Author: Philip Tirone

If you ever took a traditional economics course, you learned that human beings make rational decisions about their finances, and choose things that are in their best interests.
But you only have to look around you to find evidence that human beings are far from rational, particularly when it comes to finances.
We all consistently make irrational and stupid choices that cost us more, both in the short and the long run, because we are not always capable of deciding what is in our best interests.
This understanding of how real people make real financial decisions comes from the (relatively) new field of Behavioral Economics. This discipline looks at the intersection of psychology and economic theory, and it paints the human animal as a far more irrational creature than Adam Smith ever imagined.
Check out these five ways that humans make poor money decisions, and see if you can recognize any of your past blunders:

1. Seeing a High Price Can Make us Pay More

We like to think that we know a fair price when we see one, but the truth is that we’re remarkably suggestible. For instance, take a look for the most expensive wine on the menu the next time you are out to a nice dinner. Often, you will see a single bottle listed at $100 or even more, while the rest of the wines are listed at about $25-$50 per bottle. That one expensive bottle is listed on the menu to make the $50 bottles seem much cheaper in comparison.

Many restaurants literally only keep one bottle of the expensive stuff, because they don’t intend for anyone to actually buy it. It’s there to sell the $50 wine, which would have otherwise seemed far too expensive compared the other options.

What’s happening here is something Behavioral Economists describe as anchoring. Once we have a number in our heads, it anchors our expectations for price. Dan Ariely, in his book Predictably Irrational tells how Williams-Sonoma was frustrated at poor sales of its bread machine, priced at $275. The solution they came up with was to offer another model – one that was larger and priced at $400.
Suddenly, sales of the cheaper model rose, while no one bothered with the spendy version. This was because shoppers suddenly had something to compare the original to, and $275 no longer seemed like too much to spend- at least not compared to $400.

2. We Hate to Lose, Even When we Already Have

If you’ve ever held onto a tanking stock because it’s sure to regain its value, then you have been a victim of loss aversion. Loss aversion is psychological quirk that makes us work much harder to avoid a loss than we will to achieve a gain. In terms of the stock market, once a stock starts doing poorly, we think of the money we have already lost, and we fear further losses. But instead of cutting our losses, and accepting the fact that the money we’ve already spent is a sunk cost, we hold onto those stocks in the hope that they’ll pick back up again.
You can see loss aversion in nearly every aspect of life. This is the reason why we keep those bread machines we spent nearly $300 on, even though we never make bread in them – and we could certainly get something for them at a garage sale. The simple fact that we will never see that $300 again is enough reason to let the machine gather dust, because we’ll kick ourselves for “only” getting 10 bucks on a resale.

Loss aversion is also why we are so unwilling to cancel memberships to gyms we don’t attend, clubs we don’t go to, and cable packages we don’t use. We think about how much it will cost to rejoin if we were to quit- forgetting that every month we’re allowing more money to go down the drain for fear of “losing” the original enrollment fee.

It’s very difficult for us to remember that that money is already gone.

3. We Overvalue Free Things

How many times have you ordered a book that you’re not entirely certain you want, just to make sure you qualify for free shipping from Amazon?
When you do that (and we all do), you end up paying more money overall and end up with an unwanted item, to boot.
This is clearly irrational.
For some reason, the word “free” seems to scramble our brains. When we are offered a free item or service, we forget what other costs there might be to that item or service because we are so focused on the fact that we’re not paying money. What’s really interesting is that we are willing to pay more in order to get something free. That’s why Amazon offers free shipping for orders over $25, and why many marketers and retailers give out free gifts with purchase.

4. Future Needs Vs. Today’s Wants

We think things in the future are less important than things happening now. Human beings have a very hard time planning for the future. Apparently, 75% of Americans nearing retirement in 2010 had less than $30,000 saved, which is a pretty horrifying statistic. But before we write off three-quarters of the retiring population as irresponsible laggards, we should look at our own behavior.

