Sunday, June 1, 2008

Hedge against your bills, banking mistakes and more @ The Roundup

The customary weekly Roundup

It’s time for another weekly roundup. I’m pleased to say I had a guest post featured on Consumerist Commentary titled “Make Investment Decisions Together to Avoid These Common Mistakes”.

Tomorrow I’ll be hosting the Festival of Stocks with what seems to be a promising array of posts from personal finance bloggers near and far.

The Carnival of Personal Finance #154 was hosted by Canadian Dream: Free at 45. I’ve enjoyed these posts in particular:

The Festival of Frugality #127 was hosted by Funny about Money. The following posts caught my eye:

More from fellow personal finance bloggers:

Saturday, May 31, 2008

Psychology tricks and increased spending – The Case of Expensive Wines

Our psychology is terribly easy to trick. We’re actually pretty good at it ourselves


In each and every day of our lives we are bombarded with psychological tricks and quirks which have one goal: Make us spend more.

Advertisements take many forms and influence us both at a conscious and a subconscious level. However, every now and then a consumer research appears. It’s always rare, small and hard to find due to certain conflicting interests of the media but they always teach us valuable lessons.

This time the NY Times (Arik Asimov) gets the credit for giving a stage to a new research on the American wine consumer which I find fascinating.

Wine connoisseurs and the image of the Nuevo rich

Wine is probably the drink most associated with good living, refined palate and the upper classes (we’ll discuss associations in advertising in the near future). There are reasons why wine is portrayed and marketed as such a complicated product with infinite grape types, vineyards, years of aging, complicated ceremonies and concepts such as astringency.

These reasons include:
1. Differentiating the product
2. Differentiating its consumers
3. and above all Money

The more complicated, intricate and socially differentiating the higher it can be priced.

That’s why I was fascinated by Arik Asimov’s article for the NY Times. Apparently the intuitive and logical approach to wine and other “fine” or gourmet foods is not without merit. I’ve always wondered what would happen if I was presented with a blind taste test of anything of the sort. Now we’ve got an answer.

It seems self proclaimed wine connoisseurs have been laid bare by two recent blind taste tests. 500 volunteers rated 540 bottles of wine ranging up to $150 a bottle. Now for the fun part: A $10 bottle of wine made in Washington outscored a $150 bottle of Dom Perignon Champagne and a $2 cheap California wine outscored a $55 bottle of Napa valley Cabernet. It is important to note true wine experts actually preferred the pricier wines. We can learn quite a bit from this research:

#1 If it doesn’t taste better we must buy it for another reason

Asimov mentions a study performed in Caltech and Stanford business school were the price of wine was showed to highly influence its taste in the eyes of the test subjects.

It seems our consciousness is easily fooled by cheap psychological tricks. This phenomenon directly relates to the psychological concept of Cognitive Dissonance. A state of cognitive dissonance is actually a gap created between belief and behavior which the mind closes either through changing behavior or changing believes. Believes are easier to change then behavior.

Now think of a $50 dollar bottle of wine you just bought. It must taste better than a $5 bottle of wine otherwise you wouldn’t have paid so much for it. Your mind has to convince itself it taste much better as well so the cognitive dissonance is resolved.

#2 If we’re not fooled there must be another reason why we still buy expensive wines

Even after reading the research and writing this post I’ll probably continue buying the more expensive wines and avoid the cheaper ones even though they may taste the same. Why is that? There must be another thing of value in a pricey wine bottle.

Surely enough there is: Image. When we buy a $50 bottle of wine we buy the image that goes along with it. Having friends over and presenting a decent bottle of wine is a means of communicating as well as any. We need not be fooled but we sometimes have to get along with the program.

Even though we’re not about to drastically change our behavior it’s still good to know the forces at work and how susceptive our psychology really is. Reinforcing and sharpening our skeptic instinct is always recommended.

Image by: emurray

Wednesday, May 28, 2008

Become an Invaluable Employee by Adopting a Solution Oriented Mind Set

Invaluable and desired employees are a very rare resource. I believe a solution oriented mind set is a prerequisite to becoming one


Anyone should be able to quickly recognize the following scenario either as a manager or as an employee: Deadlines are closing, uncertainties are abundant and a certain employee, you had handed down an assignment a week ago to, keeps coming back with questions that make you wish you had done it yourself and saved that precious time.

Another relevant scenario is the perfectionist employee trying to find a perfect solution to a practical problem unable to accept time and money constraints.

Usually these scenarios end in conflict, shouts and frustrations for both sides. Expectations where no met for neither of them. The employee had expected guidance and tutoring and the manager expected results.

I feel many employees don’t fully understand how powerful a solution oriented mind set can be or how much frustration an unsecure or perfectionist employee might generate. The purpose of this post is to convey my perception of what is maybe the most important trait an employee can have: a solution oriented mind set.

Let me try and make things a bit more clear before I break down this trait to its components. When I speak of a solution oriented mind set I think of an employee capable of handling complicated assignments with:

1. Many Uncertainties
2. Gaps in knowledge
3. Unclear results
4. Surprises along the way
5. Adaptive nature
6. Producing results

This dream employee will be an asset to any organization. It’s really much simpler than it sounds. I believe the basic guideline to becoming solution oriented is to come back with results, not only more questions.

How do we make this miracle happen?

