WEBVTT - Behavioral Money Tendencies that Wreck Us #179 0:00:00.120 --> 0:00:02.480 Welcome to How the Money. I'm Joel and I and 0:00:02.600 --> 0:00:26.759 Matt and today we're discussing behavioral money tendencies that wreck us. Yeah, Juel, 0:00:26.840 --> 0:00:30.200 this episode, we are going to discuss these different behavioral 0:00:30.200 --> 0:00:32.480 tendencies that we tend to have for no other reason 0:00:32.520 --> 0:00:35.640 than because we're human, right, And these are tendencies that 0:00:35.720 --> 0:00:38.480 we have regardless of what the market is doing, whether 0:00:38.520 --> 0:00:41.520 it's a bowl market or if it's the fastest sinking 0:00:41.520 --> 0:00:44.440 bearer market we've seen in history. The better we are 0:00:44.640 --> 0:00:47.800 at identifying these behavioral tendencies, the more likely we are 0:00:48.040 --> 0:00:50.239 to be able to make better decisions that will have 0:00:50.280 --> 0:00:53.120 a positive impact on how we view and how we 0:00:53.159 --> 0:00:56.320 handle our money. Humans were fickle creatures. We do weird things. 0:00:56.720 --> 0:01:00.360 But yeah, knowing kind of what underlies the actions that 0:01:00.400 --> 0:01:03.080 we take is super helpful, especially when it comes to money, right, Maddie. 0:01:03.080 --> 0:01:05.160 That's right, man, all right. But before we get into that, man, 0:01:05.200 --> 0:01:07.560 I wanted to let you know I saw this interesting 0:01:07.640 --> 0:01:11.280 article on this website called Institutional Investor dot com, and 0:01:11.760 --> 0:01:16.240 it was talking about these Ivy League endowments, These big 0:01:16.280 --> 0:01:19.720 Ivy League schools have these private investment funds, and it 0:01:19.800 --> 0:01:23.280 was just kind of interesting to see that almost all 0:01:23.319 --> 0:01:27.760 of the Ivy League schools completely underperformed the market last year. 0:01:27.959 --> 0:01:30.440 So basically the return that these Ivy League schools got 0:01:30.600 --> 0:01:33.880 didn't keep up with just the standard SMP five index 0:01:33.920 --> 0:01:36.880 fund that we often tout on the show. Yeah, and 0:01:36.880 --> 0:01:39.640 not just the SMP five hundred, but it was waited 0:01:40.480 --> 0:01:43.560 in the SMP and the other was a bond index. 0:01:44.120 --> 0:01:46.200 And and what's so what's even more crazy there is 0:01:46.240 --> 0:01:48.520 to think that if they were comparing that against a 0:01:48.560 --> 0:01:51.520 total stock market fund, or even just one in that 0:01:51.680 --> 0:01:54.680 SMP FID fund, they would have underperformed. But even less, 0:01:54.720 --> 0:01:56.720 Like there was only one Ivy League school that I 0:01:56.800 --> 0:02:01.640 saw in there that outperformed the market, which was was Brown. Yeah, 0:02:01.680 --> 0:02:05.320 but otherwise every single Ivy League school, including Harvard and Princeton, 0:02:05.400 --> 0:02:08.720 like these fancy schools that have these massive endowment funds, 0:02:08.760 --> 0:02:10.600 which by the way, I looked at Harvard's and it's 0:02:10.639 --> 0:02:15.120 like thirty eight billion dollars, right, so much money, And 0:02:15.160 --> 0:02:17.840 so they've got these fancy investors that are trying to 0:02:17.840 --> 0:02:19.840 grow that money for the benefit of the school, right, Yeah, 0:02:19.880 --> 0:02:23.360 They're they're investing money in private markets, in private equity, 0:02:23.520 --> 0:02:26.280 venture capital, all that fancy stuff, things that aren't open 0:02:26.360 --> 0:02:28.400 to everyday investors like you and me, And they're thinking 0:02:28.400 --> 0:02:30.320 that they're going to get outside returns because of their 0:02:30.360 --> 0:02:33.359 access to these private investments that nobody else can take 0:02:33.400 --> 0:02:36.480 part in, but they still underperform just the basic investments 0:02:36.480 --> 0:02:38.440 that you and I can easily take advantage that just 0:02:38.480 --> 0:02:41.040 you and me, but all of our listeners right as well. 0:02:41.040 --> 0:02:42.960 And this isn't to point out that the IVY Leagues 0:02:43.000 --> 0:02:45.120 are just really bad at investing, but it's just to 0:02:45.240 --> 0:02:47.359 point out how hard it is to beat the market, 0:02:47.400 --> 0:02:50.440 even with all of these sophisticated tactics, even with all 0:02:50.440 --> 0:02:54.560 the networks and resources that these investors have with these 0:02:54.639 --> 0:02:57.720 IVY League schools, that the best bet probably is just 0:02:57.800 --> 0:03:00.000 to stick that money in an SP five funded fund 0:03:00.160 --> 0:03:02.360 or total stock market fund. Yeah. I think there's a 0:03:02.360 --> 0:03:05.079 tendency for individual investors as they start to learn a 0:03:05.160 --> 0:03:08.200 little bit more, to get cute or to try to 0:03:08.240 --> 0:03:12.400 get into alternative investments that are touted online. Is potentially 0:03:12.400 --> 0:03:15.360 making you a higher return, you know, closer ten, twelve, 0:03:15.440 --> 0:03:17.880 fifteen percent on your money. But if these big wig 0:03:17.919 --> 0:03:20.600 investors who have billions of dollars at their disposal aren't 0:03:20.600 --> 0:03:22.760 able to keep up with the SMP five under just 0:03:22.800 --> 0:03:25.320 the the simple trajectory of the overall stock market, or 0:03:25.320 --> 0:03:28.320 even just a standard kind of sixty mix of stocks 0:03:28.320 --> 0:03:30.880 and bonds, then how can we, as individual investors who 0:03:31.040 --> 0:03:32.880 have day jobs and all these other things on our minds, 0:03:32.880 --> 0:03:35.200 how can we even come close to beating the market? 0:03:35.240 --> 0:03:37.000 I mean, I think, I mean, I don't manage an 0:03:37.040 --> 0:03:39.280 endowment fund for a living, right, Like, I've got other 0:03:39.320 --> 0:03:41.640 stuff to do. Yeah, exactly, And so I think it 0:03:41.680 --> 0:03:43.880 just goes to show that we as investors should probably 0:03:43.920 --> 0:03:46.040 keep it simple. We're gonna make better returns in a 0:03:46.040 --> 0:03:47.880 typical year, and at the same time, we're gonna be 0:03:47.920 --> 0:03:49.520 paying lower fees, and it's just gonna be easier on 0:03:49.600 --> 0:03:51.640 us at the same time. Yeah exactly. And like you said, 0:03:51.640 --> 0:03:54.040 on a typical year, this was from last year's results. 0:03:54.440 --> 0:03:56.440 And this isn't the first year that this has happened, right, 0:03:56.440 --> 0:03:58.840 This has happened many times, and so this isn't a 0:03:58.960 --> 0:04:01.320 one time thing. This is a pattern. Yeah. And I 0:04:01.320 --> 0:04:03.560 think even if, like let's say, the Ivy League schools 0:04:03.960 --> 0:04:06.720 crushed the stock market next year, I don't think it 0:04:06.760 --> 0:04:10.280 necessarily means that investing in private equities or investing in 0:04:10.360 --> 0:04:12.960 alternative ways is a better move. I think overall, we 0:04:13.000 --> 0:04:15.280 see the trends that the numbers bear out that the 0:04:15.400 --> 0:04:18.600 simpler investing methods are almost always the best way to go. Yeah, 0:04:18.640 --> 0:04:20.920 and it'll be really interesting to see if these same 0:04:21.000 --> 0:04:24.120 numbers hold true for these endowment funds in an economic 0:04:24.120 --> 0:04:26.000 downturn as well, but for almost all of us. Yeah, 0:04:26.040 --> 0:04:28.839 the simpler the path, the better, simple path to wealth. 0:04:28.920 --> 0:04:31.960 Noil Collins would say, our good buddy, Jail Collins. That's right, 0:04:32.040 --> 0:04:33.920 all right, Matt, let's mention the beer that we're having 0:04:34.000 --> 0:04:36.440 on the show today. This one is called I d 0:04:36.600 --> 0:04:39.320 k f A. It's by Ellipses Brewing picked this one 0:04:39.400 --> 0:04:41.240 up when I was down in Orlando and brought it 0:04:41.279 --> 0:04:42.800 back in Crowler form for us to share on the 0:04:42.800 --> 0:04:44.640 show today. My friend, Yeah, this along with the one 0:04:44.640 --> 0:04:46.440 we had last week, which is I'm already pulled over, 0:04:46.800 --> 0:04:50.119 So pay that toll, Joel, I'm on it. I will 0:04:50.160 --> 0:04:54.040 get on it. No, I haven't. I'm going to