Acting and Reacting

Is the world getting safer or more dangerous? Data about crime, wars and accidental deaths indicate that life this century is much safer than it was in the past. These events are very noticeable and easily measured. On the other hand, we often ignore or excuse less immediate dangers that arise as our interactions with the world become more complex.

As I have been describing behavioral examples of errors in the five key dimensions over the last 10 years, it becomes clearer that much of the human race is still attacking twenty-first century problems with cave-man level of skills. Just as the hunter-gatherers required immediate reactions to survive, when they heard a rustling in the bushes that may or may not be a snake or predator, humans retained those instincts, following a course of acting first and analyzing later. 

Likewise the practice of not trusting or even attacking people from a different tribe or with a different belief system carries over today in many forms. “My god is better than your god” is not necessarily ancient grounds for confrontation. It happens in a modified form daily on social media.

These instant reactions and mini-superstitions come to us immediately, before we have a chance to engage our critical thinking. Thus critical thinking is often omitted from our decision process, used only to justify or rationalize actions after the fact.

Several recent books describe this psychological phenomenon in detail: Thinking, Fast and Slow by Daniel Kahneman; Nudge, by Thaler and Sunstein; and The Power of Habit by Charles Duhigg are among them. They tell how, as humans evolved, we developed mechanisms to be able to make quick decisions in times of panic or emergency. We react instantly, responding to emotional triggers often before we are aware of them. We are more comfortable following our established patterns of behavior. These programmed, intuitive reactions saved our ancestors, but they serve us poorly today.

That explains in part the need for COVID-19 bail out packages. According to Market Watch: “A shocking number of Americans are living paycheck to paycheck.” One survey says it’s at least half, another estimates 74%, as “one in four families making $150,000 a year or more are living paycheck-to-paycheck” and three in ten families having no emergency savings. No wonder it’s a crisis! The article says people are struggling.

This problem keeps coming up year after year, yet there is no change. 

Apparently what people need is something called financial literacy. An article in Ideas.TED from late last year asks: How financially literate are you?” and tells “3 things you should know about your money.” These three things are not close to rocket science: knowing how much money is coming in vs. how much you are spending; knowing your credit score and knowing how much credit card debt you have. Do we really need seminars and newsletters to teach people how to spend less than they earn to have a little left over at the end of the pay period or to read a credit card bill? These are third-grade skills.

Don’t blame it on credit cards or the eagerness of banks to lend customers more money than they can afford to borrow. These excuses are a cop-out. But this problem arose only in the last half-century or so. The world gets increasingly complex while we still try to cope using our cave-man instincts, act now and analyze later.

Critical thinking does not come naturally. It’s hard work and can sometimes be unpleasant. But it’s increasingly needed to keep up with the new products and services that technology throws at us at an ever-accelerating pace.

No Magic Money Tree

For years I have been patiently explaining how unbelievable it is that people go through life putting their faith in some magic money tree to take care of their problems. They spend instead of save, then stress about the cost of education and retirement. They expect a lifeline to bail them out – money off some magic tree. Buy now, pay later, and don’t worry about the consequences, just continue to borrow and play the lottery.

As the government increases spending, it makes no impression on them except to feel good that some people are getting more goods and services for free. If a big business is fined or sued, people assume there is some invisible bank account to cover the expenses. (Maybe the CEO will take a pay cut.) Americans fail to see the unbreakable link, either direct or indirect, between these expenditures and their own wallets.

Here are the facts. There is NO magic money tree! The money always comes from somewhere, and that always has ramifications for every single citizen: higher prices, higher taxes, a sluggish economy or a bigger share of the National Debt. The poor are usually disproportionately hurt.

When the business gets an unexpected expense, they raise prices and pass it along to their customers. This is easy when it’s due to a new government regulation that affects the entire industry. No one has an advantage, and everyone’s prices go up to cover the added cost. If it affects only one company and raising prices makes them non-competitive, they risk going out of business or downsizing, and people lose jobs.

