Buy Stuff And Be Happy

As I've worked on this blog and dug deeper into how people make financial decisions, it's becoming increasingly clear that we really have no idea what the impacts of our financial decisions are. I just ran into a shining example of this a few nights ago as I read about some new research that suggests shopping can make a person less sad. This conclusion runs in direct conflict with many books I've read or discussion I've participated in about the concept of "retail therapy" - shopping to alleviate some emotion.

The Benefits of Retail Therapy

In their paper The Benefits of Retail Therapy: Choosing To Buy Reduces Residual Sadness; Scott Rick, Beatriz Pereira and Katherine Alicia Burson explore what the emotional impact of buying something is on sadness. As they identify, saddened emotional states can lead people to do shopping they may not have done otherwise. Generally, this has been characterized as a negative process, since people spend money they didn't necessarily plan to spend. The researchers, however, set out to determine if this shopping process is actually beneficial from a non-economic perspective.

Across three separate experiments, their results supported their hypothesis: the act of making buying decisions does decrease sadness. What's interesting is that through their experiments, they identify that it's not the acquisition of new products that decreases sadness. They suggest the mechanism that decreases sadness is the actual process of choosing to buy something. This process acts as a way of regaining some control of one's life and a renewed sense of control can lead to less sadness.

Some Caveats

The researchers identify several limitations to their study. The impact on sadness, while viewed across all three experiments, was relatively mild. The "shopping environment" they set up for the experiments didn't perfectly model real-world shopping experiences. The researchers also reveal that there may be other mechanisms at work in addition to the "regaining control" mechanism, which need to be identified and studied.

I'll add some further caveats. The experiments were very small with only a few hundred participants total. Further, this is a single piece of research which needs to be reevaluated by other parties to determine if they can replicate this impact. Additionally, they measured the short-term effect of shopping on sadness without any view on long-term impact.

But the results remain highly interesting to me for two reasons: 1) they run counter to conventional wisdom and, 2) they speak to a non-economic impact of financial decisions.

Why We Know So Little

We really don't have any idea what the impact of financial decisions are. The financial planning profession and society have for so long focused solely on the economic impact of financial decisions, that we've totally missed all the other impact each financial decision has. This research is a perfect example. While as a profession we're ready and willing to admonish people for participating in "retail therapy" because it has an economic cost, we never bothered to figure out if it actually helps those people emotionally and physically!

If the non-economic benefits are great enough, the economic costs may be worthwhile. I'm not suggesting this is the case with retail therapy, but I am suggesting that we begin to try to understand these overall impacts of financial decisions much better. Until we do so, we're really failing at helping people make good financial decisions. Economics play only a small part in the financial decision making equation.

Good Money, Bad Grades?

"I want to pay for my children to go to college."

It's a common goal clients tell financial planners. And planners generally run some calculations and, based on a variety of assumptions, determine an amount needed to be saved in order to meet that goal. But recent research suggests doing so may not actually be helping clients' children out. In fact, parents fully paying for a child's education could actually be harmful to the child's progress in college!

We Seem To Know This Somehow

There's been plenty of anecdotal evidence to suggest that children who have to fund part of their college educations perform better. I've discussed this with other planners in that past. Heck, I can speak from personal experience. My GPA rose dramatically (much more than indicated in the study below) once my parents limited the amount they paid toward my college education and I began working 20+ hours per week to make up the difference! But using anecdotal evidence to guide clients is a poor practice.

Research Confirms It

Now we have a strong, research-based indication that parents should allow space for their children to put some of their own money and effort "at risk" while attending college. A report in the Associated Press, Study: Parental support sends down college GPA, reviews a study that indicates greater amounts of parental funding are correlated with a lower average GPA for students. The results:

"...parents not giving their children any aid predicts a GPA of 3.15. At $16,000 in aid, GPA drops under 3.0. At $40,000, it hits 2.95..."

As noted in the article, it's important to remember that parents funding children's college education has been illustrated to greatly increase the likelihood a child actually attends and completes college. Financial planners encouraging clients not to save for college education at all certainly would not be helping clients desiring to see their children attend college.

Just Raise The Issue

However, financial planners may want to raise the topic of how much to fund with clients and what impact on academic outcome that funding may have on the client's children. While it's not the role of a financial planner to try to shape a clients' goals unless specifically asked to do so, a planner can (and likely should) help a client understand the impact of their financial decisions. This potential impact on college performance is just such an opportunity to educate our clients.

As financial planners, we have a duty to help our clients understand the numbers and help them make financial decisions to reach their goals. However, I strongly believe that we also have a duty to help our clients see beyond the numbers, to help them understand the impact their financial decisions have on a variety of factors in their lives beyond simple mathematical ones. Financial decisions can impact emotional and physical health. They can increase the likelihood of depression, or lead to more risk-taking.