Okay, 0:04:54.120 --> 0:04:56.279 do they have an online option to pay? No, that's 0:04:56.279 --> 0:04:58.640 the thing they don't. It's ridiculous. I have to mail 0:04:58.720 --> 0:05:01.400 in the check. That's it's lame, but you better do it. 0:05:01.400 --> 0:05:02.960 It's gonna have Our listeners are gonna hold you to 0:05:03.040 --> 0:05:04.520 that as well. And by the way, do you know 0:05:04.560 --> 0:05:06.039 where this comes from? I d k f A the 0:05:06.080 --> 0:05:09.960 name of this beer. No, not exactly. I remember as 0:05:09.960 --> 0:05:12.719 a kid from playing Doom. It's a it's a cheat code. 0:05:12.839 --> 0:05:15.039 It gives you, like I think it was, like, you 0:05:15.040 --> 0:05:17.560 get all the ideas, the keys and full armor. It's 0:05:17.600 --> 0:05:22.000 like a super nerdy gamer term. Okay, that's good to know. Yeah, 0:05:22.000 --> 0:05:24.000 I didn't know what what it took for. But now 0:05:24.200 --> 0:05:25.720 how d k f A. All right, Well, let's get 0:05:25.720 --> 0:05:27.599 on the topic at hand. Today on the show, we're 0:05:27.600 --> 0:05:31.039 talking about behavioral money tendencies that wreck us. And I 0:05:31.080 --> 0:05:33.080 think we have to say up front that we're not 0:05:33.080 --> 0:05:35.560 trying to tell everybody that they're dumb. It's just that 0:05:35.680 --> 0:05:38.160 certain things are ingrained in how we are as human 0:05:38.160 --> 0:05:40.960 beings and how we approach the world. Right, so natural, Yeah, 0:05:40.760 --> 0:05:44.159 these these behavioral tendencies are not specific to just a 0:05:44.160 --> 0:05:46.000 few of us. There are things that we all experience 0:05:46.040 --> 0:05:47.880 and we all need to fight back against. Some of 0:05:47.920 --> 0:05:50.039 the hardest money mistakes to correct are the ones that 0:05:50.120 --> 0:05:54.080 we do habitually because we don't recognize those core behavioral 0:05:54.080 --> 0:05:56.520 problems that actually let us there. So in order to 0:05:56.520 --> 0:05:58.880 to break those money habits, it often means taking a 0:05:58.920 --> 0:06:02.440 step back and develop being some awareness for those behavioral 0:06:02.480 --> 0:06:05.440 issues that lead you there. For example, Matt, there's this 0:06:05.480 --> 0:06:08.240 study that was done of people that drink wine, and 0:06:08.279 --> 0:06:10.240 it turns out if you hand somebody glass of wine 0:06:10.240 --> 0:06:12.839 and you tell them the price associated with it, they 0:06:12.920 --> 0:06:15.800 automatically have an instinct for how good the wine is 0:06:15.800 --> 0:06:17.680 going to be. And if you lie to them and 0:06:17.680 --> 0:06:19.560 tell them that the wine costs more than it actually did, 0:06:19.839 --> 0:06:22.200 they assign higher value. They think that the wine was 0:06:22.240 --> 0:06:23.680 better than it actually was. So if I hand you 0:06:23.720 --> 0:06:25.520 a glass of wine and I say, man, this this, 0:06:25.520 --> 0:06:27.200 this is this is a twenty dollar glass of wine, 0:06:27.400 --> 0:06:29.280 you're gonna be like, oh man, this is this is 0:06:29.320 --> 0:06:31.520 really really good. But because that's the most we spent 0:06:31.560 --> 0:06:34.120 on wine is like twenty bucks glass. I would never 0:06:34.120 --> 0:06:35.720 spend twenty bucks on a glass of wine, So I thought, 0:06:35.720 --> 0:06:38.320 you're talking about bottles. I mean even that a little 0:06:38.320 --> 0:06:41.040 little rich from my blood. But you'll spend twenty bucks 0:06:41.080 --> 0:06:44.560 easily though on a bottle of beer, Yes I will. Well, 0:06:44.560 --> 0:06:46.080 that's the thing I mean, even aside from wine, like 0:06:46.080 --> 0:06:47.440 we did the same thing when it comes to beer, 0:06:47.520 --> 0:06:49.520 Like we get we get our hands on a twenty 0:06:49.560 --> 0:06:52.800 seven do a beer, which is rare, but occasionally we'll 0:06:52.839 --> 0:06:55.479 come across like a seven fifty million later bottle, which 0:06:55.480 --> 0:06:57.360 is the same size as a wine bottle traditionally, right, 0:06:57.839 --> 0:06:59.719 and if we know it's close to thirty bucks, like 0:06:59.720 --> 0:07:01.520 we're expecting a lot more out of that, and we 0:07:01.640 --> 0:07:04.440 kind of convince ourselves that it's going to be better. 