When the government increases spending, it comes from taxes and debt. For many years lawmakers seem to have more interest in using some combination of lower taxes and increased spending to buy votes than in acting responsibly. (In fact, they characterize a lower than expected increase as a “cut.”) This has pushed the National Debt to unimaginable levels, currently over $26 trillion. Now Congress is fighting with the President over whether to spend $3 trillion or only $1 trillion on another emergency COVID package! Where do they think that money is coming from? 

The debt, in the form of government bonds is interest-only. Payments do not lower what is owed. Growing debt leads to more interest, which holds back economic growth. Fiscal irresponsibility can lead to inflation, which also affects everyone.

Many economists tell us not to worry, despite what happened to Greece in the recent past when their debt got out of hand. In 2017, years after the initial crisis, its economy grew by only 1.4% with unemployment around 22% and one-third of the population living below the poverty line. The EU bailed them out to some degree, but there is no entity big enough to bail out the US.

It’s a simple matter of critical thinking to understand that this issue is going to become a crisis some day, but as the problem grows, no one seems concerned. Behavior has not changed. Politicians still win elections by promising more spending and programs. Even numbers in the trillions get a ho-hum response. 

Everyone must assume there is some magic money tree somewhere; but there isn’t. 

Buy Now, Pay (or regret) Later

Usually on Black Friday I write about perspective – that any deal on electronics is not worth the life of the person trampled in the stampede. Another aspect of perspective is appreciating what we have and not constantly yearning after more or bigger or newer. The problem is that understanding the difference between wants and needs is only a first step. It must be followed by the discipline not to ignore reality by buying something anyway, especially something you can’t afford.

What seems to be catching on today is a new gimmick called point-of-sale installment loans. “This holiday season, it's not enough to spot a great Black Friday deal on a big screen TV or a sweater. You need to consider whether you want to take out a loan at the checkout, too.” 

That’s right; shoppers no longer need to go to a bank for a loan to buy something they can’t pay for. An installment loan at checkout breaks the cash register receipt into a number of easy monthly payments. That service is now available at Wal-Mart and at many other retailers, both brick-and-mortar and on line. And installment loans are expected to be “hot this holiday season, as retailers attempt to drive sales and shoppers demand easy-to-understand credit.” Retailers are partnering with finance companies to give shoppers these loans, even to people who might not qualify for regular credit cards. Instead of paying at the time of purchase, shoppers can take the items home and pay in 3, 6 or 12 monthly payments.

This is not a new idea, but was usually limited to big-ticket items. Furniture stores have used it for years. The problem is that the eventual monthly payments add up to more than the original price – sometimes 20% or 30% more. 

Not paying cash at checkout is not new either. Credit cards made that possible years ago, and both arrangements involve interest. But shoppers generally ignore the interest in light of the convenience and recognize some advantages over credit cards. Installment loans have no late payment fees, which are a big revenue source for credit card companies, and people tend to like the idea of a predictable, fixed amount each month.

It really is the same idea as a mortgage or car payment, but now the idea is moving downstream to less expensive purchases. Another source says installment plans have a “wide appeal but resonates most strongly for debit users. Four-in-ten would consider using an installment plan for everyday purchases like groceries and household items.”

An American Banker article has another explanation for the trend; “many younger Americans are uncomfortable carrying credit card balances, partly because they saw their parents struggle with debt during the financial crisis and prefer the more certain repayment terms of installment loans.”

This brings up a few issues. First, the financial problems of the parents of younger Americans were not the fault of the credit card. They were problems of discipline and perspective. Going into debt in a different way is no guarantee of success. Since installment plans have no late fee, what do they do instead, send debt collectors or repossess the sweaters and Christmas toys? (This is not addressed in any of the stories.)