#1 Accept less than perfect solutions

One of the first things you understand when you become a manager is to accept trade-offs. You can’t have everything, you can’t eat a cake and leave it whole, you can’t light a candle on both ends, and you get the point.

Perfectionists don’t understand tradeoffs or are willing to make sacrifices their managers won’t. The golden rule of 80%/20% applies here as well. You’ll usually get 80% done in 20% of the time. The remaining 20% will usually take 80% of the time.

Accepting less than perfect solutions is an important first step in being able to produce viable practical solutions in shorter times.

#2 Simplify rather than complicate

For some reason we have a natural tendency to complicate things. Every single problem can be further complicated with each further complication messing things up even more.

For example consider building an excel sheet which is supposed to be used for budgetary planning. You could choose to look at an ordinary or average family and quickly build a rough sketch and have something to present quickly enough. You could also start researching every expense that was ever made trying to cover every option instead of just adding “Other Expenses”. This might not be perfect but it’s simplified and more importantly: it’s ready.

Instead of thinking of a complicated assignment as a whole trying to decipher and treat everything at once it is advisable to break it down and simplify it. Ask yourself:

1. What is the higher purpose of this assignment?
2. How do I get it done without losing myself in the process?

Nothing is as complicated as it seems. Everything can be simplified and taken from there. Even presenting your perception of the problem or a very rough and initial solution shows you are solution oriented and your manager will thank you for doing some thinking and sparing him that precious time.

#3 Get something done - Small steps are valuable

A very important part of a solution oriented approach is to get something done. Try to resist the urge to return empty handed with more questions and get something done either on a piece of paper, an excel sheet or an assembly line.

Managers like to see results but they appreciate effort as well. If you’re trying you’ve got it half made. No one can ignore a tangible effort.

An initial solution is better than nothing. It’s something to work and improve on. It’s much easier for a manager to guide and tutor with something tangible. Asking questions or clarifications with nothing to talk about but the general concept of the problem is not helpful and is perceived as time consuming and sometimes as lazy.

#4 Everything is doable – It’s an attitude

Be optimistic. Believe in solutions. I’m not trying to sell “success in 21 days” books but there’s a certain attitude required to becoming solution oriented. You’ve got to believe there is a solution.

It might be weak or partial but it’s better than nothing. You’ll be surprised how a change of attitudes or behavior can influence your believes (through cognitive dissonance for example).

#5 Managers like to decide – Give them alternatives and recommendations

The best thing you can do is come up with several solution outlines you’re not sure about and presenting them for your manager to decide. You’re not only on the right way to solving the problem and completing the assignment you’re also giving your manager exactly what he expects: Decisions to make.

These rough solution outlines, together with an initial sound recommendation are priceless and so are the employees that can put them together.

Related Posts:

1. How to Fortify Your Job: 10 valuable (and challenging) Tips
2. 6 Tips on How to Make yourself a Desired Employee

image by: alexander drachman

Monday, May 26, 2008

Sell In May and Go Away? Historical Research and Surprising Results

Seasonal indicators are always a tempting and counter-intuitive notion. Sell in May and go away?


Second in reputation only to the January effect “Sell in may and go away” is a common and well known seasonal indicator. I imagine the papers will soon fill with articles on this indicator. I think it’s a good time to examine the historical evidence.

“Sell in May and go away” refers to the abnormal returns of months November-April compared to May-October. This seasonal indicator is believed to exist due to the following reasons:

1. The summer months are usually dedicated to vacationing and time off in the capital markets as well.
2. Patterns in bonuses
3. Taxes and patterns in saving vehicles


A quick research – Should we really sell in May?

I’ve decided to take a quick look at some historical data. I’ve checked the S&P500 back from 1950’s up to today. The results of my research are displayed in the following charts. The bars represent the difference, in percentages, between the returns of November to April and May to October of a certain year:





The results as always are not definitive. Judge for yourselves:

1. In only 56% of the cases the months between November and April generated higher returns than the months between May and October.

2. However, on average, the months between November and April generated a return of 1.3% compared to just 0.2% for the months between May and October.





Adding a linear trend line suggests the spread is slowly disappearing but then again trend line don’t work well in a variable such as this (explains only 5% of the trend in this case). This could be attributed to more perfect markets with increased capital and information flow but it’s a reaching a bit.


What about 2008?

As always, the case before us is a special one. The months between November and April of 2007-2008 were the months of the sub-prime and credit crisis. Hopefully the months to come will be months of revived growth for the capital markets although skepticism is still wide spread.

One recommendation that has proved itself so far is to avoid timing the market and just hanging on if you’re investing for the long term (as you should). You never know what you might miss. We would all fail trying to time ourselves back in.


Image by: Steve took it

Sunday, May 25, 2008

Financial Philosophy, Leaving the Office Earlier and Work Lunch Ideas @ The Roundup

Sunday Roundup as Customary

As some of you may have noticed I've switched to my own custom domain @ www.thepersonalfinancier.com. Hopefully everything will work smoothly as it always has. As always your suggestions, thoughts, questions and comments are always welcomed.

The Money Hackers Carnivals #13 was hosted by Moolanomy. I made editor’s choice with Higher Gas Prices: A Blessing in Disguise or an American Wakeup Call. I also enjoyed:

The Carnival of Personal Finance #153 was hosted by Money and Values. The following posts caught my eye:

The Festival of Frugality #126 was hosted by The Financial Blogger. Here are my picks:

More from fellow personal finance bloggers: