Thursday, February 9, 2012

Review: The Behavior Gap

Reading and reviewing personal finance books can be a very hit or miss proposition for me. I have done a lot of pf reading over the years, and I'm pretty well set in terms of how I view things. I don't need budgeting advice. I don't want investment advice. I'm not looking to coupon so hard that I get a basement full of nonperishables, nor am I so close to retirement that it'll be hard to fund it. Inspiration is nice, but I tend to find that through bloggers instead of through books. I don't want a four-hour work week, I don't need you to teach me to be rich, my dads are neither rich nor poor, and I definitely don't want sexist advice from either gender. Instead, I'm looking for something a little more difficult to define - something inspirational yet educational that doesn't actually tell me what to do but helps me refine my understanding of my own goals and how to reach them with my particular finances. 

Basically, I'm looking for someone to give me advice that actually pertains to my exact situation - something that by the very nature of mass media is impossible.
Well, The Behavior Gap does it. The book promises to help you:

  • avoid the tendency to buy high and sell low;
  • avoid the pitfalls of generic financial advice;
  • invest all of your assets—time and energy as well as savings—more wisely;
  • quit spending money and time on things that don’t matter;
  • identify your real financial goals;
  • start meaningful conversations about money;
  • simplify your financial life;
  • stop losing money

It seems like a tall order for a book that weighs quite a bit less than a doorstop - but I think it's pulled off really well. For one thing, the concepts are cleverly illustrated with (literal) back-of-the-napkin drawings. Seeing things detailed as a Venn diagram or simple line graph sometimes does more to explain human behavior than six paragraphs of words could ever do.

In addition, Carl Richards is pretty explicit that he can't give you advice in this book that would be beneficial to your situation - there are just too many variables! Instead, his goal is to help you question your own motives so you can make the decisions that are right for you - the person with all the information you need. 

Now, on to some of the specific things that really inspired me about this book:

Planning and strategy are first and foremost. As Dave Ramsey says, If you fail to plan, you plan to fail. In The Behavior Gap, Carl Richards details how to develop a strategy that works for YOU to achieve YOUR goals in a framework that's realistic for your life. As he puts it, "Financial decisions almost always are life decisions. Before you decide on your financial decisions, you need to choose your life goals." Create a plan that will act as guidelines for your behavior, and when you make a financial decision, whether it's a large one or a small one, check it against your plan. If it doesn't match up - no matter what a "great deal" it might be - you owe it to yourself to pass it up.

Seems simple, right? But consider a framework wherein you want to limit risk in order to slowly develop a nest egg. And then somehow you are offered a chance to go in on early stock from Facebook's IPO - and somehow in our hypothetical world, you're offered the stock for 50% off. Sounds like an awesome opportunity - but it would be the wrong decision in terms of the framework of your strategy. You'd have to stop your emotional reaction in order to focus on the parameters that you've set up for yourself. It's really hard - but in a way, it's also a relief. I've used this effectively myself, by setting a "policy" for my life. Sorry, my policy is to not use store credit cards - I'm not going to apply for that card, even though it offers me 10% off, because that's my policy. Sorry, I'm a nonsmoker. Nonsmokers don't buy cigarettes, so therefore I will not be buying that pack of cigarettes or bumming a cigarette. Nonsmokers don't smoke, and I'm a nonsmoker. Therefore...

This isn't financial planning - it's psychology. And it WORKS.

Back to our Facebook example. If you succumb to every whim of investing, you'll wind up with a collection of hot stocks that don't have a cohesive strategy behind them. You'll tend to fall for the funds that come recommended in slick magazines or websites (which only make money by trying to sell you stuff) instead of the ones that actually would serve your short and long-term goals the best. My goals will be different from your goals - maybe vastly different. Given that, is it likely to make the best financial sense for us to both invest in the same stock that's been recommended to everyone in the world? Probably not.

Who do we look to as experts? This is important because it not only helps us define our own goals, but as Carl Richards says "We have a tendency to assume that what we do know is more important than what we don't know." Reading widely to determine what it is we don't know - and to learn more about it, explained by people who don't have their hands in our pocketbooks - is really important.

Science fiction author Robert Heinlein wrote in Time Enough For Love that "A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects." Expanding on this, I'd say that any adult should be able to balance a checkbook, create a budget, forecast expenses, calculate compound interest, save for a rainy day, negotiate the price of a large purchase, research an investment or large expense, and qualify for a loan. We should not make the mistake of thinking that what we do know about any of these facets of personal finance is more important than what we don't know.

In addition, listening to anyone - family members, friends, experts - can be misleading for one big reason that we tend to overlook. "People tend to give you advice that's based on their own fears, their own experience, their own expertise, their own motivations. Their advice typically has little to do with the reality of your life," he notes. Not just about finances - think abut they kind of advice you get from people about your love life, restaurants to go to, where to live. Of course it can only be based on their own experiences. 

It’s important to figure out what will really make you happy and focus on that - ultimately, you’re the one who has to live with it. Your own happiness is dependent on what you expect out of life - if you can come up with realistic expectations that will satisfy your major goals, how much money you have is beside the point. 

Carl Richards goes on to offer both some general and specific ideas about how you can define that happiness for yourself, and by defining, achieve it. My happiness will not look like your happiness. My goals will not look like yours. Our roads to our respective happy endings may look totally different from each other’s, but hopefully one thing will be similar - the behavior we exhibit along the way. Not the specific acts, but the means of getting there. Identifying our destination and, like a good pilot, making course corrections along the way to ensure we get there. 

The Behavior Gap is so full of fantastic information and quotable quotes that I filled up pages and pages for this post - but really, all of that is to say this: go read this book. 

Full disclosure: I received a digital copy of this book to read for review. That in no way influenced by opinion of it, and in fact I intend to go buy a copy to keep on my shelf and maybe a second to loan out to people who need to read it.

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