It's Just Money

Saw this ad for a popular online broker recently

I was cruising around Yahoo Finance today when I stumble upon this ad...

So, here's my gripe.  What exactly are they advertising?  Here are my best guesses.

CNNMoney.com Reader Question

I thought this question, sent to Walter Updegrave of CNNMoney.com, was very interesting.  In two very brief paragraphs the reader reveals that she is tripping over virtually every stumbling block described by behavioral finance.  Here's the question:

We put almost all of our money in the stock market through our adviser in 2000 and we are still down! One account he manages went from more than $80,000 down to $30,000 and now it is back to $50,000.

We originally paid this adviser 1.5 percent a year, but after we complained he lowered the fee to 1 percent. We're thinking of giving him six more months to get us back to where we were in 2000, but we don't want to take our money out at a loss. What should we do? -Linda, Rutherford, N.J.

Walter has a pretty good response, but frankly I'm not so concerned about the response.  I just thought it would be an interesting case study to identify the behavioral finance pitfalls that Linda of Rutherford, N.J. wass falling prey to.  Let's make it multiple choice.  Which of the following apply:

• Loss Aversion
• Status Quo Bias (or Endowment Effect)
• Gambler's Fallacy
• Self Serving Bias
• Cognitive Framing
• Mental Accounting
• Anchoring

What do you think?  I think three clearly apply, you can make an argument for three others, and one doesn't apply here.

The Bogleheads' Review, Chapter 19

Welcome to the Bogleheads' October Project, Chapter 19, "Mastering Your Investments Means Mastering Your Emotions."

Let's start with a little quiz:

1.  A bat and a ball cost $1.10 in total.  The bat costs $1.00 more than the ball.  How much does the ball cost?

2.  If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?

3.  In a lake, there is a patch of lilypads.  Everyday, the patch doubles in size.  If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?

We'll come back to the answers at the end, but trust me, this relates to the my review of Chapter 19 of the Bogleheads' Guide to Investing.

When it comes to investing, we are all better off to be like Mr. Spock, above.  Emotions, at times, serve us very well.  The fight or flight reaction pumps up our adrenaline and helps us either in battle, or to get the heck out of a bad situation.  However, knowing which to do when is often when our emotions get the better of us.  Things like ego and overconfidence could be big trouble.

We are all emotional beings.  This we know.  We get excited, fearful, optimistic, depressed.  These emotions have a greater impact on our decision making than most of us would like to believe.  In the end, almost all of us, in almost everything we do make one massive error that, if applied to investing, could cost you dearly.  What is this error?

We make decisions emotionally and justify them rationally.

Bad Decisions in Deal or No Deal

Why do so many people leave Deal or No Deal empty handed?  Because they make poor decisions.  I have some thoughts about what drives this decision making.  Let me tell you about this guy on Friday's show and what he did.

First of all, his run on the show began on the previous episode, which I didn't watch.  So, I don't know much about his background other than he is a stay at home dad, and they were hoping to win enough from the show for the family of four's dream trip to Fiji.

As Friday's show began, he had turned down a $34,000 offer with six cases remaining, $5, $10, $200, $300, $5000, and $300,000.  Hitting the $300,000 case would be catastrophic.  He hit the $5,000 case, bringing in an offer of $52,000.  The highest previous offer was $55,000.  He gave a corny speech about great people making you believe, and little people making you doubt your dreams.  Sounded like the kind of talk you hear at multi level marketing meeting.

He turns down the $52,000.  I would have taken it.  He hits the $300 case, bringing the offer to $76,000.  Now the two kids (cute little boy and girl around 10 and 11) tell dad to take the offer.  The kids are right.  Not just because of what is about to happen.  Wife says that she "feels good" that he has the $300,000.  He doesn't take it the deal.  Wife yells out how much she loves him and believes in him, and the kids groan, "Oh my God, Dad!"