0:07:04.480 --> 0:07:07.159 And typically that is because it is better, right, Like 0:07:07.200 --> 0:07:09.720 you try to sell some swell that's super price like 0:07:09.760 --> 0:07:11.760 that and it's not gonna last. That's gonna hurt the 0:07:11.760 --> 0:07:13.520 brewery's name when you do something like that. But yeah, 0:07:13.520 --> 0:07:16.440 I totally understand. It's honestly why I try to never 0:07:16.560 --> 0:07:20.000 look up the ratings of beers on untapped before I 0:07:20.040 --> 0:07:22.080 drink them, because I don't want to be swayed by 0:07:22.520 --> 0:07:25.480 the the star rating on there. I try to I'm 0:07:25.560 --> 0:07:27.880 very scientific, so I try to approach it very analytical, 0:07:28.080 --> 0:07:31.160 and I try to be objective about it, not subjective. Yeah, yeah, 0:07:31.200 --> 0:07:32.400 you want to come up with it in your mind 0:07:32.440 --> 0:07:34.600 before you see what other people said about exactly. I mean, 0:07:34.640 --> 0:07:36.760 that makes sense, but I think it is interesting though. 0:07:36.800 --> 0:07:38.640 That's just one of these tendencies. And we're gonna cover 0:07:38.680 --> 0:07:41.160 a lot today in the show, all these tendencies that 0:07:41.200 --> 0:07:43.440 we have that lead us down this path of making 0:07:43.480 --> 0:07:47.480 bad money decisions because of these kind of ingrained behavioral 0:07:47.520 --> 0:07:50.800 tendencies that we have. Yeah, those unseen behavioral tendencies can 0:07:50.840 --> 0:07:53.920 totally cost us lots of money and poor buying decisions 0:07:54.000 --> 0:07:57.720 and bad investing moves as well. That's why behavioral economics 0:07:57.800 --> 0:08:00.760 it's rapidly becoming a topic of risk, man, at least 0:08:00.840 --> 0:08:03.840 you and me, because we can't divorce our emotions from 0:08:03.880 --> 0:08:06.320 our decisions. It's really hard to do that. But the 0:08:06.440 --> 0:08:10.120 more that we are able to see the correlation between them, 0:08:10.520 --> 0:08:12.440 the more likely we are to be able to make 0:08:12.520 --> 0:08:15.760 better decisions, and that will have a positive effect on 0:08:15.840 --> 0:08:17.880 how we view and how we handle our money. Yeah, man, 0:08:17.920 --> 0:08:20.200 I kind of grew up, I would say, with a 0:08:20.280 --> 0:08:23.480 negative money attitude, just kind of a negative association towards 0:08:23.480 --> 0:08:25.560 money in general. And I think that stems from from 0:08:25.560 --> 0:08:27.600 a few different things that I encountered while I was 0:08:27.600 --> 0:08:30.280 growing up, and and because of that, I've kind of 0:08:30.360 --> 0:08:34.400 struggled to develop a positive association with money in my adulthood. 0:08:34.679 --> 0:08:36.960 I don't want to be super rich, but I do 0:08:37.000 --> 0:08:38.480 want to be well prepared for the future, and I 0:08:38.480 --> 0:08:40.240 want to have the freedom to choose the work that 0:08:40.280 --> 0:08:41.760 I want to do. I don't want to have ample 0:08:41.800 --> 0:08:43.920 time with my family and friends. So I had to 0:08:44.000 --> 0:08:46.760 work through these negative associations with money in order to 0:08:46.840 --> 0:08:50.680 realize that building wealth wasn't the bad thing, Like saving 0:08:50.679 --> 0:08:53.480 from my future isn't bad. Just because I had these 0:08:53.520 --> 0:08:56.480 negative associations with money growing up, I guess I kind 0:08:56.480 --> 0:09:00.120 of correlated having money with like the great to be 0:09:00.240 --> 0:09:03.480 lifestyle where people were just like drinking champagne every night, 0:09:03.520 --> 0:09:06.040 these fancy cars, fancy parties, and I was like, well, 0:09:06.040 --> 0:09:07.880 I don't have any interest in that. That sounds terrible. 