For women in male-dominated fields like engineering, there are lots of stressors, both subtle and overt. As a result, many end up leaving the field altogether. But the ones who stay develop strategies to survive and to even challenge the status quo. Guests: Jessica Townsend, Ana, Elena, and Teresa Cardador. Our theme music is Matt Hill’s “City In Motion,” provided by Audio Network.
Episode 372: Aaron Patterson on the Ruby Runtime
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Aaron Patterson of GitHub discusses the Ruby language and its runtime. Host Jeremy Jung spoke with Aaron about the Ruby language and how it works. They discuss the language virtual machine, concurrency, garbage collection, and JIT compilation. If you’ve ever wondered what’s happening under the hood of a programming language, this is a great introduction.
SE-Radio Episode 365: Thorsten Ball on Building an Interpreter in Go
SE-Radio Episode 255: Monica Beckwith on Java Garbage Collection
SE-Radio Episode 348: Riccardo Terrell on Concurrency
Ruby Under a Microscope
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The area that is now Oklahoma was once a place called Indian Territory. Beginning in the 1800s, the U.S. government designated the land in the Great Plains as a place where it could force indigenous peoples in order to make room for American settlers as they pushed west. All of the routes on the Trail
Edward Hieatt, SVP at Pivotal Software, and John Rogers, Executive at CoreLogic, discuss software development using the Agile methodology and how it differs from other methods in practice and results.
Host Deborah Becker speaks with outgoing Bentley University President Gloria Larson and education editor Jon Marcus on the future and priorities of small colleges. Plus, Evan Horowitz on rising gas price may be here to stay. Also, the new border war in Boston between docked versus dockless bicycles.
Marriage is hard — and there are signs it’s become even harder in recent decades. We examine how long-term relationships have changed, and whether we might improve marriage by asking less of it.
Lisette Voytko and Kira White are back, with Your Body and You. BOO! It’s CreepyPodsta: The Creepypasta Podcast. Support the show on Patreon! $1 a month gets you two bonus episodes and one short story! Theme music is by Matt Holt If you want to be prepped for future episodes, go ahead and read up on Mrs. Willison’s Homemade…
Everything You Always Wanted to Know About Money (But Were Afraid to Ask) - Freakonomics Freakonomics
Q: You have $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much will you have in the account if you left the money to grow? A) More than $102. B) Exactly $102. C) Less than $102. D) I don’t know. (Photo: frankieleon / Flickr)
Our latest Freakonomics Radio episode is called “Everything You Always Wanted to Know About Money (But Were Afraid to Ask).” (You can subscribe to the podcast at Apple Podcasts or elsewhere, get the RSS feed, or listen via the media player above.)
The bad news: roughly 70 percent of Americans are financially illiterate. The good news: all the important stuff can fit on one index card. Here’s how to become your own financial superhero.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post.
- * *
A bunch of years ago, I had just quit what I had thought was my dream career — trying to become a rock star. And now I was trying to figure out what came next. I was considering three options. No. 1 was to become a shrink. I really liked psychology — but, in the end, I decided I was too selfish to spend my days helping other people with their problems. No. 2 was to become a financial advisor; I really liked learning about saving and budgeting and investing — but, again, I was selfish; I didn’t want to devote all my energy to other people’s problems.
No. 3 was to become a writer — and that’s what I did. But the other ideas didn’t just go away. There’s at least a little bit of psychology in just about every episode of Freakonomics Radio. As for the financial stuff — well, that’s something we all wrestle with that every day, isn’t it? Today on Freakonomics Radio, we’ll wrestle with it together. We will wrestle with the standard advice on how much to save:
Harold POLLACK: “You have just told me to save 20 percent of my money. Fuck you!”
We’ll wrestle with the fact that a financial windfall does not guarantee long-term success:
Annamaria LUSARDI: We found that 15 percent declare bankruptcy.
And: we’ll lay out a personal-finance road map that anyone can follow:
John BOGLE: It’s pretty simple: avoid emotions and concentrate on the economics.
- * *
Annamaria Lusardi is an economist who teaches in the business school at George Washington University.
LUSARDI: I was born and raised in Milan and moved to the U.S. about 25 years or so ago for my graduate studies.
As you can tell, she still sounds a bit Milanese.
LUSARDI: I have to say I cannot get rid of it. It’s inside me.
When Lusardi first moved to the States, many things were unfamiliar. Our sports, for instance — especially American football.
LUSARDI: I only became interested in football because everybody is watching football on Sunday. If I needed to talk to my friend, we had to talk about football first. When I met the football players, then I had to be able to talk football seriously.
When she “met the football players”? What’s that all about? Well, a few years back, George Washington University started a special M.B.A. program called STAR — that stands for “special talent, access, and responsibility.” The program was designed for people who were already very successful.