In effect, this is just another marketing ploy to get people to spend money they don’t have. The example in one of the articles was of a woman who bought tires from Wal-Mart. She was all right with paying the $644 in three monthly payments of $224, but she “doesn't remember the interest rate.” (It’s about 18% APR.) In this case, tires were probably a necessity, but sweaters, purses and toys?

All this is happening while U.S. household debt, according to Motely Fool, reached $13.54 trillion earlier this year, “an amount that has risen for 18 consecutive quarters.” 

Wake up America; debt is debt! Have a happy Black Friday, but don’t do anything foolish.

Where the Money Goes

An email arrived last week in my inbox that I had trouble believing. If it had not come from a company I was already doing business with, I’d have sent it straight into the spam bin.

The email was from one of my credit card companies suggesting that I “make tax season a little brighter. Simply use your [credit card] to pay for your federal or state payments online and you’ll be rewarded.¹^,² Not only is the process fast and secure, you’ll earn valuable points you can redeem for travel, gifts and more." (Footnotes say that only some states accept credit card payment and that additional fees may apply.)

There was a time when financial advisors would urge, even beg, people to use their tax refunds to pay down their high interest credit card debt. Now we get the opposite; pay the taxes on time with the credit card, so instead of paying interest and penalties to the government for late payments, we open up the possibility of paying interest and penalties to the card company. This seemed pretty crazy until I noticed some of the other financial decisions happening across the country.

This recent USA Today piece tells a scary story. Many Americans have gotten into the habit of ignoring the total price of things they buy. If they believe they can fit the monthly payments into their budgets, they go ahead with no consideration of overall cost, including interest on the loan. 

The particular example here is car buying. In one expert’s opinion, "Easy credit and longer repayment terms have coaxed many consumers into buying more car than they can really afford," causing car debt to reach an all time high of $1.2 trillion. 

One banker remarked that his company limits auto loans to 72 months, but some competitors offer 84-month loans. That seems a little strange as the average length of car ownership hovers around 80 months. It’s more like renting a car than really owning one (and owing more than it’s worth for almost the entire time). But this mindset is to look at the monthly payment, to ignore the regularly increasing interest rates and to buy as much car as fits the budget. So people can be easily drawn to the midsize SUV rather than a midsize car with a price difference of almost $13,000, just increase the length of the loan.  Meanwhile GM is forced to close a small car assembly plant in Ohio due to fewer buyers. (Then the price of gasoline goes up, and everyone  starts complaining! Whoops, behavior has consequences.)

What most don’t realize at the time of purchase is that the car is collateral for the loan. One downturn in the economy or one temporary job loss for any other reason could mean losing the car no matter how faithfully payments were made up to that point. An example from the article tells of a 26-year-old, who lost her job at as a legal researcher and was unemployed for two months. She went into default and her 2010 Chevrolet Equinox was repossessed. That is not an isolated case. “More than 7 million Americans are now at least three months delinquent on their auto loan payments, the benchmark for many lenders to trigger a repossession.”

The behavior continues. Credit cards offer deals to help you earn “valuable” points, while banks and finance companies offer longer and longer loan durations to keep payments down (and their profits up). Everyone thinks in terms of installments rather than total cost. When the shocking news comes that you can’t buy a retirement on those same terms, it’s too late. The consequences of poor economic understanding coupled with poor critical thinking will be devastating. Everyone will be looking to the government for a bailout, a government with the same attitude of buying now and borrowing to make up the difference with no concern about the future.

My Credit Card Pays Better Interest than My Bank!

Here is an odd realization.  My credit card actually gives me a better interest rate than my bank.

“How can that be?” the crowd will scream.  Everyone is always complaining about high interest rates on credit cards.  They currently average around 16.1% and some are much higher!  Not only that, but if you make a minimum payment or even a partial payment, the interest applies not only to what is left after the payment, but to the entire amount you owed them before the payment.  It takes many years to pay off a credit card if you pay just the minimum, even if you never use it again.  Typical advice from financial advisors and planners is to pay off your highest interest debt first, and that is invariably credit card debt.