• How many times have you bought something with a credit card without a specific plan to pay it off?
• How often have you promised yourself you’d diet only to be tempted off the path the moment you see a box of donuts?
• How many times have you left work for yourself to do in the morning, only to curse yourself the next day?

What’s going here is something called hyperbolic discounting. That’s a 50¢ word for our unconscious feeling that now matters more than later. We know that we ought to put money aside for retirement, but man is that far away! And the money is here now. So, we tend to think that retirement will take care of itself, while the money can be put to “good use” now.

5. We Overestimate the Possibility of Unlikely Things Occurring.

Our brains are wired to think that things we can easily come up with an example of are likely to happen. This is something called the availability heuristic. What that means is that we think we’re much more likely to win the lottery or win big in Vegas than is statistically possible just because we can think of examples of people who have won.
Since we can think of those examples, we think the outcome is more likely. And every time you read a news story or see a movie about such winners, your brain believes that you winning is even more probable.
Even if you are able to sidestep the availability heuristic, you may still fall victim to the similar gambler’s fallacy. This is when you believe that something is “due” to happen because it hasn’t for quite some time. For example, you might bet on a coin coming up heads on the 21^st toss after it has come up tails every time for 20 tosses. It seems as though the coin is “due” to come up heads, but it’s still only 50/50 odds.
Otherwise rational investors may find themselves following the gambler’s fallacy by avoiding buying stocks that are going gangbusters, for fear that there has to be a fall eventually. Statistics may show a general regression toward the mean (i.e. – everything evens out eventually), but general statistics are meaningless when talking about individual events.

Irrational Money Decisions Affecting Your Life

Approaching all of our financial decisions rationally is remarkably difficult to do. It pays to think about the money choices we make, and try to figure out what our motivation is each time. A little mindfulness and self-knowledge can do wonders for combating irrational decisions.
Source: Good Financial Cents

A decade ago, I was in the mortgage business. Back then, the banks were handing out loans like candy during a parade …
Bad credit? No problem!
No job, no savings, and bad credit? No problem!
As we now know, all sorts of people were getting into loans they couldn’t afford. From where I was sitting, it just didn’t feel right.
So I refused to be part of the problem. I told my clients: “When the rates change and the real estate cycle matures, you won’t be able to afford that loan. Let’s get your credit score up so you can qualify for a loan with better rates.”
It started with just a few clients here and there. I helped them improve their scores, and in short order, they could afford a loan.
Today, about 11,000 people have been through my credit-improvement program. I have another 50,000 people who subscribe to my credit-education list.
And you know what? Even though I’m a long way away from my goal, it feels right …

I feel like I’m on the right side of the equation—helping people take control of their finances and their future.
So it seems appropriate that today, the day of counting our blessings, I say thank you.

Thank you for reading my emails.

Thank you for telling your friends and family members about my program.

And thank you for your feedback.

Happy Thanksgiving!
– Philip Tirone

Here’s a great budgeting tip …
If you’ve been through a tough financial time, I’m sure you’ve renewed your commitments to creating budgets. You probably take a second look at price tags. You ask yourself things like:

Is an espresso really worth $4?

Wouldn’t it be smarter to rent a movie than spend $25 at the theater?

