$ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ Intentional Investing Newsletter November, 2004 $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ = $ IN THIS ISSUE: 1. Note from Your Editor, Lynne 2. Article: How We Make Choices 3. Resource Spotlight: Choose the Right Financial Advisor: Getting the Advice You Need 4. Intentional Investing Announcements ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Note from Lynne -=- Dear Reader, I'm delighted at the continued response to our series on Choice, Money and Happiness. It confirms my belief that many of us want to understand HOW we deal with money not just WHERE to put our money. Speaking of "how", our feature article this month addresses just that -- how we make decisions. We examine the fascinating work of psychologists Daniel Kahneman and Amos Tversky who have spent the last 30 years studying this dynamic topic. From their research, we distill five common "rules of thumb" that can actually lead us astray from making wise choices. Let me draw your attention to two FREE Intentional Investing teleclasses in November and December, dedicated to helping you move from understanding to action in making wise money choices. See the Intentional Investing Announcements section for more details. And, for those of you who missed our lively October teleclass on "Choosing the Right Financial Advisor," we have two offerings. In the Resource Spotlight, read specific recommendations from our knowledgeable guest Financial Advisor Stacy Feiner. Then in early January, we will repeat the teleclass, so plan on joining us. We have at least two more articles in this series on choice and money, so stayed tuned. If there is a particular question you have, or topic on choice and money that you'd like to read about, let me know. And, do pass this newsletter on to friends who might benefit as well. Warm regards, Lynne ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Lynne Hornyak, Ph.D., Editor e-mail: Lynne@LMHServices.com Coaching successful professionals to greater financial freedom and well-being. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Feature Article: Choice, Money, and Happiness Part 3, How We Make Choices -=- We're typically so busy making the choices that constantly face us that we don't have -- or take -- the time to step back and think about "How DO I make choices?" If you learned a decision-making model at school or work, it probably included the following steps: * Identify the goal(s) * Prioritize the goal(s) * Identify the options * Evaluate the options in terms of how likely each will meet the goal * Select the best-fitting option * Evaluate the results * Modify or maintain your strategy based on the results Sound familiar? It sounds very logical. Yet, one thing that is certain about us human beings is that we are not machines that operate (i.e., make choices) solely by logic. So how do we wade through the volumes of information available, and sort through the numerous possibilities that confront us when making decisions, large and small? What if we could understand the ways that our minds attempt to help us sort out lots of information coming our way? Let's call these attempts or strategies: "rules of thumb". In fact, psychologists Daniel Kahneman and Amos Tversky have discovered several rules of thumb that people use to shorthand the decision- making process. These researchers and their colleagues have studied the question of "How do we make decisions?" for the past thirty years. What they found is that many of us use these strategies automatically. Yet, the outcome isn't necessarily what we intended. Rules of thumb can lead us astray as we attempt to make wise choices. Here are five rules of thumb to watch for, and how they can influence your financial decisions. 1. Vividness and Availability. Savvy consumers do research before deciding on a big purchase, right? What kind of research might they do? Say, for example, that you are doing a major renovation on your home. You research design magazines for ideas, read consumer publications to educate yourself about the process, interview architects and homebuilders, price out your budget, etc. You even find a current review in a consumer magazine that evaluates top renovation companies in your area, and includes ratings and comments by actual customers. You are now considering Company A for your special job. Then you hear from a dear friend that her best friend had the renovation project from hell with Company A. You learn all the horrible details - long delays, sizable overruns, daily hassles with the electricians and carpenters. What happens to your decision to hire Company A? If you are typical, you'll give substantial weight to this anecdotal "evidence," maybe so much so that you go with another company. But, what just happened? How does one story outweigh the evidence of your research, including a detailed consumer survey? It's called "salience" - the vividness of information. Vividness has a profound effect on how available certain information is to memory. And, sometimes we can confuse the fact that it is available (because of vividness) with how important or meaningful that information is to our decision. What's the implication? Vividness, while appealing, can easily short-circuit our careful analysis. Vividness should not be synonymous with the importance of information. 