LUSARDI: They are often very wealthy and they have to manage many things — not just their wealth, but also their name, their reputations. it just so happened that most of the students were actually athletes and the majority of athletes were actually football players.
These were professional football players.
LUSARDI: Some of them were from the Baltimore Ravens, and I am a big Baltimore Ravens fan. They are, first of all, incredible students. They are my favorite students.
Why were they her favorites? Lusardi found her athlete-students incredibly disciplined and, perhaps not surprisingly, good team players. She was also impressed with how charitable they were. And she was charmed by their sheer size. One day, she was talking about the financing options of buying a car. The example she’d always used in previous classes was a Toyota Corolla. But the football players all started giggling. One student raised his hand. “Professor Anna,” he said, “I do not fit into a Toyota Corolla!” Lusardi also realized these N.F.L. players were facing an unusual financial predicament.
LUSARDI: These are people which are very talented, very competent, but they have no knowledge of how to manage this money. Often they come from background where nobody has taught them financial literacy.
Financial literacy is, and has been for a couple decades, Annamaria Lusardi’s passion.
LUSARDI: We make financial decisions every day. The financial decision that we make today are different than the decision that our parents made. Our parents didn’t have to worry about pensions, they didn’t face the type of mortgages we face now. Didn’t have probably all the credit cards and all this consumer credit at their fingertips. Also, they didn’t have student loans. But we see other trends as well. For example, financial markets around the world have become more complex.
Many economists, for many years, have assumed that most people are financially literate.
LUSARDI: We assume that people know about interest compounding and they know about risk and risk diversification, and they act accordingly.
But how much do people really know about the most basic financial principles? That’s what Lusardi, in collaboration with the economist Olivia Mitchell, set out to learn. They came up with three survey questions.
LUSARDI: This was actually driven by the fact that in the first survey we only had room for three.
They piggybacked their financial literacy questions onto the 2004 Health and Retirement Study. Being limited to three questions turned out to be a blessing.
LUSARDI: Because first of all these questions are very predictive, but also because there are only three, they were adopted in so many national surveys in the U.S. and then in as many as 15 other countries around the world, and more recently a variation of these questions have been added to a global survey. So now we know about financial literacy around the world.
Okay, before we hear about the state of financial literacy around the world, let’s hear the questions. No. 1:
LUSARDI: “Suppose you have $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?”
The answers were multiple choice. A) More than $102. B) Exactly $102. C) Less than $102. Or, if you really want to play along, D) I don’t know.
LUSARDI: And the correct answer is…
The correct answer is: A), more than $102. Because 2 percent interest on $100 in a year is $2, so after year 1 you have $102 — and then over the remaining four years, the interest grows on that $102, and so on. And that’s why compound interest has been called “the eighth wonder of the world.”
LUSARDI: Question 1 is about compound interest but really it’s about assessing numeracy.
Okay, question No. 2:
LUSARDI: Question 2 is about inflation: “Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account?”
The answers: A) More than today. B) Exactly the same as today. C) Less than today. Or, D) I don’t know.
LUSARDI: The answer is “less than today” because if inflation is 2 percent, prices go up 2 percent. But if you only earned 1 percent in your saving account, you basically can buy less.
And: question No. 3:
LUSARDI: Question three has to do about risk diversification: “Do you think the following statement is true or false: buying a single company stock usually provides a safer return than a stock mutual fund.” “True,” “false,” and of course you can say, “Do not know.”
And the correct answer is … true! Buying a single stock is safer than buying a mutual fund. Just kidding! That’s false.
LUSARDI: Because a single company is a lot riskier than a basket of stocks. Don’t put all of your eggs in one basket.
Okay, how you’d do — did you get all three right? If so, that would put you in a distinct minority.
LUSARDI: Americans are not financially literate.
That’s right: Lusardi found that only around 30 percent of the respondents got all three questions right. The numbers are pretty similar around the world, even in other rich countries. In the U.S., financial literacy has some distinct demographic differences: “those facing most challenges,” Lusardi and Mitchell wrote, “are the young and the old, women, African-Americans, Hispanics, the least educated, and those living in rural areas.”
LUSARDI: Financial literacy should not be taken for granted. Actually, if you ask me, we are at a crisis level.
You might ask yourself: if financial literacy is so important; and if so many people are so bad at it — what are we doing wrong? One simple answer is that even well-educated people often don’t attain, as part of their formal education, much of a basic financial literacy. What about parents — aren’t they supposed to teach their kids the basics? Maybe. But money being what it is — a topic that makes a lot of people uncomfortable — you can see how a lot of parents, especially if they’re not financially literate, somehow never get around to teaching their kids.
Some people argue that financial education isn’t the answer anyway. They say the main problem is that too many financial instruments are either too complicated or inherently exploitive. We got into this debate in an earlier episode of Freakonomics Radio; here’s the legal scholar Lauren Willis on why it’d be better to design more user-friendly financial instruments than to expect everyone to learn more about personal finance:
Lauren WILLIS in a Freakonomics Radio episode: It’s like saying, “We should start teaching everybody to be their own doctor, teaching everyone to be their own mechanic.” Terribly inefficient to do that. Not only is it inefficient, but it has this culture of blaming the consumer. “You’re the one who didn’t figure this all out. You didn’t go to the classes or didn’t pay attention, or whatever.” And that’s not going to help in the long run.
Annamaria Lusardi does not share that view. At George Washington, she founded a research center called the Global Financial Literacy Excellence Center. Its mission is pretty obvious. And part of that mission, it turned out, was to teach financial literacy to a bunch of pro football players. Whose circumstances, she points out, are quite atypical.
LUSARDI: They are very young and they get all of the money that people earn in a lifetime early in life.
That’s right: as Lusardi writes, “A career lasting six years (the median length) will provide an N.F.L. player with more earnings than an average college graduate will get in an entire lifetime, plus a modest pension.”
LUSARDI: But they just couldn’t translate that sum of money, the lump sum they had, into the stream of money that they could support themselves throughout life.
There are a lot of ways to blow a sudden fortune. Friends and family may come at you with their palms open. You’re approached by all sorts of advisers with all sorts of brilliant investment schemes. There are taxes to pay — upper-income-bracket taxes, by the way, which shrink your net income by a lot. And, of course, it’s a lot more exciting to spend money today than to save it for tomorrow. Lusardi, inspired by her current football students, decided to gather some data on older players.
She and her colleagues looked at a cohort of N.F.L. players who’d been drafted in the late 1990s and early 2000’s, to assess their long-term financial outcomes.
LUSARDI: We look at bankruptcy rather than other measures of financial distress because these are the things we can check and which there is data.
And what’d they find?
LUSARDI: We found that more or less twelve years into retirement, 15 percent declare bankruptcy.
That’s right: 15 percent of these guys, who’d already earned a career’s worth of income, went bankrupt — a rate that’s similar or even higher than the overall population of men in their age group, even though the N.F.L. retirees had obviously earned a lot more money. Lusardi also found that the risk didn’t even decline for the players who earned the most.
LUSARDI: To me, the experience of the N.F.L. is a good example of the effect of financial illiteracy.
The N.F.L. bankruptcy data reinforced Lusardi’s earlier findings about financial illiteracy. So what’s to be done? Because it’s pretty obvious that many people have no idea how to handle their personal finances. Even people who you’d think should know — even exceedingly well-educated people, like this guy:
POLLACK: I must say I had a very lackadaisical attitude about personal finance until I was about 40 years old.
That’s Harold Pollack.
POLLACK: I’m a professor of social service administration at the University of Chicago.
Pollack works with University of Chicago institutions like the Crime Lab and the Center for Health Administration Studies.
POLLACK: I have a doctorate in public policy, but I hadn’t really applied it to finance.
But then something happened.
POLLACK: My mother-in-law died suddenly and my brother-in-law Vincent had to move into our home. He’s intellectually disabled, and he was 340 pounds and had many related challenges.
Pollack’s wife had to quit her job to take care of her brother, and Pollack began to worry about their financial health.
POLLACK: One day we had to buy a Lazy Boy-type chair just because he was so big that our furniture didn’t work for him, and it was like $900 for this chair. And I just remember thinking, “I’m going to go through all my money.” I became obsessed with personal finance.
He began looking at the literature on investing.
POLLACK: One of the first things I learned was that the conversation among real experts was actually a lot simpler than the conversation that you would get if you watched financial TV or read brochures from financial-services firms.
The people Pollack calls “real experts” — academics, typically, who’d done real, empirical studies — told a very different story than investment professionals.
POLLACK: I started to joke around that the fundamental problem that the industry faced was that the best advice was available for free at the library.
Pollack started writing about these ideas on a blog called The Reality-Based Community. For one piece, he was interviewing the financial journalist Helaine Olen about a book she’d written, called Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.
POLLACK: And I said to her, “Isn’t the industry’s fundamental problem that the best advice for most people would fit on an index card, and it’s available for free at the library?” We chuckled and the conversation moved on — except that I started getting emails from people and comments on my blog saying, “Hey, where’s the index card?”
But there was no index card.
POLLACK: I was speaking metaphorically so, of course, I was stuck. But I had planted a flag and I felt I had to honor that. So I just reached into my kitchen drawer and I pulled out my daughter’s 4×6 index card that she was using for school. And I scribbled down in maybe two minutes nine rules and I took a picture with my iPhone and I posted it on the web.
Coming up on Freakonomics Radio: Harold Pollack’s index card catches fire on a variety of websites.
POLLACK: Boing Boing, which I’d never heard of actually. Lifehacker, which I also had never heard of.
Also: are credit card rewards programs as good as they seem?
POLLACK: All the research suggests that that these rewards programs just make you spend more money.
And: how closely should you watch your investments?
BOGLE: Don’t peek!
- * *
As I mentioned earlier, before settling into my writing career, I thought about becoming either a psychologist or a financial adviser. What I didn’t mention is that the book I was working on before Freakonomics was a perfect hybrid of those two things — it was about the psychology of money. The working title was Money Makes Me Happy (Except When It Doesn’t). That book got put in a drawer once Freakonomics started happening. But I still think its animating sentiment is pretty solid. Basically: money is one of those rare topics — a bit like sex, and maybe religion — that people have strong feelings about, and yet have a hard time discussing.
As a result, a lot of us stumble through life knowing we should know more than we do about personal finance but we’re too intimidated or embarrassed or something to do much about it. Harold Pollack, a public-policy scholar at the University of Chicago, tapped into this sentiment when he dashed off an index card with nine easy rules about personal finance. It got nearly half a million hits on Pollack’s blog; The Washington Post picked it up; also:
POLLACK: Boing Boing, which I’d never heard of actually. Lifehacker, which I also had never heard of. A bunch of these websites that actually have big followings — that I’m too old to be in the target demographic — for really grabbed it.
The card was translated into Romanian.
POLLACK: Which is great. I hope that people in Romania find it useful. I’m not sure that they have 401(k)’s there. I suspect we’d have to modify it a little bit. It just started showing up all over the place. In fact, there was a guy who plagiarized it. I found a YouTube video, of some life coach who just wrote out his own card. It was word-for-word exactly what I wrote and he spoke it as if he had made it up.
YOUTUBE CLIP: And that’s all the financial advice you’re ever going to need written on this index card.
POLLACK: It was hilarious to listen to because he actually has a great voice, but he had completely stolen the idea. There was just something about it for a lot of people. All of us are facing this very intimidating task: “How do I save for retirement? Where to invest my money? How do I deal with all these questions about budgeting and when to buy a house and all that stuff.” “Oh, I just have to look at these nine rules on this card.”
Pollack never pretended that he’d discovered some amazing new rules of financial behavior.
POLLACK: When my colleagues at the business school saw this and they saw what these rules were, they were just like, “You’re kidding.”
But that didn’t stop him from turning his index card into a book, co-authored with the journalist Helaine Olen. It’s called, yes, The Index Card: Why Personal Finance Doesn’t Have to Be Complicated.
POLLACK: Of course, it’s ironic that I say, “Here’s this index card. That’s what you need.” Then people are saying, “Well, why is there a book?” In some sense, you could say all of religion comes down to the Ten Commandments, but a lot of us seem to need some commentary on those, need to know how to execute those. Or depending on your religious faith — I sometimes refer to the book as the Midrash to our index card for your Jewish listeners.
And, for our non-Jewish listeners: a Midrash is rabbinic commentary or teaching on a biblical text — not quite a canonical passage, but revered nonetheless. That’s kind of what Pollack was going for with The Index Card book. Okay, so what’s in it? Let’s start with Rule No. 1:
POLLACK: Rule No. 1: strive to save 10 to 20 percent of your income.
Because — well, if you aren’t saving any money, then everything else is a lot harder.
POLLACK: One of the great things is once you start to save this money it really reduces the stress in your life so amazingly fast. I must say that my original card said, “You should save 20 percent of your income.” That’s really hard. I got a bunch of emails that were essentially in the following form: “Dear Professor Pollack: I’m a 28-year-old single mom and I work as a cashier. You have just told me to save 20 percent of my money. Fuck you!”
My responses to all of those emails was, “You know what? You’re totally right. I totally see where you’re coming from. At this stage in your life, you cannot save 20 percent of your gross income.” When you’re at that stage, how can you manage your credit card debt? How can you save something? How can you start getting yourself on a good budget? You’re doing that, you’re doing really well. My original card was really good for middle class people like me. It wasn’t quite as good for people that were at different stages in their life.
I was brought to some humility by the large audience that I inadvertently attracted.
Rule No. 2:
POLLACK: Rule No. 2: pay your credit card balance in full every month.
How important is this one?
POLLACK: This may be the most important single rule on the card for a lot of people. If you’re carrying a credit card balance, every dollar that you pay down on that, you’re getting a risk free, tax free return that’s usually more than 15 percent.
Because that’s roughly how much you’re paying the credit card company for the privilege of using their money.
POLLACK: Unless your name is Warren Buffett, you’re just not going to get that investment from anything else that you’re doing. Credit cards and other forms of high-interest loans are just a really serious trap for a lot of people.