Should I buy a new pair of running shoes for $90, or can I make do with my old pair?
These are good questions to ask, but instead of looking solely at price tags, let’s also start considering this question:
How much is my time worth and how many hours will I have to work to pay for an item?
I call this association between how much your time is worth and how many hours or days you will need to pay for the item the “Hour Factor.” Figuring out your “Hour Factor” by asking a series of questions is critical in helping a person get a budget under control.
I created the Hour Factor after I wrote 7 Steps to a 720 Credit Score because I began to realize that creating a budget wasn’t enough for people who struggled to stop spending money. Instead, they have to develop an entirely new mindset that guides them when making a buying decision.
For instance, imagine that you are considering buying a $250 gadget. To determine the item’s Hour Factor, start by asking: How much is my time worth?
An attorney might make $250 after taxes. A minimum-wage worker who does not pay taxes might make $7.25.
Next ask: How many hours will this item cost me?
The gadget will cost the attorney one hour; the minimum-wage worker will pay thirty-eight hours for the same gadget.
Is the latest gadget worth thirty-eight hours? If you cannot afford your insurance premium, is it worth even one hour?
Only you can answer this question. They trick is twofold: First, begin associating purchases with the amount of time you must work to secure them. Next, consider the opportunity cost associated with each purchase.
The Hour Factor process works like this:
* Answer the question: How much is my time worth?  Determine this as an after-tax figure. If you are paid hourly, this calculation is simple: divide your take-home pay check by the number of hours you worked in that pay period. If you are paid a salary, divided your annual after-tax income by 2080 (the number of hours a full-time employee works in one year, assuming a two-week vacation).
* Relate all spending to your hourly wage. For instance, let’s assume your hourly wage is about $16.50. If you are going to buy the latest $200 cell phone, divide its cost by your hourly wage to determine the Hour Factor. Ask yourself these questions: How much is my time worth? Is this cell phone worth twelve hours of my time? “
* You must also know your weekly “disposable” hours. Let`s say, for instance, that your weekly expenses cost you twenty hours, meaning you have an additional twenty hours to “dispose” of. When we put this in terms of time, you can begin to see that you are “disposing” of one about hour of your life when you treat your friends to $15 of coffee drinks. You are disposing of five hours of your life when you splurge on a lavish meal complete with appetizers, dessert, and drinks.
* Finally, consider the opportunity cost for each of your purchases by asking these questions:
1. What else could I buy with ___ hours of my time? Twelve hours could be directed toward health insurance, a car payment, a retirement account, or your child’s college tuition. When asking, “What is my time worth?,” you begin to see that twelve hours of your time might be worth a car payment, but it certainly isn’t worth a new pair of shiny shoes if you cannot afford your car payment otherwise.
2. What investment and savings opportunities am I losing by disposing of these hours? Consider, for instance, that your goal is to purchase a home. You know that you must save $60,000 for the down payment on a $300,000 home. Assuming you make $16.50 hourly and you have twenty “disposable” hours each week (that is, once you have paid for all necessities, you have twenty hours left over for savings, impulse shopping, entertainment, or whatever else you choose to buy), you must save  about 3,640 hours to afford the down payment. If you saved each of your disposable hours, you could afford the down payment in about three and one-half years.
Or, you can buy that cell phone, take a lavish vacation, and splurge on expensive dinners. Only you can decide what your time is worth.

It’s that time of year where I have to issue my big warning:
Steer clear of retail store credit cards!
From now until Christmas, you will likely spend a few days in shopping malls. And more than a few of the retail stores you visit are going to try to seduce you into applying for a retail store credit card.
“You’ll save 10 percent on today’s purchase by applying for a retail store credit card,” they will tell you.
You’ll hear it over and over. In fact, just about every major store has a promotion intended to lure people into signing up for a retail store credit card.
Beware!
Retail store credit cards will hurt your credit score.
And they will hurt your wallet.
Let’s say that you go into Banana Republic to buy your mother-in-law a sweater. The cashier tells you that if you sign up for a Banana Republic Card, you will get a 15 percent discount on that day’s purchases.
Let’s do the math and see how this adds up …
Imagine that the sweater costs $55. This means you will save $8.25 if you sign up for a Banana Republic Card.
But consider all the different ways you might end up spending MORE money:

1. You will have to pay interest on the sweater, assuming you do not pay the bill immediately. And you will also have to pay interest on all future purchases.
2. And there will be future purchases. If you have a credit card, you will be more likely to engage in retail therapy, and you will be more likely to spend more money at the store. (In fact, this is why the stores want you to sign up for their credit cards. They know people who use credit cards end up spending more money than people who use debit cards or cash.)
3. You might even spend more money that day. I should take advantage of this offer, you might think, piling a few more items in your shopping cart and thinking that you are “saving” money because of the 15 percent discount.
4. You have added a credit inquiry to your credit report. Credit inquiries count for 10 percent of your credit score, so your score drops a few points. This will cost you money in the future as a lower credit score means you will have a higher interest rate on other credit cards, your home loan, or your car loan.