2. Anchoring Most of us make informed decisions by comparing one option to another. That's logical and reasonable. What we can overlook, however, is how we can be influenced by the specific CONTEXT of that comparison - in other words, to what we "anchor" our evaluation. Take shopping for a camera as an example. I want a camera to take on vacation - light to carry, easy to shoot, reasonably good pictures but I'm not striving for "National Geo" quality. If I look in a discount electronics store, I find cameras that range from $100 - $1000. I see that there are cameras that meet my criteria starting at $129. Since I'd rather spend my money in great restaurants, I buy the $129 camera. Now, imagine that I go shopping with my camera-buff friend. We go to his favorite camera shop where they show us the latest models - ranging from $500-$1000. The five hundred dollar camera meets all my criteria. And compared to a $1000, the $500 camera looks like a bargain. Guess what I buy? Have my needs or goals changed in some way that requires me to purchase a $500 camera rather than the $129 model? No. But I was "anchored" differently based on the comparison items. What's the implication? Be aware of the influence of context -- your comparison points -- and keep your eye on your goal. 3. Psychological accounts Financial leaders at large corporations are not the only ones capable of "creative accounting." According to Kahneman and Tversky's research, all of us do that ourselves, often without being aware of it. And, the way we frame our personal "psychological accounts" can have a significant impact on how we do or don't spend our money. For example, imagine you are deciding whether to join an expensive social club. How you "account" for that potential use of your money can vary substantially - and influence whether you spend the money or not. If you're single, you might allocate the expense to your "find a partner" account, viewing the membership as an investment in your relational future. Or, you want your kids to rub elbows with other successful folks, so you allocate the membership to your "children's success" account, and also view it as a good investment. Imagine your cost\benefit analysis, however, if the membership is yet another allocation to your "indulgences" account. What's the implication? These psychological accounts aren't likely to be something you have on paper. They're in your mind. Being aware of how you frame, and creatively account, for items can help you recognize when you're rationalizing, or when something is truly a good investment. 4. Loss Aversion Kahneman and Tversky developed a concept, based on their research, called prospect theory that explains how we evaluate options and make decisions. They observed that subjective experiences - such as our responses to financial gains or losses - are not directly proportional to the objective situation - e.g., actual gains and losses in money. They also found different relationships between the objective and subjective for gains and for losses. Examining gain scenarios, Kahneman and Tversky found a case of "diminishing returns." Say you win $100, and you have X amount of satisfaction from that win. Winning $300 does not make you three times X as satisfied. Each additional unit satisfies you less than X, which is why there is not a straight-line correlation between objective wealth and subjective happiness. In scenarios of loss, the researchers found that the subjective, negative feeling of loss was much more intense for people than the elation of gain. Other studies suggest that losses may have twice the psychological impact of equivalent gains (Schwartz, 2004). It seems like we all hate to lose, what the researchers coin "loss aversion." What's the implication? We'll often put more time and effort into avoiding loss - because it FEELS so much more intense - than into decisions where we stand to gain. How many of us avoided selling losing stocks because it was so painful to face those losses - even when selling them and reinvesting the money would have resulted in preserving principal or actually produced a gain? 5. Sunk Costs Related to loss aversion is the phenomenon of "sunk costs." This rule of thumb focuses us on the past -- what we've put in -- rather than our goal or what we stand to gain in the future. Imagine that you've spent $1000 on some new software that is supposed to make your business run as smooth as oil. "Everyone" is using it. You start off enthusiastically, investing 10 hours in trying to get the program up and running. From the start, the software is user-unfriendly -- at least to you. You find yourself in a black mood whenever you have to use it. Over time, you use the software less and less, but never take it off your system. Years later you finally remove it, but only because no one supports the software anymore. Who of us can't relate to making an investment -- financial and\or psychological -- that wasn't right for us, yet we held on because of what we'd already sunk into it? What's the implication? Acknowledge "water over the dam", take your "lessons learned" and focus more productively on what you really need. In Summary Aren't our minds something? In the face of overchoice and too much information, we naturally develop mental rules of thumb to deal with the overload. Yet, our rules of thumb can also lead us down paths that aren't the best direction for us. Awareness is empowering. As you understand how you make decisions, you can choose to be less influenced by vividness, anchoring, "creative accounting", aversion to loss and reactions to sunk costs - and keep your choices in clearer perspective. Reference; Kahneman, D & Tversky, A. Cited in Barry Schwartz' The Paradox of Choice: Why More is Less, 2004. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Like what you're reading? Then send this newsletter to friends, family, and colleagues who are interested in moving toward greater financial freedom and well-being. They can subscribe at www.lmhservices.com, or by sending an e-mail to Lynne@WLMHServices with "subscribe newsletter" in the subject line. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Resource Spotlight: Choosing The Right Financial Advisor: Getting the Advise YOU Need -=- There were so many good questions during our teleclass on Choosing the Right Financial Advisor last month that we didn't get to several valuable questions. Our knowledgeable guest Dr. Stacy Feiner offered to answer them after the call. And, Stacy has generously agreed to have her responses published for all Intentional Investing readers to benefit from the information. 1. What type of advisor would be most appropriate for a recent graduate or for someone just entering the workforce? At early stages of wealth development, it is wise to seek basic investment advice from an Accountant who could also prepare and file your tax returns, or an Advisor at a bank. 2. Where would I find a Financial Advisor who could advise me on investments such as real estate purchases? Financial advice is more than just investment advice. A client can expect a Financial Advisor working with a full service investment firm to be capable of advising them on investment purchases such as income generating property, second homes, art, antique cars, boats, horses, and other types of investment properties. A Financial Advisor should be prepared to join clients in the negotiating process, on conference calls, and during valuations and assessment meetings. Additionally, Financial Advisors should be available to evaluate lending options and tax consequences for such purchases, as well as evaluating the insurance options necessary for these properties. 