One problem is that credit card companies are savvy — and they can make you feel like you’re doing a great job just by paying off what they call the monthly minimum. You are doing a great job — for them. Because they’re collecting all that interest from you. Pollack warns us to beware of any deal that offers to help you smooth out your cash flow.
POLLACK: If you belong to a gym and they say you can pay $500 upfront for the year or you can make 12 equal $50 payments.
If you choose that payment plan, the cost of your membership is now $600. Therefore, whenever possible:
POLLACK: You try to use cash as much as you can and you pay off your credit card. By the way, one of the things that I recommend to people is basically ignore your credit card reward program. All the research suggests that that these reward programs just make you spend more money.
Rule No. 3?
POLLACK: Rule No. 3: max out your 401(k) and other tax-advantaged savings accounts.
A typical 401(k) is a retirement plan run by your employer. But there are a lot of options, including for self-employed people.
POLLACK: There are several reasons why your 401(k) or your equivalent is just the foundation of your saving. First of all, very often your employer will kick in a matching contribution, and that is free money. You can also set up your 401(k) contributions to be automatic, so you never have to touch the money.
There are other tax-advantaged savings vehicles.
POLLACK: For example, there are two things that people can do to save money for their kids college that have tremendous tax advantages. One is called an E.S.A. and I won’t go into the details, but the second account is called the 529. The 529 actually allows you, if you have a little bit more money or you have a large family that wants to contribute, you can actually put in up to $14,000 a year.
Pollack works hard to not bring politics into his financial advice but as soon as you get into tax-advantaged savings plans, you’re getting into politics. Because these tax breaks don’t just happen. Someone in Washington had to draw up a plan that was meant to reward some kind of behavior — in the case of 401(k)s and 529s, that’s saving for retirement and college, respectively. But the tax code is full of breaks — many of which, some people argue, tend to help well-off people become even better off. The home-mortgage interest deduction, for instance. So what are you supposed to do if you think the tax code is unfair? Well, unless you’ve got some friends on the House Ways and Means Committee or the Senate Finance Committee — they’re the people who write the tax code — maybe the best advice is to simply work hard to exploit the existing tax breaks. Sure, you can complain that “the tax code favors rich people.” Or you could say, “Hey, using the tax code to my advantage could help me become rich.” All right, moving on to:
POLLACK: Rule No. 4: never buy or sell individual stocks.
POLLACK: Rule No. 5: buy inexpensive, well-diversified index mutual funds and exchange-traded funds.
We actually spent our previous episode going over this idea in some detail. Bottom line: most people who pick stocks for a living do a worse job than a monkey with a dart board — and they charge you a lot more than a monkey would. How much? Enough to fund their beautiful offices, and homes, and boats — even though, again, your investment returns will likely be worse than if you just bought, as Harold Pollack notes, some low-cost, diversified index funds.
POLLACK: This is a completely easy one. There’s just a ton of literature that suggests that people chase after shiny objects and the stocks that we buy aren’t particularly well-chosen. The stocks that we sell, we’re often selling them at the wrong times. Why do you want to get into that?
We also spoke last week with John Bogle, the founder of Vanguard, the world’s largest universe of low-cost index funds. Here’s how Bogle summarizes the appeal of what Pollack is preaching:
BOGLE: You want to capitalize on the magic of compounding returns without succumbing to the tyranny of compounding costs.
But that “tyranny of compounding costs” can be hard to resist — because the people who sell investment advice are really good at selling it. They make you believe they alone know the secrets to the investing universe. They do it in TV commercials like this one:
FINANCE FIRM’S COMMERCIAL: We understand the challenges of a complex global economy …
Pollack’s advice: do not heed the siren call of slick, fancy, expensive investment advisors. For what it’s worth, this has become quite standard advice; and it’s backed up by acres of research. That research also suggests that, for the average investor, diversification is a good idea. A few different types of stock-index funds — growth, value, international, etc. — and also some bond funds and maybe some other, less sexy investments.
POLLACK: You want to have the right percentage of your investments in stocks and in the other classes that you invest in. If the stock market drops 20 percent you should be buying stocks after that not because you think the market’s now undervalued or anything like that but just because the percentage of your portfolio that is in stocks is now below where you want it to be.
BOGLE: I like the idea of a little balance in your asset allocation.
Jack Bogle again:
BOGLE: For the youngest investors, when you first start obviously, you should be 100 percent in stocks. But as you build up a little assets maybe by the time you’re 25 or 30 you’re probably going to want to be 15-20 percent in bond funds, and 85 percent in stock funds. As you get older, you’re going to probably want more in bond funds and less in stock funds because the fear of loss is going to be greater when you have a very large amount of money.
Obviously it can be really hard for the average person to take in and execute all this investment advice on their own. So you might consider hiring a financial advisor. But not just any financial advisor, Pollack says:
POLLACK: Rule No. 6: make your financial advisor commit to the fiduciary standard.
