Image for post
Image for post

Dear Kids,

We are very proud of you for getting into college! You’ve done a great job applying for financial aid and saving your earnings from your summer job. Now, it’s the time to have “the talk”. Don’t worry, not that “talk”! It’s about something much more terrifying: money.

We know that your savings and financial aid won’t be enough to pay for tuition, room and board, and all the other incidentals of college life. You are going to ask us for money. It’s OK. Here´s how to figure out how much to ask us for.

The big idea is that you need to figure out how much of your expenses you can meet on your own, with your own resources. You can ask us for whatever’s left over. Just understand that, if this is more than we can afford, you may need to borrow some of it. …


Image for post
Image for post

A. Not us humans, that’s for sure..

Any objective view of the state of our economy, politics, technology and even our own day-to-day behavior provides loads of evidence that we are living for the moment. We don’t save enough for our retirement, our planet continues to warm and our economy gets more unequal because we don’t make the required, hard, thoughtful and expensive decisions today. Finance, psychology and philosophy all have something to say about this and suggest cures.

Finance

Finance offers some black and white guidance. For any decision affecting the future, you should project its costs and benefits now and into the future. Simply figure out how much you would need to invest today such that it will grow to equal those future values. This is known as exponential discounting. For example, a hypothetical 30-year-old named Isabella should be willing to give up $100 per month in current spending so long as this will turn into an extra $400 per month when she retires, assuming it grows at a rate of 3% above inflation. …


Image for post
Image for post

Alpha is finance-geek speak for an investor’s skill that allows her to outperform an index, like the S&P 500, on a risk adjusted basis. At a recent behavioral finance conference, I sat on a panel that addressed the idea of behavioral alpha. Our moderator asked, “What is it and how do we get more of it?”

I offered the observation that, in a sense, all alpha is behavioral. Whether you follow an algorithm (set of automatic rules) to select investments, decision rules, gut feeling or all three. …

About

Decision Fish

Observations and applications from decision science, behavioral economics, finance, cognitive psychology and philosophy. Apps and more at www.decisionfish.com.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store