…I wrote a piece entitled ‘My Case for Home Ownership’ in which I report on real estate affordability in the Portland-Metro region.

…I wrote a piece about the neuroeconomics and why our emotions and instincts often cause us to make poor financial decisions.

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The reality is that most households know they should spend less than they make so that they can save for future needs (i.e. retirement, rainy day fund, etc.).  Furthermore, most households have a desire to put their financial lives in order.  The problem is not knowledge it is pschological.  As Jason Zweig points out in his book “Your Money & Your Brain” the human brain has evolved over millions of years and only in very recent history has it been exposed to rational, analytical reasoning.  It’s no wonder that despite our understanding of concepts it is still very difficult for us to put theory into practice.  Here is an excerpt:

“…our investing brains often drive us to do things that make no logical sense-but make perfect emotional sense….Our brains were originally designed to get more of whatever would improve our odds of survival and to avoid whatever would worsen the odds.  Emotional circuits deep in our brains make us instinctively crave whatever feels likely to be rewarding- and shun whatever seems liable to be risky….That’s why knowing the right answer, and doing the right thing, are very different.“

I look forward to completing this book and gaining a greater understanding of the biology of how decisions are made.  I plan to share other thoughts and excerpts over the course of the next few weeks so please stay tuned.  If you have any interesting thoughts or resources to share on this subject please do so below in the comment section.

Lewis Lapham

His latest issue is entitled “Lines of Work” and deals with employment.  In Lewis’s opening essay he survey’s the US’s historical connection to employment and raises a very interesting point about employment and debt that I had never thought about before.  I thought I would blog about it today in case you wanted something to ponder over the weekend.

Here’s the excerpt:

“…somewhere in the middle of the 1980s on the yellow brick road with Toto and the Gipper… was easy access to conspicuous credit.  For how else could the American Leaves of grass join their top-dressed companions on a golf course unless they borrowed money?  The country’s working and middle classes discovered that it wasn’t the value of the work itself, or its manufacture of a decent living…that made up the sum of a country’s wealth and well-being.  Their great collective enterprise was the labor of consumption, and with it the derivative of debt…”

Leading up to this point in the essay Lewis had painted the US’s connection to work & employment much like the “protestant work ethic” you might imagine.  When American’s wanted something they worked long & hard, saved their money, and eventually purchased that house (if they didn’t build it with their own 2 hands) or car or ________.  In this instance the workers labor & unemployment was a direct means to an end.

But in the 1980s US workers now had the option to work for years and years and years OR purchase that item today using credit and then pay for it over time..  My question is, did the onslaught of widely available credit in our culture create a disconnect between our labor & consumption?

I’d love to hear your comments below.

I just started a new book by Yuval Bar-Or entitled Play to Prosper.  I had blogged about Dr. Bar-Or back November HERE.  He is an expert in decision-making in the context of risk and caught my attention because of my interest in the role emotion plays in how we make economic decisions.  His new book is a guide for individual investors to navigate the complicated world of investing.  In his writing he uses sport & games as analogies for explaining the different roles that individuals play in the world of finance.

In the first few chapters he stresses the importance of engaging professionals who are upheld to a fiduciary standard.

“The key is to find those coaches who are fiduciaries, meaning that they have a legal obligation to place your priorities ahead of their own.”

I am proud to mention here that as a CFP® I am required to act in this manner.

Recently it’s become apparent to me that most individual investors believe that financial planners are synonymous with investment advisers.  However, this is not the case, only a minority of investment advisers carry the CFP® designation.  Furthermore, most do not want to spend the time planning.  This book provides a nice summary of the role of a financial planner:

“Financial Planners take a comprehensive view of the client’s financial situation and develop a plan to achieve the client’s intended overall objectives.  Rather than focusing only on investing, their advice may encompass investments, insurance products, educational trusts and, in some cases, taxation and wills.  (They provide a game plan, but don;t execute it).“

I should point out that some planners do execute the plan but often they do not require the client to do so with them.

“The Big Short” deals with the collapse of the subprime mortgage-backed bond market so as NPR’s Jacob Goldstein points out he basically wrote books about the alpha and omega.  Although this topic may sound dry and boring Lewis writes in a narrative style and does a great job of capturing the culture of Wall Street then and now.  Lewis himself claims in the interview that he doesn’t like writing about money but instead likes writing about subjects which offer an insight into the social culture of a specific time and place.

I have too many notes to list in this post but I highly recommend the book.

Here are just a few excerpts that I’ll share:

*Quoting a financial professional: “…Any business where you can sell a product and make money without having to worry how the product performs is going to attract sleazy people.”

*A hedge fund manager pontificating on Buffett (had to include this quote): “At one point I recognized that Warren Buffett…did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules…I also immediately internalized the idea that no school could teach someone how to be a great investor.”

*A recount of the madness: “In Bakersfield, California,  a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000.”

*Monetary losses caused by the sumprime era: “…the International Monetary Fund…out losses on US-originated subprime-related assets at a trillion dollars.” (Keep in mind that this was not the amount of the underlying mortgages.  This tally got so high because investment banks were selling Credit Default Swaps and other derivatives that were effectively bets on how the underlying mortgages would perform.)

• You can get everything from pad thai to a fried pie in one of the hundreds of food carts that have taken over empty parking lots downtown.
• “This seems to be a mecca for the misplaced half-cast rock-and-rollers,” Gardiner says. “A lot of half-rican, halfie, half-black, half-white rockers out here and metal heads and punk rockers. I like that a lot. It seems to be that I chose the correct place to come if this is where we’re all flocking to.”

• Twenty years ago, the percent of people with college degrees in Portland was lower than the national average. Now, it’s more than 10 points higher — about 40 percent. (does this seem contradictory to the previous bullet point?)

Too bad there isn’t any mention about significant job growth.

If you get a moment I would highly recommend reading this article.  This could change the face of manufacturing as we know it today.  And, to tie it into the theme of this blog this could have huge implications for reducing inflationary pressure by cutting the cost of manufacturing goods.  Good article Economist!