3. What qualifications should a Financial Advisor have? All financial advisors are required to register with the SEC/NASD and practice with a "Series 7" license. The SEC/NASD mandates compliance with all regulations, policies, and laws in the securities industry. Beyond that you may want your advisor to have prior professional experiences that would enhance their understanding of investing. This could include holding additional credentials such as a CFP (Certified Financial Planner), CPA (Certified Public Accountant), CDFA (Certified Divorced Financial Analyst) OR holding advanced degrees such as an MBA, JD/Attorney, Psychologist, Business Consultant, Business Owner/Entrepreneur. 4. What should I ask when interviewing a Financial Advisor? What is the process for becoming a new client? (How long does it take?) Do you have an investment discipline? (What is your buy/sell policy?) How often do you plan to contact me for updates and reviews? (Expect at least quarterly contact FROM your advisor). A final note from Stacy: "Again...Thank you all for being leaders in your financial pursuits. Good Financial Advisors appreciate conscientious clients. More importantly clients deserve a trustworthy and conscientious Financial Advisor." Profile: Stacy Feiner is a partner on a Financial Advisory team at Merrill Lynch. Dr. Feiner and her partners advise clients on every financial issue involving individual wealth and business finance and lending with a disciplined and client-centered focus. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ If you are interested in coaching, contact me for a free half-hour consultation at Lynne@LMHServices.com. or (202) 387-5923. Please include your name, e-mail address, phone number and brief description of your interest in being coached. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ -=- Intentional Investing Announcements -=- $ Free November-December Teleclasses $ TO REGISTER: Send an email to Lynne@LMHServices.com with "Register " in the subject line. In the body of the e-mail, please include your name and email address where you'd like to receive the teleclass phone number and information. Be Intentional! – Teleclass Series on Money and Choice Making Good Money Decisions: Five Rules of Thumb that Lead You Astray Tuesday, November 16 8:00 – 9:00 pm Eastern We make decisions that affect our money life all the time – routine, small choices about what and where to eat for lunch through big decisions like investing our retirement funds, buying a car or financing a mortgage. And we all use “rules of thumb” to make those decisions – whether we are conscious of them or not. Want to be more intentional and effective in your decision-making? Join us for this revealing teleclass. Learn how five rules of thumb may be leading you astray -- and how to stay your course toward satisfying money choices! Register by November 15 Five Keys to Increasing Your Financial Happiness Tuesday, December 7 8:00 – 9:00 pm Eastern Feeling distressed or stressed about your money life? What do you do if you can’t make immediate or big changes in your financial situation? What is it that people who are successfully coping with the realities of their financial life do that allows them to enjoy their life and reduce chronic worry or unhappiness? Come to this teleclass to learn five key tips for making your journey to financial well-being a less stressful, more joyful ride! Register by December 7 Future teleclasses: Since a number of Intentional Investing readers weren’t able to attend our October 26 teleclass, Choose the Right Financial Advisor, we will be hosting our guest Stacy Feiner, a seasoned financial advisor with Merrill Lynch again in early 2005. Look in future announcements for date and time. 4Love+Money – “Talk to the Coaches” Teleclass Series on Relationships and Money With Kathryn Lord, Romance Coach Five Great Questions About Money to Ask Your Date (or: We’re an Item! What I Need to Ask NOW About Money) Thursday, November 11 8:00 – 9:00 pm Eastern Facilitators: Lynne Hornyak, Intentional Investing and Kathryn Lord, Find-a-Sweetheart.com Your new relationship has some traction. But, you can’t live on love alone. Learn five basic questions that every person needs to ask their new partner, and themselves, about money – without taking the romance out of the relationship! Register by November 10 ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Have you been to the Intentional Investing webpage lately? Go to www.lmhservices.com and click on "Changing your Relationship to Money." On the Intentional Investing webpage, you can take a self-quiz on Your Relationship to Money, participate in a survey on gender and money, access articles written by Lynne as well read previous editions of this newsletter! ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ PLEASE NOTE: Intentional Investing [TM] is intended for informational and educational purposes only. It is not a substitute for financial, legal, accounting, psychotherapeutic, or other professional advice and consultation. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ Copyright 2000-2003 Lynne Hornyak. All rights reserved. The above material is copyrighted but you may retransmit or distribute it to whomever you wish as long as not a single word is changed, added or deleted, including the contact information. However, you may not copy it to a website without my permission. Reprint permission will be freely granted upon request. Advance written permission must be obtained for any reprinting of this material in modified or altered form. ^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^`^ $=$ CONTACT INFORMATION $=$ Lynne Hornyak, Ph.D. LMH Services Coaching and Consulting 3818 Klingle Place, NW Washington, DC 20016 Phone: (202) 387-5923 Fax: (202) 244-3373 e-mail: Lynne@LMHServices.com Web: www.LMHServices.com