“You are the average of the five people you spend the most time with.” – Jim Rohn
“Do not be deceived: Bad company ruins good morals.” – 1 Corinthians 15:33
Over Nurtured
There is an age-old debate that spans across many different disciplines, it is the debate of nature versus nurture. At the heart of the discussion is the question of what really shapes us, is it our genetics or our environment and our experiences?
In the field of behavioral economics, discussions about our cognitive biases and our general humanness (fear, greed, envy, panic, etc.) capture a lot of attention. Today, I want to shift our focus a bit and discuss the nurture side of the equation. In the age of influencers, we have a robust environment of outside input that is all looking to shape our views on money.
Let’s start with one of my favorite historical examples on this topic.
Under the Influence
In 1971, Professor Philip Zimbardo of Stanford University put together what looked to be a fairly innocuous experiment. Some 55 years later and this experiment is still heavily referenced and studied by sociologists, psychologists, and professionals across a variety of disciplines.
It all started with this advertisement in the help wanted section of The Stanford Daily:
Male college students needed for psychological study of prison life. $15 per day for 1–2 weeks beginning Aug. 14. For further information and applications, come to Room 248, Jordan Hall, Stanford U.
Zimbardo would narrow down the applicants to 24 recruits and what was targeted for a 2-week experiment would be cut short at 6 days due to what was deemed severe emotional distress.
The students were assigned one of two roles: prisoner or prison guard. The basement of Jordan Hall was converted to a mock prison set, and actual police officers were sent to the homes of the “prisoners” for a realistic arrest to kick off the experiment. The prisoners were stripped of their names and would only be referenced based on their ID numbers.
Just days into the social experiment, the guards zealously embraced their roles and oppressed the prisoners through insults, shaming, and other psychological tactics. Just two days in, the prisoners would revolt in a planned coup and the experiment would soon be cut short as it went beyond the intended scope and control of the professor.
In one postmortem interview a student prison guard reflected, “I really thought that I was incapable of this behavior. I was surprised, no, I was dismayed that I could really act in a manner so absolutely unaccustomed to anything I would really even dreamed of doing. While I was doing it, I didn’t feel any regret, I didn’t feel any guilt, it was only after when I began to reflect on what I had done that this behavior began to dawn on me…”
Regular Rich
There is perhaps no better example of the nurture-factor than the Stanford Prison Experiment. Although we don’t find ourselves in this extreme of an environment, it is perhaps these more subtle daily influences that are more damaging.
Just last week one of my best friends sent me a short video from Instagram and was considering some major financial decisions based on the advice provided in the video: https://www.instagram.com/templeton_walker/reel/DcWcRA9I1w2/
I’d like to take a moment to analyze and respond to the advice provided by this influencer. I want to draw your attention to how I digest and assess this advice and hopefully equip you to be vigilant and resistant to these influences – and influencers – that are shaping your perspective on money.
Start with the Why?
Prior to offering my critique, I think we need to start with why this type of advice is so attractive and why there is such an appetite for this style of guidance. The finance industry has a long history of creating outsiders – people feeling like they lack the knowledge, vocabulary, and insider information to be financially successful. This creates a vulnerability that breeds a desire for advice that feels relatable, palatable, and within reach.
This reality should sound the alarm for the finance industry as a whole. The financial advisor needs to be a translator, one who simplifies the complexities of finance, and incrementally drives understanding and aha moments for clients. There is a teach-a-man-to-fish truth to all of this; the call of the hour is to teach people how to think so that they are prepared to combat deceptive advice.
This reality should also sound the alarm for the investor. True financial wisdom can be simple and palatable, but it is never gimmicky. Investors need to be discerning and avoid gimmicks that seek to oversimplify or fast-track financial success.
The Gimmick of Regular Rich
“Regular rich, not as unattainable as you would think, there is a very clear path to get there.”
In an effort to not be under the influence we have to be skeptical of financial gimmicks. Catchy phrases like “regular rich” have a tendency to grab our attention. These gimmicks are often relatable and sound like they best describe the exact solution we’ve been looking for. We internally justify the concept and affirm ourselves, “That’s right, I don’t need to be Elon Musk wealthy, I would be incredibly satisfied with simply being regular rich.” Then the influence really sinks its teeth in, and we are off to the races – our ailment has been defined, an elixir has been prescribed, and we are ready to take action.
The prescription for regular rich was both simple and memorable: pay off all debt and achieve 10% investment returns.
Paying Off the Mortgage
“You have to pay off your home.”
The first mandate of this two-rule formula was the advice that you should pay off all debts, and specifically your mortgage. At first read, this seems both logical and prudent, but in the world of finance there is always nuance. Hence why an advisor’s favorite two words are, “it depends.”
I personally land in the camp that paying off one’s mortgage is often a preference driven decision. There can be quantitative reasoning for maintaining a mortgage, but if the peace and joy derived from ridding yourself of that debt doesn’t break the financial plan then one can simply defer to their preferences.
BUT the question that must be asked is if there is a downside to paying off a mortgage? There can be. For many, maintaining a mortgage helps the investor/saver retain liquidity. Liquidity, easy access to your money, becomes crucial for both emergencies and opportunities. A home is an illiquid asset, it cannot be quickly converted to cash – even a home equity line of credit (HELOC) has a lead time for approval, a limited lifespan, and can be retracted at the lender’s discretion.
