Clements’ article in the WSJ this week was fun. He looked at evolutionary psychology for reasons why people make so many financial mistakes. Sorry, no link as the WSJ is subscription only site.
From Terry Burnham, the author of Mean Markets and Lizard Brains and Robert Frank, the author of Luxury Fever, comes the idea that our instincts are out of step with modern financial life, so we tend to make mistakes, such as:
--we keep striving for bigger houses, fancier cars, bigger paychecks even though research suggests these won’t make us happier in the long run. We do this because our ancestors that survived and reproduced had the greatest drive. There is nothing that tells us to stop as we are "maximizing machines."
--Our ancestors were best served by consuming all they could immediately. Hang on to food? It would rot. Hence the difficulty in saving. “Because saving is such a new concept for us, some folks save too much—and many save way too little.”
--The pain we get from losing $1000 is greater than the pleasure we get from gaining $1000. This causes many people to shy away from stocks, worrying about the risk. The evolutionary roots may be the importance of retaining territory outweighing any need to gain new territory.
--The last point was the need of our ancestors to be good at spotting patterns, like where to fish and get other food. But hunting for patterns can be a disaster in the stock market. If something is too popular, it will be overpriced.
Animal instincts? Maybe, maybe not, but it is fun reading.
From Terry Burnham, the author of Mean Markets and Lizard Brains and Robert Frank, the author of Luxury Fever, comes the idea that our instincts are out of step with modern financial life, so we tend to make mistakes, such as:
--we keep striving for bigger houses, fancier cars, bigger paychecks even though research suggests these won’t make us happier in the long run. We do this because our ancestors that survived and reproduced had the greatest drive. There is nothing that tells us to stop as we are "maximizing machines."
--Our ancestors were best served by consuming all they could immediately. Hang on to food? It would rot. Hence the difficulty in saving. “Because saving is such a new concept for us, some folks save too much—and many save way too little.”
--The pain we get from losing $1000 is greater than the pleasure we get from gaining $1000. This causes many people to shy away from stocks, worrying about the risk. The evolutionary roots may be the importance of retaining territory outweighing any need to gain new territory.
--The last point was the need of our ancestors to be good at spotting patterns, like where to fish and get other food. But hunting for patterns can be a disaster in the stock market. If something is too popular, it will be overpriced.
Animal instincts? Maybe, maybe not, but it is fun reading.