The fiduciary standard is a federal requirement designed to ensure that financial advisors don’t sell clients products that are better for the advisors than for the clients.
POLLACK: It basically says: “All the advice that you’re giving me and all the products that you’re offering me are designed to maximize my own financial well-being. You’re not being paid by anybody except me. I understand in a transparent way your financial incentives.” If you don’t have the fiduciary standard, it’s a little bit like walking down to the Ford lot and saying, “Do you think I need a new car yet or do you think I should keep driving the old one for another couple of years?” There was a wonderful study done by some researchers at Harvard where they just sent out actors who had different kinds of retirement savings. They would go into storefront financial firms and they would just say, “Hey, here’s what we’re doing. Tell us if we should do something different.” Some of them had crazy investments that were all in the stock in their employer. Some of them had absolutely excellent investments that have been designed by financial professionals in low-cost index funds and things like that. The ones that had excellent investments, the majority of the financial advisers they talked to recommended that they actually not do that, that they do something that is essentially a more expensive imitation of that.
This is not meant to besmirch the reputation of all financial advisors. It’s also worth noting that sometimes, it may be the advisors who try to keep their clients on the right track.
Barry RITHOLTZ: We get paid a percentage of assets.
Barry Ritholtz writes about investing but also runs an asset-management firm.
RITHOLTZ: The more assets we gather and the better those assets perform, the more revenue the firm sees.
Ritholtz has instituted a clever incentive to address his clients’ investing behavior.
RITHOLTZ: If people maintain a portfolio for three years and don’t do anything foolish with it — and there’s a constant temptation to do something foolish — we will discount our fees an additional 15 percent as a good reward for good behavior. The thinking is, left to their own devices, after three years people get bored, especially in a market like we’ve seen over the past few years. So they start looking for a little fun, a little action, and, “Hey, maybe we should roll out of this long-term conservative portfolio and start dabbling in I.P.O.s and venture capital.” We want to discourage that behavior.
All right, moving on — to the single-biggest expenditure most of us will ever think about.
POLLACK: Rule No. 7: buy a home when you are financially ready.
Okay, so let’s pull that apart — the “buying a home” piece and the “financially ready” piece.
POLLACK: We should think of our home as something that we use and consume and something that helps us with our life, not as the major pillar of our wealth. We’ve been conditioned from birth to believe that you’re not a full adult until you own a home. You have to be careful about that.
Your home is the most leveraged and undiversified investment you’re ever going make in your life. You don’t want to rush into buying a home and you want to buy a home in a very sensible way.
“Sensible” meaning what?
POLLACK: That means when you have a nice 20 percent down payment, which lets you get good terms on your loan. It means getting a vanilla-ice-cream-fixed-rate 15-year or 30-year loan, rather than to try to do something like an adjustable-rate mortgage. It means buying a home that you can afford and still have a strategic reserve if you move in and your hot water heater breaks or a raccoon eats its way through your roof or all the things that can happen to a home.
Buying a home also represents what economists call a “commitment device” — it’s a way to lock yourself into a behavior you need some help getting locked into. In this case, your mortgage payment is a forced savings plan. Pollack sees the value in this thinking — but the lock, he says, can be fairly flimsy.
POLLACK: A home is a good commitment device although it’s a less effective commitment device than it once was because of home-equity loans. Home-equity loans used to be called second mortgages. There was a certain stigma to getting them. They were not common. One of the challenges we discovered in the foreclosure crisis was there was a lot of people that were trying to dip into their home equity. When their value of their home dropped, boy, that could really blow up on you. If you’re going to use it as a commitment device you have to actually commit to it and not try to dip into your home equity in various ways. That’s, “buy a home when you’re financially ready.”
Rule No. 8?
POLLACK: Rule No. 8: insurance. Make sure you’re protected.
Ah, insurance! So many types, so much pressure and fear. Honestly, that’s a topic for a whole other episode some day. Maybe we’ll get to that. But for now, here’s Pollack’s thumbnail take:
POLLACK: The purpose of insurance is to make sure that you are protected if you have a life-changing event. You don’t need insurance for the $500 problem when somebody hits a baseball through your kitchen window. You do need insurance when the tree falls, there’s a $50,000 problem and your whole kitchen gets taken out. You need life insurance in case the people that depend on you need you after you die. You need liability insurance when you’re driving. You need to make sure that your life wouldn’t change if there was some adverse event. One of the things that we advise people in general is get the largest deductible that you can. You want the homeowner’s insurance with the $5,000 deductible if you can get it. First of all, it costs money for the insurer to honor all these smaller claims. You don’t want to be having to pay for that. But secondly, the people who get the high-deductible insurance are the people who know that they’re pretty unlikely to use their insurance. You’re putting yourself in an insurance pool that’s likely to be more favorable than the ones with the low deductibles. Insurance is important to guard against the big things, not the little things.
