]

Brewer12345, when you figure that out, let me know. I also have dreams of doing this in my retirement years. I've thought about facilitating a Dave Ramsey Financial Peace University course, just to see if I have the patience to not slap the participants when they report the stupid stuff they do.

My state is apparently implementing a mandatory financial education program as part of the standard curriculum starting with 3 graders next year. Low hanging fruit would be to get involved in my daughters' school. But I think Junior Achievers, the FDIC, teh Federal Reserve and other organizations have programs and possibly standard presentations that I will be checking out.

 

[Arifriekinel]

I think this area of knowledge/expertise is almost totally ignored by our education systems at all levels and that parents, in general, do not teach their kids about finances. I know from my upbringing and education that my parents never talked about managing personal finances. I did have one uncle who, after I had opened my first checking account, pointed out the sheer stupidity of placing my signature on the check register index booklet.

I never got anything financial-wise from my mom, but I did watch her struggle, which was education enough for me!


As far as it being taught in school, I can't put the weight on it all being ignored by the system. We were required to take two financial classes for graduation from my high school, which taught about retirement savings, compounding interest, saving money, even the average salaries for varying degrees and occupations, pensions, social security, vehicle loans, mortgages, just about everything up for discussion here.

You had to take one freshman year, Keystone, and one senior year, Capstone, or no graduation for you. To this day on Facebook, people I graduated with complain about how 'these are things we should have been taught in school!' I distinctly remember them sleeping and spitballing their way through both of those classes. We graduated only two years ago, and they've already forgotten that they even took the classes, nonetheless the content.

So even when the education is shoved in our faces (It helped me, just by paying the slightest bit of attention), people just don't seem to care until they've already dug themselves into a pit of despair.

 

[Mulligan]

Its worse that not being educated, in my experience about the worst class for finance management skills are the educators. Remarkable how bad most 403b programs are. Teachers just have no interest and insight into financial matters. Fortunately most have a DB retirement system or they would be in trouble or teaching until they die.

My experience resembles yours. Part of the problem is they come out of college, get a job, and perceive their professional job should allow them to live a professional lifestyle (which it usually doesn't the first 10 years or so). Then it is debt payments the rest of their career. In my state though fortunately for them, after 30 years, your take home retirement pay is the same as if you are working, so you can stay clueless your whole life and get away with it. I really don't even know what purpose a 403b serves for most educators since they mostly retire in their same tax bracket. Should just avoid the 403b hidden high fee mess and fund yearly the Roth and go from there.

 

[nun]

Money is one of the last taboo subjects and I think people often have a phobia about it. IMHO, smart people are just as likely to be terrible money managers as dumb people because so much more than intelligence is involved. Social status is often linked to spending and the display of wealth rather than frugality and maxing out the 401k and no matter what your IQ people like to be admired.

I sometimes watch that dating show "Millionaire Matchmaker" (I'm not proud of it) and they show people who say their net worth is one or two million driving Ferraris and living in the Hollywood Hills. If you only have one million it's dumb to drive a $200k car, you should be driving a Ford Fusion and using the $180k you'd save to finance ER, actually I bet the Ferrari is leased ,which is even dumber.....guess I won't be on that show even though I meet the financial requirements.

 

[Beryl]

Good thread.

My sister, who has a doctorate (I never finished mine), is the same way. Some of these folks don't even want to HEAR about money management.

It is kind of like an overweight person who doesn't want to look at or talk about dieting. (I avoided THAT topic for years.)

 

[ChocoKitty]

I think money management can be a challenge because it's not just about money. Money management requires you to think deeply about your goals, priorities, habits, and values. I suspect that's an uncomfortable topic for many people, especially since it requires facing what you say you value versus what you actually value (via your spending habits) head on.

 

[imoldernu]

Good subject.
As a naive "investor", I'll plead ignorance based on my age, and how different things were back in "those days".
In the early days, 1950's and '60's, it wasn't "pensions", but "Profit Sharing", a different animal.
Then in the mid 60's, "Pension Plans"... no choice. You joined or were left out.
It wasn't until the mid 70's when IRA's came in... the first chance to "invest by choice"... At age "middle 30's", and busy with life, it was easy to follow the recommendations to put IRA money into "Bank Accounts" which were paying 5% to 10+%, and not to worry about "investments".

The only financial advisers were in the banks, unless one was managing an inheritance. Maybe they were out there, but no one that I knew ever had an adviser.

In our case, with four kids, in the early 1980's we didn't have a lot of extra "investment money" anyway. A $30K salary only went so far, considering mortgage, insurance, kids education, 2 "necessary" auto's etc.