This high interest seems like a scheme for banks to make more money, but it is partially due to the need to cover the risk they face when lending money, which a credit card is.  Some of those people will default on their debt and never pay them back.  The default rate on credit cards is up this year, but usually hovers around 3%.  That’s 3% of people who walk away from their debt leaving the banks holding the bag.  They charge the high-risk people more because they are more likely to default, but they charge everyone else more (except for those low, teaser introductory offers to get you hooked) to make sure they have collected enough to cover their losses.  As I’ve written elsewhere, businesses and governments really have only one source of money:  our wallets.  We all end up paying the price for bailing out the deadbeats.

Given all that information, what I’m saying about getting interest from the credit card company doesn’t seem to make sense.

But I’m not talking about the interest consumers have to pay.  I’m talking about the interest the credit cards pay us in the form of those cash back bonuses.  Discover pays 1% on all purchases (with some 5% quarterly specials) and a Capital One card advertises 1%,  2% on groceries and 3% on dining.  So here is the catch; when I pay off my credit card in full every month I get a cash bonus for every dollar I have spent and I pay them no interest.

When I look at a typical bank savings account I find an interest rate of 0.1% at Chase, for example, (or 0.4% for a Premier Account with monthly fees and/or monthly limits unless the balance is over $15,000).  So for practical purposes, the Discover credit card pays me 10 times as much for the money I spend each month as the bank would pay me if I let them keep my money for a year (assuming I did not have to pay any extra fees).

I know it’s not a pure comparison, money spent is clearly not the same as money saved, but the contrast is still interesting.  The credit cards don't pay me interest for lending them my money.  They pay me to borrow their money hoping I will end up paying them more in interest in return - but I don't!  It’s a curious result from some creative critical thinking.

Why Is This So Important?

The behavioral model is very important for a number of reasons.  One is that the focus on behavior moves the discussion away from personal attacks.  If a person’s behavior is good, it is recognized as such, to encourage more of the same.  If a person’s behavior is poor, the discussion is not about attitude, motives or intentions; it’s about what changes to behavior will make him or her more successful.

Another important aspect of the model is the insistence that we all improve behavior in the five key dimensions.  This is no longer optional.  The world is getting more complex at an accelerated rate.  We cannot face that complexity with the same casual approach that suited our ancestors even a few generations ago.

Eric Schmidt, Executive Chairman of Alphabet’s board of directors, the parent company of Google, made an interesting observation at a technology conference in 2010:  “Every two days now we create as much information as we did from the dawn of civilization up until 2003.”  And that was 7 years ago!  He added that he doesn’t believe people are ready for what’s coming in terms of technology.  Of all that information how much is accurate or even useful?  Yet we are exposed to so much more every day at an increasingly alarming pace and must cope with it.

How did our grandparents deal with the fear of phishing emails or identity theft, traffic light cameras or drones and other invasions of privacy?  They didn’t.  Was anyone concerned about teen cyber-bullying or “sexting” even a few years ago?  In years gone by we had locks on our doors instead of security systems, and we thought hacking meant you had a bad cough, not that your savings or personal information might have been compromised.  No one was “addicted” to their “device.”  The frequency and stress level over the latest health news or food warnings were significantly lower.   The world didn't screech to a halt when the computers crashed.  And today credit cards, home equity loans and other financial tools make it so much easier to go into debt and stay there.

What about the avalanche of advertising we face?  The ad-blocker on my browser counts the ads as it blocks them.  One day I made note of the time as I caught up on (and stored and disposed of) personal email.  In 30 minutes the software blocked 97 ads.  That’s someone trying to sell me something at a rate of more than 3 times per minute.  Advertising exposure within our society is exploding.