0:09:07.960 --> 0:09:10.800 So I just don't want to accumulate money. And because 0:09:10.800 --> 0:09:13.520 of that, you know, saving from my future wasn't attractive 0:09:13.559 --> 0:09:15.880 to me. But it turns out, and then when you 0:09:15.960 --> 0:09:18.240 study things a little bit further, that the opposite is 0:09:18.240 --> 0:09:20.640 typically true of rich people. Right If if you read, 0:09:20.679 --> 0:09:23.080 for for example, the book The Millionaire next Door, you 0:09:23.120 --> 0:09:25.800 see that the way that people actually are able to 0:09:25.960 --> 0:09:29.040 amass some wealth is by living frugally, right, they drive 0:09:29.040 --> 0:09:30.960 older cars, they live in the same home for a 0:09:30.960 --> 0:09:33.000 long period of time. So I had this negative money 0:09:33.040 --> 0:09:34.760 association and that's something that I've had to work through, 0:09:34.960 --> 0:09:37.800 and so doing that has been really really helpful to 0:09:37.960 --> 0:09:40.760 help me develop a more positive association with money as 0:09:40.800 --> 0:09:42.800 opposed to kind of just that negative one that had 0:09:42.840 --> 0:09:44.959 been ingrained for all those years. It's cool to see too, 0:09:44.960 --> 0:09:47.600 that that frugal lifestyle can lead to wealth, right, Like 0:09:47.640 --> 0:09:50.640 that can lead to millions. It's not necessarily like the opposite. 0:09:50.640 --> 0:09:52.760 It's like, it's not like once you become a millionaire, 0:09:52.800 --> 0:09:54.840 then you can, you know, start living lavishly and kind 0:09:54.840 --> 0:09:56.640 of living the life. It's like, no, Like, the way 0:09:56.679 --> 0:09:59.360 I'm able to accumulate wealth is because I live frugally, 0:09:59.640 --> 0:10:02.520 and pattern of behavior I feel like carries on as well, 0:10:02.559 --> 0:10:05.360 like after someone might you know, have millions in the bank. 0:10:05.720 --> 0:10:08.760 That's why oftentimes those millionaires next door, like they drive 0:10:08.880 --> 0:10:11.920 used Ford Explorers. Yeah, I remember specifically that being one 0:10:11.920 --> 0:10:14.040 of the cars that a lot of them drove. It's like, 0:10:14.200 --> 0:10:16.720 why do they buy used water Explorers. They're like, I 0:10:16.720 --> 0:10:18.920 don't know, they're cheap, you know, they get it done, 0:10:19.000 --> 0:10:22.520 and it's often. Why uh, incredibly rich family often as 0:10:22.559 --> 0:10:25.800 they pass on that fortune to their kids, why doesn't 0:10:25.880 --> 0:10:28.840 last very long? Well? Yeah, oftentimes that frugal lifestyle isn't 0:10:28.840 --> 0:10:31.839 necessarily adopted by that younger generation. And when you weren't 0:10:31.840 --> 0:10:34.600 the one actually worked in order to accumulate that wealth. 0:10:34.920 --> 0:10:37.040 Easy come, easy go. Right there, there's kind of that 0:10:37.080 --> 0:10:39.480 factor as well. Well. I think I'm lucky enough to 0:10:39.559 --> 0:10:42.720 not have had any negative money attitudes. I guess growing 0:10:42.800 --> 0:10:46.160 up we talked about money like fairly often. Um, I 0:10:46.200 --> 0:10:50.520 just had negative attitudes towards other stuff like what peace 0:10:50.520 --> 0:10:53.600 and carrots, which I still don't like, by the way. 0:10:53.679 --> 0:10:56.000 Actually I like carrots okay, but pea's not my favorite. 0:10:56.440 --> 0:10:59.000 I specifically remember a standoff between me and my parents 0:10:59.040 --> 0:11:01.800 over green beans over eating one one green bean. Man. 0:11:02.120 --> 0:11:04.320 Green means are great. I love green means now, but 0:11:04.480 --> 0:11:06.840 I prove my point, I will say that my parents 0:11:06.840 --> 0:11:08.360 got the message. Well, I mean, I want to kind 0:11:08.360 --> 0:11:11.880 of continue talking about like negative attitudes though, right, because 0:11:11.880 --> 0:11:13.920 whatever your history with money has been in the past, 0:11:13.960 --> 0:11:17.000 it's important to step back and to consider that those 0:11:17.040 --> 0:11:20.000 attitudes and those views could be negatively affecting how you 0:11:20.000 --> 0:11:22.560 relate to money. Now, right, Like, when we underestimate our 0:11:22.559 --> 0:11:25.479 past like that, it can have a serious negative