My point is this: The $8.25 “savings” ends up costing you a bundle.
Think of it this way: Why would retail stores promote these cards with discounts unless they know they can eventually make money off the retail store credit cards?
As always, be sure to leave a comment below, particularly if you successfully fight off a pushy sales clerk trying to get you to sign up for a retail store credit card!

An interesting credit score data mining observation has emerged from our friends over at Credit Karma.
Apparently they took a look at the average credit scores of 20,000 people and placed those scores into bins based on the email address people use. They then calculated the average credit score.
Now your email domain is not an indication of credit worthiness and switching to a different email provider does not impact your score at all. It’s just an interesting observation of the credit scores of people that typically use a particular email provider.
If you use BellSouth as your email provider, your score is the highest in the survey results. Congratulations.
If you are using an email address from Yahoo or AOL, the average credit score of your fellow email users is, well, in the toilet.
Seems among the mainstream free email providers, Gmail users are the king of the credit score hill, followed by MSN, Hotmail, and Yahoo at the bottom. It looks like the average credit score of GMail users is 682 while Yahoo users are down at 640. That’s quite a difference.

Author: This article was contributed by GetOutOfDebt.org, a site that provides free help for people looking for debt consolidation advice.
Source: If You Use a Yahoo or AOL Email Address. Your Credit Score Probably Sucks
Source: Defendants Lose The Weight Of Their Assets In “Hoodia” Weight Loss Case

In April of 2009 the Federal Trade Commission (FTC) charged makers of a “Hoodia” weight loss supplement with deceptive advertising. The companies, Nutraceuticals International, Stella Labs and key company players and controllers David Romeo, Deborah Vickery, Craig Payton, and Zoltan Klivinyi claimed that using their product would lead to weight loss and appetite suppression.
In its complaint, the FTC alleges that the defendants not only made false and deceptive claims about what hoodia could do, but also, on one or more occasions, claimed that their product was Hoodia gordonii, a plant native to southern Africa, when it was not. They claimed their product was scientifically proven to suppress appetite, resulting in weight loss; and was clinically proven to reduce caloric intake by 1,000 to 2,000 calories per day.
Last week the charges were settled against the aforementioned (sans Klivinyi who is no longer residing in the United States). Under the settlements:
David Romeo, controller of Nutraceuticals International and Stella Labs, are banned from making any weight-loss claims while marketing foods, drugs, and dietary supplements. The settlement imposes a $22.5 million judgment against Romeo and the two companies, which will be suspended when Romeo forfeits his vacation home in Vermont, and assigns to the FTC the right to collect on $635,000 in business loans owed to him. If it is later determined that the financial information Romeo gave the FTC was false, the full amount of the judgment will become due.
Nutraceuticals International principal Craig Payton is banned from marketing any foods, drugs, or dietary supplements. The order against Payton does not require him to forfeit any assets, as they were already seized in an unrelated federal drug case.
Nutraceuticals International marketing executive Deborah Vickery is required to pay a $4 million judgment, which has been suspended due to her inability to pay. If it is later determined that the financial information she gave the FTC was false, the full amount of the judgment will become due.
All five defendants (the three mentioned and the two companies) are prohibited from making any false or unsupported claims about foods, drugs, or dietary supplements, and from helping others to make these claims. They also are barred from misrepresenting the results of any scientific study – Source.
Consumers should be wary of any dietary supplement and/or weight loss diet ad. As with anything else in life, if it seems too good to be true, it usually is. Take caution folks. Talk to your doctor about any weight related questions or concerns.
Author: This article was contributed by GetOutOfDebt.org, a site that helps free help for people getting out of debt.
Source: Defendants Lose The Weight Of Their Assets In “Hoodia” Weight Loss Case