Pollack’s next rule, he admits, is in a different category than the others. It is not actually about personal finance.
POLLACK: Rule No. 9: do what you can to support the social safety net.
Pollack has heard from a lot of people who don’t like Rule No. 9:
POLLACK: They said, “You’re giving all this sensible investment advice and then you got all political on me.”
But Pollack thought it was essential to include this, for a few reasons.
POLLACK: One is there’s a lot of people who need help. Secondly, to the extent that my story is a part of our book, it would not be fully honest if I left off Rule No. 9. At the beginning of our conversation I talked about how my brother-in-law Vincent moved into our home and what a challenge that was because of his intellectual disability and his medical challenges. We would have absolutely gone bankrupt without his Social Security, Medicare, and Medicaid that prevented our family from losing everything taking care of him. We have to have each other’s backs. What the social safety net does, what social insurance does, is it is it allows us to protect each other against these risks that would just crush any one of us if we had to face it alone. It’s really important. As individuals we should we should do everything that we can to be prudent investors and to support ourselves and our families and to follow the rules that I’ve laid out. But you cannot guard against everything in life. I don’t particularly enjoy paying my taxes on April 15th, but I do feel that the American taxpayer had my back when I had a crisis. And you know I should be doing the same thing for other people.
As you may recall, Harold Pollack’s index card had nine rules. But his and Helaine Olen’s book, called The Index Card, has 10.
POLLACK: Rule No. 10: remember the index card.
Okay, admittedly, this one is kind of meta.
POLLACK: The idea here is we hope that this card is helpful. Take it out, put it on the refrigerator. It’s a reminder.
A lot of recent social-science research suggests that reminders like this, nudges like this, are pretty effective. Also: one reason people often fail to make good decisions — financial or otherwise — is because those decisions are too complicated or intimidating. So: simplicity is a thing to strive for. And to value. Will a simplified choice always lead to optimal outcomes? Of course not. But will it generally produce a better outcome than either avoiding the problem or doing something really stupid? Yes, it will. Experience is also pretty valuable; I guess that goes without saying. So to conclude this primer on personal finance, maybe it makes sense to hear a bit more from the most experienced investor I know — Vanguard founder Jack Bogle.
BOGLE: At almost 88 years old, I might be the most blessed man in the United States of America.
Bogle’s longevity was not preordained.
BOGLE In 1960, I had my first heart attack. I was only 31 years old, had it on a tennis court. I almost died. I had a disease that had never been discovered. It was finally discovered years later in France. But I was a mystery man and the doctors looked at me funny. When I got a pacemaker inserted, one doctor said to me, “You really probably don’t have that much time left. Why don’t you go up to the Cape and just walk out on the beaches every day. Take it easy, enjoy the remaining time on this earth.”
Bogle did not follow that doctor’s advice. A few decades later, he did need a heart transplant.
BOGLE: The transplant took place 21 years ago. I’ve broken a lot of records for anybody 65 years of age who gets a transplant. Not many 65-year-olds get 21 extra years.
DUBNER: Let’s hear your quick advice for a primer on personal finances. Aside from investing in index funds— we know you’re going to advocate that. But it sounds like you’ve got a personal philosophy in terms of personal finance as well, yeah?
BOGLE: It’s pretty simple: avoid emotions and concentrate on the economics. Invest for the long term and don’t trade. The ups and downs of the markets are unpredictable and foolish in the short term.
DUBNER: You say that as someone who’s successful at avoiding emotions, but you have to know that most people aren’t whether we’re talking about investing or saving versus spending or politics or whatever. How did you either get to be the rational thinker that you are, or how do you advise people move in that direction? Because plainly it’s not so easy for most people.
BOGLE: No. Let me be honest. It’s not easy for me. When we get one of these 50 percent declines, I’ve faced three of them in my career. It’s not fun. I get a knot in my stomach. A lifetime of experience, 65 years of experience in this field, has taught me that emotions are evil and therefore you really ought to fight to keep them out of the equation. Because the day you are most concerned is the day the market hits bottom and that’s the day you want to get out. Tthe day you will want to get in when the market it’s a new high. Well, believe me, buying in at the market’s new high and selling out at the market’s bottom is a very difficult way to make money.
DUBNER: What about spending versus saving? How would you counsel someone to think about that?
BOGLE: Well, every family is different. Given the unequal distribution of income, 20 percent of the families can’t possibly invest. They’re trying to stay alive, keep the wolf from the door, keep the children fed and housed and warm. When you get well up the scale of living, you’re able to afford more. People should pay themselves first out of every paycheck and have a contribution to a pension plan and just keep putting it away. Don’t even look at it. Don’t peek! When you open your envelope when you’re age 65 and are retired, be sure and you have a good cardiologist with you because you’re going to faint.
DUBNER: Faint with happiness, not with shock.
BOGLE: Faint with happiness, right. You won’t believe it!
Believe it! And: if you still have questions about your personal finances, there’s good news: Harold Pollack will be answering your questions during a one-hour Facebook Live event we’re hosting, on Wednesday, August 9th, at 2 pm Eastern Time. You can post your questions on the Freakonomics Facebook page, or email them to firstname.lastname@example.org with the subject line “Personal Finance.”
Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rosalsky. Our staff also includes Alison Hockenberry, Stephanie Tam, Merritt Jacob, Eliza Lambert, Emma Morgenstern, Harry Huggins and Brian Gutierrez; we had help this week from Sam Bair. Most of the music in this episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts. You can also find us on Twitter, Facebook, or via e-mail at email@example.com.
Here’s where you can learn more about the people and ideas in this episode:
John Bogle, founder of The Vanguard Group.
Annamaria Lusardi, chair of economics and accountancy at George Washington University.
Harold Pollack, professor of social service administration at The University of Chicago.
Barry Ritholtz, co-founder and C.I.O. of Ritholtz Wealth Management.
“Bankruptcy Rates among N.F.L. Players with Short-Lived Income Spikes,” Kyle Carlson, Joshua Kim, Annamaria Lusardi, and Colin Camerer (May, 2015).
“The Behavior of Individual Investors,” The Handbook of the Economics of Finance, Brad Barber and Terrance Odean (North Holland, 2013).
“The Best Investing Advice has Always Been Too Boring for TV,” Harold Pollack, The Atlantic (January 7, 2016).
“Efficient Capital Markets: A Review of Theory and Empirical Work,” Eugene Fama (May, 1970).
“Financial Literacy and Retirement Prepared-ness: Evidence and Implications for Financial Education,” Annamaria Lusardi and Olivia Mitchell (January, 2007).
The Index Card: Why Personal Finance Doesn’t Have to Be Complicated by Helaine Olen and Harold Pollack (Portfolio, 2017).
“Luck Versus Skill in the Cross-Section of Mutual Fund Returns,” Eugene Fama and Kenneth French (October, 2010).
“The Market for Financial Advice: An Audit Study,” Sendhil Mullainathan, Markus Nöth, and Antoinette Schoar (April, 2011).
“Morningstar’s Active/Passive Barometer,” Ben Johnson, Thomas Boccellari, Alex Bryan, and Michael Rawson (June, 2015).
Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen (Portfolio, 2013).
“The Professor, the Student, and the Index Fund,” John Bogle, The Bogle eBlog (September 4, 2011).
“A Random Walk Down Wall Street: The Time-Tested Strategies for Successful Investing,” Burton Malkiel (W. W. Norton & Company, 2016).
Global Financial Literacy Excellence Center.
“What do Hand Washing and Financial Illiteracy have in Common?” Freakonomics Radio (January 20, 2012).
Accents are truly fascinating. Put simply, they are how a person sounds when they talk. From England to America and all over the world, the way people speak in their native tongue can vary drastically. What are the influences? When do accents begin to take hold? Can you lose or gain an accent? Learn about all this and more in today’s decidedly interesting episode.
SE-Radio Episode 280: Gerald Weinberg on Bugs Errors and Software Quality : Software Engineering Radio
SE-Radio Episode 280: Gerald Weinberg on Bugs Errors and Software Quality
Filed in Episodes
on January 24, 2017
• 2 Comments
Marcus Blankenship talks with Gerald Weinberg about software errors, the fallacy of perfection, how languages and process can reduce errors, and the attitude great programmers have about their work. Gerald’s new book, Errors: Bugs, Boo-boos, and Blunders, focuses on why programmers make errors, how teams can improve their software, and how management should think of and discuss errors. We learn why all programs are perfect (for something), quality can be judged only by the end user of the software, and computers act as “error amplifiers” for our own human imperfections.
Meaningful categorization of novice programmer errors https://www.computer.org/csdl/proceedings/fie/2014/3922/00/07044420-abs.html
Are these bugs really “Normal”? https://www.computer.org/csdl/proceedings/msr/2015/5594/00/5594a258-abs.html
Jerry’s book: Errors: Bugs, Boo-boos, and Blunders https://leanpub.com/errors
Jerry Weinberg’s homepage http://www.geraldmweinberg.com/Site/Home.html
Jon Jagger’s discussion of Jerry’s books http://jonjagger.blogspot.com.au/p/jerry-weinberg.html
Markus Gardner’s discussion of Jerry’s books and ideas http://www.shino.de/2013/03/03/2352/
http://traffic.libsyn.com/seradio/SE-Radio-Episode-280-Gerald-Weinberg-on-Bugs-Errors-and-Software-Quality.mp3Podcast: Play in new window | DownloadSubscribe: iTunes | Android | RSS
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