consequence 0:11:25.760 --> 0:11:28.800 on how we behave now. And there's negative views. They 0:11:28.800 --> 0:11:31.520 can look different depending on the individual. So, Joe, while 0:11:31.559 --> 0:11:33.600 you might have seen having tons of money as a 0:11:33.640 --> 0:11:37.040 big negative, others might see having like a modest amount 0:11:37.080 --> 0:11:39.120 of money as like the worst thing ever, right, and 0:11:39.160 --> 0:11:42.720 this might cause them to prioritize wealth too much. So 0:11:42.760 --> 0:11:45.840 it all depends on who you are and your life experiences. Yeah, man, 0:11:45.840 --> 0:11:47.560 And all these behavioral tendencies that we're going to talk 0:11:47.600 --> 0:11:50.600 about all of us have seen at least in someone else, 0:11:50.840 --> 0:11:53.080 but in all likelihood we've struggled with it too. And 0:11:53.120 --> 0:11:54.760 so let's get to some of those and kind of 0:11:54.800 --> 0:11:58.160 how to combat our behavioral tendencies, the tendencies that tend 0:11:58.200 --> 0:11:59.840 to wreck us and our money. And we'll get to 0:11:59.840 --> 0:12:11.079 the right after the break. All right, man, we are 0:12:11.160 --> 0:12:13.040 back in the break and we're talking about these different 0:12:13.040 --> 0:12:16.360 behavioral money tendencies that wreck us. Uh. Let's first kind 0:12:16.360 --> 0:12:19.320 of touch on how we tend to make emotional money decisions, 0:12:19.360 --> 0:12:21.679 right like this pretty much plagues us. All we can 0:12:21.720 --> 0:12:24.040 easily think about some of those emotional bios on Amazon 0:12:24.160 --> 0:12:26.000 or maybe a night outce I cry every time I 0:12:26.080 --> 0:12:28.720 hit the bye button on Amazon? Is it that painful? 0:12:28.720 --> 0:12:32.400 Free to purchase anything? But let's go a level deeper, though, 0:12:32.440 --> 0:12:35.480 and cover some of these more nerdy behavioral economic terms, 0:12:35.520 --> 0:12:37.679 what they mean and how they can apply to your life. 0:12:37.720 --> 0:12:40.040 Let's first talk about the endowments effect. You know, we 0:12:40.080 --> 0:12:43.200 actually just talked about endowment funds. This is a little 0:12:43.200 --> 0:12:46.160 bit different, but basically, the endowment effect is when you 0:12:46.160 --> 0:12:48.679 place more value on the things that you have because 0:12:48.720 --> 0:12:51.400 you already own them. Right. So, for instance, like, if 0:12:51.400 --> 0:12:52.599 you're trying to get rid of some stuff, do you 0:12:52.679 --> 0:12:55.400 find yourself unwilling to start selling things you own on 0:12:55.440 --> 0:12:58.160 eBay in order to maybe pay off high interest credit 0:12:58.160 --> 0:13:00.559 card debt? That could be because we as hum tend 0:13:00.640 --> 0:13:03.000 to overvalue what we already have in our possessions, and 0:13:03.040 --> 0:13:04.840 so it's natural for us to to not want to 0:13:04.920 --> 0:13:08.480 part with those items because we do overestimate the actual value. Yeah, 0:13:08.559 --> 0:13:11.560 that quick example. I think if let's say, for instance, 0:13:11.600 --> 0:13:13.360 you were into baseball cards and you had a Kim 0:13:13.400 --> 0:13:16.840 Griffey Jr. Autographed rookie card, right, and it was worth 0:13:17.120 --> 0:13:19.160 a thousand bucks. I don't know how much that cards worth. 0:13:19.160 --> 0:13:22.120 I just guessing that sounds pretty generous. Okay, maybe it's 0:13:22.120 --> 0:13:24.080 worth five. Do you own this card? Because no, I 0:13:24.080 --> 0:13:25.840 guess I would explain why you say it's worth a 0:13:25.880 --> 0:13:27.520 thousand dollars. I don't because if I did, I'd have 0:13:27.520 --> 0:13:29.720 a thousand bucks my pie. I'd tell it. But so, 0:13:29.840 --> 0:13:32.400 my brother in law is getting into basketball cards right now, 0:13:32.840 --> 0:13:36.520 and he actually recently sold a card, a rookie card 0:13:36.600 --> 0:13:39.000 for like a new NBA player, I think, for like 0:13:39.240 --> 0:13:41.720 three thousand bucks on eBay. What's Yeah, so these cards 0:13:41.800 --> 0:13:43.880 are worth a lot of money, some of them. That 0:13:44.160 --> 0:13:47.120 is crazy. I didn't know there's that much. I guess inflation, right, Yeah, 0:13:47.400 --> 0:13:49.040 Like when I was a kid, cards did not cost 0:13:49.080 --> 0:13:50.679 that much, right, Yeah, you go get a nice one 0:13:50.679 --> 0:13:52.559 for twenty bucks or but I mean we would just 0:13:52.600 --> 0:13:54.440 buy the packs since he was in there. But let's 0:13:54.440 --> 0:13:56.720 say you had a nice one in your possession, and 0:13:56.760 --> 0:13:59.040 you've got some high interest credit card debt too. Well, 0:13:59.280 --> 0:14:01.640 if you could esentially pay off your credit card by 0:14:01.800 --> 0:14:05.160 selling your kid Griffe Junior rookie card, well then that 0:14:05.160 --> 0:14:07.400 would make a whole lot of sense. But most people 0:14:07.440 --> 0:14:10.240 probably overvalue the card they already have in their their possession. 0:14:10.559 --> 0:14:12.240 Would you go out, let's say you didn't have the 0:14:12.280 --> 0:14:15.320 card and pay a thousand dollars at the card shop 0:14:15.360 --> 0:14:17.720 in order to buy it while you're in credit card debt? 0:14:17.960 --> 0:14:21.240 No way, Probably not. That's the endowment effect. That's essentially 0:14:21.280 --> 0:14:23.840 you assigning more value to the card because you already 0:14:23.880 --> 0:14:26.280 have it, then you should because you wouldn't go out 0:14:26.280 --> 0:14:28.640 there and buy that same card today for that amount 0:14:28.640 --> 0:14:30.520 of money. Yeah. I think this can also be extended 0:14:30.560 --> 0:14:33.560 to things like checking accounts and savings accounts that we have. 0:14:33.720 --> 0:14:35.880 In particular, like I'm thinking about credit cards that you've 0:14:35.880 --> 0:14:37.520 had around for a long time and you have this 0:14:37.600 --> 0:14:39.880 sort of emotional attachment to it, right and guess what, 0:14:39.960 --> 0:14:42.920 maybe it's got an annual fee and you receive like 0:14:43.000 --> 0:14:45.720 next to no benefits from this dumb card. I think 0:14:45.720 --> 0:14:47.520 the same thing could apply to checking accounts. A lot 0:14:47.520 --> 0:14:50.080 of people still have their checking accounts with big banks, 0:14:50.400 --> 0:14:52.160 and they have monthly fees if they don't meet a 0:14:52.200 --> 0:14:55.440 certain threshold of a balance or certain transactions. Right. And 0:14:55.440 --> 0:14:58.000 so these credit cards or these checking accounts are costing 0:14:58.240 --> 0:15:00.480 us money if we have them, And the reason that 0:15:00.520 --> 0:15:02.960 we're hanging onto them is because we've always had them 0:15:02.960 --> 0:15:05.120 like these are you know, we have this emotional attachment 0:15:05.160 --> 0:15:07.720 to them where we're over assigning the amount of value 0:15:07.760 --> 0:15:10.400 that these accounts that these cards bring us when we 0:15:10.480 --> 0:15:11.800 know that if we were going to open up a 0:15:11.800 --> 0:15:14.320 new account today that we would definitely not open up 0:15:14.320 --> 0:15:17.040 those accounts. Now, yeah, there's a little bit of inertia 0:15:17.040 --> 0:15:19.000 bias in there, and oh yeah, yeah, it's it's hard 0:15:19.080 --> 0:15:21.640 to do something new like that when when we've always 0:15:21.680 --> 0:15:24.040 been doing this other thing for years. Yeah, Matt, Let's 0:15:24.040 --> 0:15:27.160 talk about another emotional behavioral money tendency that that we 0:15:27.240 --> 0:15:30.360 sometimes make, and that's the sunk cost fallacy. And before 0:15:30.400 --> 0:15:32.840 we get to the fallacy, let's kind of define what 0:15:33.000 --> 0:15:36.320 sunk costs are. That is, essentially any past cost that 0:15:36.360 --> 0:15:39.280 has already been paid and cannot be recovered. So, for example, 0:15:39.280 --> 0:15:42.040 concert tickets are the perfect illustration the price you paid 0:15:42.080 --> 0:15:44.640 for the tickets. Well, there are sunk costs, but if 0:15:44.680 --> 0:15:46.960 the money you've already paid is causing you to do 0:15:47.000 --> 0:15:49.520 something that's making you worse off or more unhappy, then 0:15:49.640 --> 0:15:52.480 you fallen prey to the sunk cost fallacy. So to 0:15:52.560 --> 0:15:54.400 the concert tickets, let's say you get sick and it 0:15:54.440 --> 0:15:57.040 would be a miserable time if you went to that concert, 0:15:57.240 --> 0:15:59.560 but you go anyway just to get your money's worth. 