Saving was a matter of trust. Bank Saving Account Returns were closer to Investment returns in the 80's. At one point we had a 100K 3 year CD paying 11 1/2%. Of course, housing values were increasing, too.
We missed the day trading boom in the late 80's early 90's using much of our savings to start a new business. By 1990, we were retired, and not ready to get involved in "risk" of any kind. When CD rates started going down, in 2000, we began shifting what we could into IBonds.

So yeah... clueless... and ignorance... but in a small defense of not doing due diligence, times were a little different.
and... who could have even imagined retiring before age 65?

 

[TOOLMAN]

I have some technically accomplished friends who are almost clueless about investing, retirement planning and even personal finance.
I have never understood how otherwise very smart people can be so uninterested in their own financial security

My engineering boss once told me "I am spending too much time working to make money".
That was good advise for me. I think many neglect the out put of work and focus on only on the input.

 

[Midpack]

You had to take one freshman year, Keystone, and one senior year, Capstone, or no graduation for you. To this day on Facebook, people I graduated with complain about how 'these are things we should have been taught in school!' I distinctly remember them sleeping and spitballing their way through both of those classes. We graduated only two years ago, and they've already forgotten that they even took the classes, nonetheless the content.

So even when the education is shoved in our faces (It helped me, just by paying the slightest bit of attention), people just don't seem to care until they've already dug themselves into a pit of despair.

This made me laugh. I graduated Mech Engr and took a semester of macro Econ, a semester of micro Econ in college (electives) - found them fascinating, and continued learning about Econ throughout my adult life. However, I also took a Personal Finance course (still have the book) and found it boring and pedestrian, though I did study and learn, so it probably registered later when I actually had some money (unlike in college).

And my parents were frugal, so I had that example, but they never taught me anything beyond "live within your weekly allowance." My Dad was an orthopedic surgeon/hospital admin, but his knowledge of investing is/was abysmal - way conservative and always pessimistic about the economy. Fortunately he has/has a COLAd pension and retiree health care, though he managed to accumulate a reasonable nest egg.

 

[heeyy_joe]

It's a brain thing. Pleasure center of the brain and all that.

 

[JoeWras]

Fantastic thread, and a truly perplexing problem.

It hit home to me when our long time neighbor across the street was foreclosed. He "owned" the home for 30 years! WTH?

Well, after they retired, he did a whole bunch of idiot things which I won't get into detail. But the crux was he kept taking out second mortgages on the home to finance things like $100k+ motor homes.

The guy was smart. Computer programmer for my first Megacorp. I was shocked and astounded by the turn of events. Just plain stupidity.

 

[SJ1_]

Triggered by another thread, this phenomena has always puzzled me to no end. It's been noted here countless times, but the "why" has not often been discussed.

While I had some employees who unfortunately may not have been capable of handling money for themselves, many with HS educations could. But even more, I have some technically accomplished friends who are almost clueless about investing, retirement planning and even personal finance. Among them (most without pensions):

• An attorney
• A small IT company owner
• Several engineers
• Several doctors, medical specialists
• An accounting manager (this one really amazes me)
• A small business owner

I know them well, and it's obvious from the questions they ask me, especially since I retired early, how naive they are about money. Some of them contribute 10% to a 401k and invest in target funds, and then assume all will take care of itself. They've never even estimated a portfolio goal or annual spending. One just sends his money to his guy at EJ and knows little else, couldn't tell me what it was invested in, but wondered if I had any "hot stocks" for him. Another has been paying Mass Mutual 1% per year for well over 20 years to manage his money! I met with his MM advisor, a nice guy who was clearly just parroting MM recommendations without much underlying knowledge of his own - charging 1% per year!

I want to just shake them and ask WTH, but I know better than to provide investing advice to family and friends, especially when they haven't even asked.

I have never understood how otherwise very smart people can be so uninterested in their own financial security

People seem to be good at different things.

Intelligence seems to be based on different things. I went to my sons College Graduation and when they introduced the valedictorian they rattled off all of her amazing accomplishments and scholarships she was awarded. Was simply amazing. She got up there and told everybody in the audience all the things she couldn't do. That was pretty amazing too. Her point was that different people have different skills and that is why we need each other.
the truly brilliant people (INHO) are those that realize their strengths and weakness and act accordingly.

 

[JoeWras]

This made me laugh. I graduated Mech Engr and took a semester of macro Econ, a semester of micro Econ in college (electives) - found them fascinating, and continued learning about Econ throughout my adult life.

Me too. Engineer who took econ. Since I chose the elective, I actually cared. The other students who had this as a "flunk out" course for their majors (like physics in engineering) just slept through class.

I learned way too much in my second class which was focused on government finance and taxation. That's yet a whole different issue, but one that is hitting home these days. So you think people are bad at their own finances? True. But they are even more clueless as to how our government works financially.