Here is another example.  Last week I received an email telling me I may be a “Class Member” in a lawsuit against Staples “if between March 24, 2009 and April 25, 2017, you [1] bought a Rewards-eligible product and a non-Rewards eligible product in the same transaction, [2] used an item-specific coupon on the non-Rewards eligible product, and [3] were negatively impacted by Staples’ pro rata coupon accounting.”  If I don’t want to opt out of the settlement and I submit a claim form, I would be “eligible to receive $10 in Staples Rewards.”  (Further reading told me the class representative – I think that means the guy who sued – will get $5,000 and the law firm will receive $500,000 in fees and cost.)

How in the world do I know if I was negatively impacted?  Should I pull out all my Staples receipts for the last eight years to check?  Just reading this and trying to understand it is not worth $10 of my time, no less filling out an online form.  Yet apparently this stuff is happening every day to punish companies for apparently shady activities, although they admit no wrongdoing and settle to avoid the hassle.

I read recently that if everyone took the time to read only the privacy policies on all the websites visited, the annual cost in lost work time would be over $780 billion.  And that doesn’t even address what rights we might be signing away when we check the box without reading the even longer “terms and conditions.”

We must face it.  The world is getting more complex at a speed nearly impossible to keep up with.  People think technology is wonderful as they play games on their phones, but the technology is a double-edged sword with significant dangers.  As the robots are coming for our jobs and the hackers are stealing our data, the degree of critical thinking, discipline, responsibility, economic understanding, and perspective that served humanity in the past will no longer cut it.  We must do better or be overwhelmed.

IOU

When I heard that average household debt in the US was over $90,000, I went on line to find out some of the details.  I found that the $90,000 number was the amount owed spread out over all households.  Considering that about 30% are debt-free, that means only the households that are in debt owe an average of over $130,000, an even more surprising number.

This personal debt includes student loans, mortgages, credit cards and auto loans.  Now averages are tricky and summing averages does not necessarily represent reality, but such a large debt while we hear constant reports of stagnant income for the middle class is still a matter for concern.

While I was looking for the details, I ran across this article about a similar problem in Australia.  Their “household debt has skyrocketed to 185 per cent of disposable income and continues to soar.”  They blame the problem on a combination of “ill-considered public policies and lifestyle and investment choices of individual households.”  Driving these personal spending and investment choices are artificially low interest rates and other government policies and programs that discourage savings and encourage borrowing.

The article predicts that in less than five years the household debt bubble will burst leading to widespread economic hardship for those who have incurred unsustainable levels of personal debt.  As a remedy to avoid the crisis, they recommend that the Australian central bank, analogous to the Fed in the US, raise interest rates to discourage borrowing.  This will cause some short-term pain, but will avoid a likely major economic upheaval if behaviors don’t change.

This story of Australia and the urgency with which it was written made me curious about the corresponding number for the US.  I found an estimate of the household annual disposable income for the US of $41,355.  If this is, in fact, the same calculation, the average household debt in the US is not 185 per cent of disposable income – it’s almost 220 per cent!

Should we be as panicked as the Australians?  I’m not sure.  But it seems to be at least a wake-up call about personal borrowing and spending.  Overspending is a discipline issue and the consequences, whatever they are, will catch up sooner or later.

Credit Card Fraud

Since November when 40 million Target customers had their credit card information compromised, the focus has turned to the fact that the US leads the world in credit card fraud due in part to the use of “decades-old” technology.  The new technology, used in most of the rest of the world, features smart cards, debit and credit cards with an encoded computer chip in place of the magnetic strip on the back.  The chip changes the encryption with each use, making it significantly more difficult for criminals to steal information.  This CBS Evening News story gives all the details, but gives some pretty meaningless numbers as well.

The meaningless numbers come near the end.  The reporter says that smart cards are only effective in stores and may cause criminals to shift their attention to online transactions.  Supposedly, it happened in England when, after issuing smart cards, on-line fraud increased from 23% to 65%.  What seems like a large increase may or may not be.