Maybe a financial decision will lead to a child doing more poorly in college than expected.

Limiting Choices and Details in a Full Disclosure World

As financial planners, we live in a world where we are required to give our clients full disclosure on conflicts of interest and to make certain we do not omit vital information and details when providing advice. But what if those requirements actually lead our clients to potentially make worse decisions? What if more information leads to poorer financial decisions?

An interesting article by Ron Friedman, Ph.D. on Psychology Today makes precisely this assertion. Friedman writes:

Imagine that you are a loan officer at a bank reviewing the mortgage application of a recent college graduate with a stable, well-paying job and a solid credit history. The applicant seems qualified, but during the routine credit check you discover that for the last three months the applicant has not paid a $5,000 debt to his charge card account.

Do you approve or reject the mortgage application?

Group 2 saw the same paragraph with one crucial difference. Instead of learning the exact amount of the student's debt, they were told there were conflicting reports and that the size of the debt was unclear. It was either $5,000 or $25,000. Participants could decide to approve or reject the applicant immediately, or they could delay their decision until more information was available, clarifying how much the student really owed. Not surprisingly, most Group 2 participants chose to wait until they knew the size of the debt.

Here's where the study gets clever. The experimenters then revealed that the student's debt was only $5,000. In other words, both groups ended up with the same exact information. Group 2 just had to go out of its way and seek it out.

The result? 71% of Group 1 participants rejected the applicant. But among Group 2 participants who asked for additional information? Only 21% rejected the applicant.

More information changed the decision made by study participants. The information didn't change the fact set, yet dramatically altered the analysis of the decision...likely for the worse. But what does this mean in the context of financial planning? Can financial planners select what information to provide to clients and what information to allow to be ignored? Can choices given to clients be limited in order to reduce information overload that might cause clients to make a poor decision?

I suspect that in practice financial planners do this all the time. Certain information is deemed as inconsequential or distracting by the financial planner, likely without them even consciously deciding so. Certain options are clearly so detrimental or unsuitable that the financial planner never even considers it for the client.

But I wonder if it would be a mistake for a financial planner to deliberate withhold information from clients based on a belief that some information might lead to a poor decision. Legal issues aside, is a financial planner equipped to determine what information is valuable and helpful and which information is harmful? Worse yet, by withholding information, are a planner's personal biases and money scripts impacting the decision about what information to share and withhold?

Instead of acting as the gatekeepers of information, I suggest planners help clients understand that more information isn't always better.  Planners can help clients understand the impact too much information can have on decision-making. Planners can help clients recognize when the client is digging exceptionally deeply for information, and help the client reflect on whether that information will actually help the decision or may, in fact, harm it.

It seems clear that too much information is detrimental to good financial decision-making. And, at some level, financial planners must limit the amount of information they give clients, if for no other reason than a lack of time and patience (both on the part of the planner and client) to work through every piece of tangentially relevant information. But how do planners know what to share and what to hold back? What is critical for a good decision and what is harmful? How does a financial planner know when to caution a client that more information may be detrimental?

I suspect that answer lies somewhere in the 10,000 hours of practice identified in Malcolm Gladwell’s Outliers as required to master a skill. There may be no specific process or procedure to determine this, only learning through experience and observing a mentor and practice.

Bad Outcomes, Revisited

In my last post Good Decisions, Not Good Outcomes I made the argument that a good decision doesn't necessarily result in a good outcome. Further, I argued that a bad outcome does not mean a decision was bad. I'm not sure how effective my argument was, but fortunately I can today share a much better take on the same argument.

Thanks go to  Susan Weiner (@susanweiner) for tweeting to me the article linked below from the Farnam Street blog. The blog post speaks to the issue of decisions versus outcome in a very effective way. I found the Decision/Outcome matrix to be particularly compelling.

What Happens When Decisions Go Wrong

If we can agree that the quality of decision and quality of outcome are not directly tied to one another, we have a new issue to deal with. Why bother with trying to make good decisions at all if the outcome is still a result of chance?

As stated in my previous post, I believe that good decisions and a good decision-making process should result in a higher frequency of good outcomes on the aggregate. Any individual decision may still turn out poorly, but the likelihood of bad outcome is lower than for decisions made with a bad decision-making process.

Good decisions and good decision-making remains important even though chance plays a large role in final outcome.

The linked article explores another topic I want to dive into more, the Decision Journal. I've long been interested in the benefits of journaling and often speculated that a client/planner journal could be beneficial in the financial planning relationship. A decision journal sounds particularly compelling. I will be exploring that more in the near future.

For now, I'm glad to have had a well laid out agreement with my position shared with me. I think breaking the decision/outcome link is an important starting point for this blog.