0:15:59.840 --> 0:16:01.720 You just took line and sinker fell for that stunt 0:16:01.720 --> 0:16:03.920 cost fallacy. Yeah. A lot of times folks will refer 0:16:03.960 --> 0:16:06.080 to this as like throwing good money after bad, right, 0:16:06.120 --> 0:16:08.800 because you're you're trying to essentially like redeem the situation 0:16:09.160 --> 0:16:11.840 by throwing more money at that problem, when in fact 0:16:11.920 --> 0:16:13.800 it's just making you worse off. Man. I think of 0:16:13.800 --> 0:16:16.200 an example in our life where I think we came 0:16:16.240 --> 0:16:18.760 really close to falling into the stunt cost fallacy. This 0:16:18.800 --> 0:16:20.080 is when we were at our old house, Kate and 0:16:20.120 --> 0:16:22.720 I and our family was growing. I was working from home, 0:16:22.880 --> 0:16:25.320 and our house wasn't working for us right. We knew 0:16:25.440 --> 0:16:27.720 that we needed to renovate and make the house bigger, 0:16:28.040 --> 0:16:29.760 and so we were. We had planned out this massive 0:16:29.760 --> 0:16:32.200 renovation and it was going to cost us a lot 0:16:32.200 --> 0:16:34.440 of money. But we'd kind of fallen in love with 0:16:34.480 --> 0:16:36.800 the idea of renovating it because we designed it, We'd 0:16:36.800 --> 0:16:38.920 worked with architects, and we had this awesome plan was 0:16:38.920 --> 0:16:41.400 going to make a ton of sense. And deep down 0:16:41.440 --> 0:16:43.360 to side, I think we also knew that it wasn't 0:16:43.400 --> 0:16:46.800 necessarily going to fix some of the underlying issues with 0:16:46.880 --> 0:16:48.960 the house, Like it was gonna make it bigger, but 0:16:49.000 --> 0:16:51.160 there is gonna be some awkwardness to it, right, And 0:16:51.240 --> 0:16:53.520 so like the problem there is had we done that 0:16:53.560 --> 0:16:56.200 because we already had the house. Obviously this is a 0:16:56.240 --> 0:16:58.320 little bit related to the endowment effect because we already 0:16:58.320 --> 0:17:00.520 had the house as well. But we already paid a 0:17:00.520 --> 0:17:02.000 lot of money for that house, and we're looking to 0:17:02.320 --> 0:17:04.320 dump a lot more money into it in order to 0:17:04.440 --> 0:17:06.399 make it work moving forward. But I think how we 0:17:06.440 --> 0:17:08.359 continue to go down that path, I think we definitely 0:17:08.359 --> 0:17:11.199 would have fallen victim to some cost fallacy. Yeah, I 0:17:11.200 --> 0:17:14.400 think let's give a couple more examples that people can 0:17:14.400 --> 0:17:16.080 also relate to. I think one is that if you 0:17:16.080 --> 0:17:18.160 own a car and you realize that you have these 0:17:18.160 --> 0:17:19.840 other debts you need to take care of, but you're 0:17:19.840 --> 0:17:22.440 gonna lose money by selling that car your upside down 0:17:22.440 --> 0:17:25.200 on it. Let's say, well, it might still make sense 0:17:25.480 --> 0:17:28.520 to sell that car and and take that loss in 0:17:28.600 --> 0:17:30.480 order to reduce your costs that you can put more 0:17:30.520 --> 0:17:33.000 of your money towards those debt payments. But it's so 0:17:33.080 --> 0:17:35.600 hard to actually do because we're emotionally tied to the 0:17:35.600 --> 0:17:37.760 fact that we're gonna quote unquote lose money on that 0:17:37.840 --> 0:17:39.800 one decision, and if we can think about the larger, 0:17:39.840 --> 0:17:42.400 overall picture, it's really helpful so that we don't fall 0:17:42.440 --> 0:17:45.399 prey to that sun cost fallacy on that one item. Dude, 0:17:45.400 --> 0:17:47.920 totally right, Like looking at that big picture can completely 0:17:47.920 --> 0:17:50.280 put things in the right perspective. Also, I think about 0:17:50.280 --> 0:17:52.080