Think about it using hypothetical numbers.  If there were 1000 cases of fraud in Year 1 and 1000 cases in Year 2, then on-line fraud did jump from 230 to 650 (23% to 65% of 1000).  On the other hand, it is reasonable to assume that the total cases decreased.  Since there were 770 cases of fraud not on line (1000 - 230) and most of those went away due to the better technology, there might have been only 300 total cases both on line and at stores.  In that case in Year 2 there would have been 65% of 300 cases on line or 195, which is a decrease from the original 230 cases.  So there might have been no discernible shift of attention by criminals at all!  If this had been one of those standardized test questions, the answer would have been “e.  Not enough information given.”  But it wasn’t a test question; it was a serious news story, one using incomplete data to imply a still-lurking danger.

Another example comes from Reuters about seatbelts saving children’s lives.  The news is good, 43% fewer children killed on the highways due to increased seatbelt usage over the last 10 years.  With one in three deaths occurring when children are not buckled up the CDC urged parents to “make sure their children use appropriate-sized car seats, booster seats and seat belts on every trip."  The study points out that deaths of improperly secured children differed by race, “nearly half (45 percent for blacks and 46 percent for Hispanics) versus a quarter (26 percent) for white kids."  Is this really necessary?  Are they implying that minority parents are less careful?  I don’t think so.  But the added information not only distracts from the primary message, it also falls into the same “not enough information” category of the credit card fraud example – 45% of how many vs. 26% of how many?

Cases of meaningless or incomplete numbers are not unusual in the news business.  They obviously don’t think it through.  They are counting on us to join them in not thinking it through and to automatically trust their assumptions and come to similar conclusions or, in more sinister instances, to mindlessly accept a false or misleading impression.  It’s critical thinking; not paying attention leads us to go along with rather than analyze and question many false conclusions.

Discipline, Debt and Cell Phones

Can most of our problems in America really be attributed to behavioral failures in only five key dimensions?  Consider the dimension of discipline.  To be successful in life, we must understand that we can’t have everything we want right now.

Years ago credit cards were rare.  The first were issued by department stores, hotel chains and gas stations, but the type of cards that are popular today weren’t invented until 1958.  Even so, Americans who grew up in the depression era, had developed frugal habits and were hesitant to accumulate debt except for very large purchases such as houses and cars.  More recently that mindset has changed as people were encouraged to buy now and pay later.  Sliding a plastic card has less psychological impact than pulling cash out of your wallet.  It’s much easier to over-spend, especially on those nice-to-have items, to the point where “[a]bout 24 percent of Americans have more credit card debt than emergency savings” and “people’s ability to save up for a rainy day and keep a handle on credit card debt… hasn’t improved...”

This inability to save is a symptom of poor discipline.  "As people acquire more money, they almost immediately start purchasing things that they've felt they've always wanted rather than thinking about what percentages that they should put away and the [favorable] consequences of changing their spending habits."

The same behavior patterns related to discipline affect cell phone abuse/addiction.  Within 20 years of their introduction, Americans seem not to be able to live without a phone in their pocket.  Loud conversations intended for others and ringing noises in the middle of meetings, movies, and church services interrupt our daily lives.  Talkers and texters behind the wheel pose a danger to themselves and to others.  I don’t recall in the 1980s seeing people lined up at telephone booths because they couldn’t wait to talk to a friend or relative.  Reading while driving was considered outrageous and very dangerous, not a common occurrence.  Now that it’s so easy, people can’t seem to resist.  When the behavioral model is applied, the similarity between cell phones and credit cards is striking and the solutions are the same.

Discipline is about delayed gratification.  Whether the issue is overeating, lack of exercise, smoking, gambling, texting while driving, or overspending, stronger behavior in one area will carry over to the others.  Discipline applies to all these problems and more, just as problematic behavior in the other dimensions explain many of the consequences we now complain about and often look to others to fix.