Additionally, the potential funds resourced to pay off the home are currently earning some sort of rate of return. Whether in stocks or money market funds, one needs to calculate the potential opportunity cost for paying of the home. Tax deductions and expected rates of return need to be considered to come to an intelligible conclusion regarding opportunity cost. In a world full of sub 3% mortgage rates this calculation becomes a crucial first step.
Achieving Consistent 10% Returns
“You guys can find a fund that they will pay you 10%.”
Your internal warning flags should always go up when attractive rates of returns (e.g. double-digit returns) are talked about in a simplistic, expectant, and flippant manner. The influencer from the referenced video says it is easy to find 10% returns. He goes on to explain that one could expect or rely on $200,000 of income from a $2,000,000 investment portfolio.
Anyone, and I mean anyone, in the field of financial planning are simply appalled by this statement. The scariest part of this assumption is actually not the figure used for returns but the assumption that returns at that level could be achieved in a consistent fashion to align with an equivalent withdrawal expectation.
Here’s the reality, historical rates of return at this level are accompanied by a high standard deviation. Take the S&P 500 for example, you can find extended periods where an average of 10% is achieved but the dispersion of returns on an annual basis (standard deviation) is quite wide. In the last 20 years, there have been years when the market was down nearly 40% (2008) and years when it was up more than 30% (2013). Average returns are achieved by a collection of highly varied returns.
Simply put, varying rates of return matched with recurring withdrawals just don’t mix well. The industry term we use is called sequence of returns risk. An investor still needed to eat and fill up their gas tank in 2009, but the decline of 2008 made this at minimum complicated and most likely detrimental.
Role Models
I do think there is a potential that I receive some pushback for my critique above. Someone would want to encourage me to zoom out for the overall perspective of the message and to find the good in what is being portrayed. I hear you, but influencers influence and some of the folks watching this video are considering taking action and reframing their own financial plans based on this advice.
Back in 1993 Nike put out this famous commercial where basketball great Charles Barkley says, “I am not a role model. I am not paid to be a role model. I am paid to wreak havoc on the basketball court. Parents should be role models. Just because I dunk a basketball doesn’t mean I should raise your kids.” In the edgy cultural moment of the 90’s, athletes were feeling the pressure of fame and influence and many wanted to opt out of that responsibility – this commercial captured their perspective. Some 10 years later Lebron James offered his viewpoint, “Once you become a professional athlete or once you do anything well, then you’re automatically a role model.”
I work in a highly regulated industry. I am held to a high standard as a fiduciary. I serve 40 families whom I know well, care about deeply, and I am constantly thinking about ways to better serve them. My guidance and advice are personalized – factoring in their tax situation, legacy wishes, preferences, habits, etc. Respectfully and honestly, I am baffled that influencers give blanket advice that will catch the eyes balls of thousands of savers and investors while accepting no clear accountability or responsibility for their advice. Charles Barkley was wrong, you simply can’t have the fame without the influence – they are attached at the hip – and in the words of the late Stan Lee, “With great power comes great responsibility.”
AI Only Exacerbates the Problem
This article is all about how our environment shapes our behavior. In the last 12 months we’ve seen drastic changes in our environment based on the growing AI landscape. Commensurate with this change, I have seen a significant change in client behavior. It is simply easier to ask off the cuff money questions to an app on your phone while getting ready for bed or sitting in traffic in your self-driving car. There is no concern of wasting anyone’s time or asking an embarrassing question – it is a very safe place.
What’s the downside? This AI tool becomes an influencer, and this presents the same concern I expressed above – no accountability, experience, or personal touch.
I met a young man recently who requested a time to meet and discuss his career aspirations. His background, enthusiasm, and ambition all pointed to him being a great candidate. He dressed the part and came to the conversation well prepared with a leather journal full of questions and curiosities. At face value, he looked quite prepared – it gave off the impression that he did his homework. About 5 minutes into the conversation, it was obvious to me that he took a major shortcut in his prep work. His questions about The Bahnsen Group were just a bit off and I came to the assumption that he asked AI to do the research on his behalf and prepare the questions for him. He knew the power and value of researching the company but chose to delegate that to AI. About halfway through the conversation I had to ask him, “Did you visit our website and do this research yourself or did you lean on AI to do this for you?” He was a bit hesitant, and potentially embarrassed to come clean, but he did divulge that he heavily leaned on AI. I encouraged him to be careful and let him know that this shortcut was well apparent in our dialogue.
This scenario isn’t unique to an eager young job seeker, I see this every day. I get an email or I am in a conversation where I see a sequence of fairly intelligible thoughts but just a bit skewed or out of order. This is the influence and impact of AI reliance and something we need to be aware of and careful with.
Proceed with Caution
So, where do we conclude? Delete social media and avoid AI tools? No, but we do need to proceed with caution and be careful about what we let influence our decisions.
There simply isn’t enough time to share all the stories of bad outcomes that were the result of being under the influence. We need to be diligent, slightly paranoid, and protective of what shapes our decisions.
This isn’t a Stanford psychology experiment; this is your life.
Trevor Cummings
PWA Group Director, Partner
