Author: ken

Thoughts for Valentine ’s Day

An important way to be mindful about money is to keep your head when your heart is involved. All too many relationships get into trouble when personal finances are joined before each party gets to understand how far they can trust the other.

An article in this week’s Newsweek cautions: “Be wary . . . . It is not just your signature on a piece of paper. There are repercussions that can hurt your finances and creditworthiness for years to come.” (See, “ 5 Financial Miscues in the Name of Love.”)

Typical mistakes include co-signing a loan or a lease or taking out a joint credit card before knowing much about the financial behavior of your partner. In the flush of a new relationship, it can feel mean-spirited or harsh to refuse to help out in the way he or she expects. Moreover, sharing financial responsibility might even seem like a good way to build cooperation and trust. But if the contingencies are not worked out in advance, it can easily backfire.

You don’t necessarily need a legal document or a pre-nuptial agreement. But, you do need some serious conversations that anticipate the many things that can happen, the things that you won’t expect and, probably, don’t even want to think about. Credit companies will seek out the more prosperous member of the couple when payments are missed, and that can be a devastating moment of truth. That shock can become corrosive to the entire relationship. And how you will both handle job loss, illness, family crisis, accidents, undisclosed or forgotten debts and other obligations?

It is not unusual these days for new partners to have serious and frank conversations about past lovers and previous sexual activity. But we tend to be more secretive about money. In our culture, self-esteem is closely tied to financial success, and that makes it feel risky to be too open. Moreover, security can feel jeopardized when too many people know too much about what you’ve got in the bank. The rich worry that their friends are attracted to their money more than to them, while the poor often go to great lengths to conceal what they don’t have and keep up appearances.

“You don’t trust me,” can feel like a devastating reproach, but trust that is not grounded in experience is mere gullibility. It is not something you can force or take for granted. You build it carefully and slowly over time.

(Also published at Mindful Money)

No Such Thing as a Spotless Mind

It’s better for the mind to focus on something than to wander — at least this is the conclusion of a survey by two Harvard psychologists reported in Science.

“Whatever people were doing, whether it was having sex or reading or shopping, they tended to be happier if they focused on the activity instead of thinking about something else. In fact, whether and where their minds wandered was a better predictor of happiness than what they were doing.” (See, The New York Times:  “When the Mind Wanders, Happiness Also Strays.”)

I can’t say I am surprised.  Psychoanalysts have used the technique of free association for years to track down the worries and anxieties of their patients.  We know that the mind freed of specific preoccupations is free to worry, and there is always something to worry about.  Encouraging it wander can help you find the more important worries.

The converse is also true.  A mind that concentrates intently on one thing has only that one thing to worry about.  We have known for years that those who obsess are usually trying to bind their attention that way, keeping it from straying to other, more frightening thoughts.  They are protecting themselves from the multiplicity things they would otherwise flood their minds.

But if you have one thing to worry about and you are making progress with it, not just escaping from other worries, you are essentially fulfilling what the evolutionary purpose of consciousness is probably all about.  And that feels good.

Daniel Gilbert, one the authors of the study, said he was surprised by the finding:  “our data suggest that the location of the body is much less important than the location of the mind, and that the former has surprisingly little influence on the latter. The heart goes where the head takes it, and neither cares much about the whereabouts of the feet.”

He added:  “I find it kind of weird now to look down a crowded street and realize that half the people aren’t really there.”

That too is no surprise for those of us who pay attention to the unconscious.  Not only is the body piloted by programs that operate out of awareness, the mind constantly wanders to detect threats that could turn out to be important for survival.

So when the mind finds something useful to concentrate on, stilling what William James called the “blooming and buzzing” confusion that fills our heads most of the time, we can start to feel effective.  We are no longer simply immersed in our worries, but we are also feeling more competent, and more in control.  That doesn’t always make us happy, but it does make us happier than we were.

Is It Denial – Or Corruption?

The financial reporter for The New York Times Gretchen Morgenson notes that the report of the Financial Crisis Inquiry Commission “makes for compelling reading because so little has changed.”  It’s what’s missing that captured her attention.

For months during the crisis, we were preoccupied with financial institutions that were “too big to fail.”  It seemed obvious that the big banks whose collapse would be catastrophic for the economy either had to be broken up or regulated so they couldn’t take on undue risks again.

The related problem was “moral hazard.”  That is, if the government rescued them from the consequences of their own behavior, that would undermine the principle that we are all responsible — and accountable – for our mistakes.  Saving the banks would put them in a privileged category — and increase the likelihood that they would go ahead and do it again.

And it was not lost on most of us, at that time, that this privileged treatment contrasted with the foreclosures and dispossession experienced by tens of thousands of homeowners who defaulted on their mortgages.  Who was coming to their rescue?

Morgenson points out that there is nothing in the new congressional report about “too big to fail.”  She suggests, in fact, that further bailouts lie ahead, and moral hazard has indeed occurred.  The recent report to Congress of the special inspector general for TARP noted that when the government stepped in to save Citigroup in 2008, “it did more than reassure troubled markets — it encouraged high-risk behavior by insulating risk-takers from the consequences of failure.”  (See, “A Bank Crisis Whodunit, With Laughs and Tears.”)

This is definitely not a case of unconscious motivation.  It’s taking place in broad daylight.  The facts are clear.  What’s missing is the urgency, the importance and meaning of the facts.  What was so obviously needed two years ago, has simply become unimportant. Why?

No doubts the big financial firms themselves were against it.  They didn’t want to be broken up, and they didn’t want to be regulated any more than they had been.  They wanted to be free to resume business as usual. And, of course, they have tremendous influence through their lobbyists and political contributions.  A Republican congress, moreover, is more likely to be on their side.

But I suspect that, in our general eagerness to get out of the recession, we all are also willing, shortsightedly, to let the banks resume their old practices.  We, too, want to go back business as usual.  The risk just doesn’t seem so risky anymore.

So it could be the corruption of our system where money determines policy.  Or it could be a kind of collusive denial, abetted by our fading memories.

Or it could be both:  Reining in the banks seems less and less important as time goes by – and less and less likely.

ROSE COLORED RETIREMENTS?

The Real Problems of “Global Aging”

Fewer people retire in the way they used to, the way we used to think they should, moving to the sun belt or dividing their time between golf and the grandchildren.  A report in the McClatchy Newspapers calls this erosion of traditional patterns of retirement “one of the biggest demographic shifts in history.”

The reason:  an inexorable increase in life expectancy.  An aging population is putting a burden on younger generations.  The process has been amplified recently by a surge in “baby boomers” – one that unfortunately coincides with the Great Recession.

“It’s the reinvention of retirement,” says William Novelli, a former chief executive of the AARP.  “Work is an increasing part of the so-called retirement years.”

But how does that shift affect our emotional lives?

The McClatchy report casts a strange rosy glow over this complex and worrisome development:  “While the process is fraught with challenges, core elements of the trend remain positive.”   It gives a host of examples, many of which emphasize retirement as an opportunity for new growth. (See, “How Retirement is Being Reinvented Worldwide.”)

A city clerk in Alabama stayed on because “she simply loves her job.”  A Japanese man, forced to close his rice shop age 63, “found a new job as a taxi driver – and plans to keep at it for years to come.”  A teacher in Wales lost her job and then set up a career-counseling firm to help other retirees find work.  She commented optimistically:  “Lots of people . . . have so much to offer.”

I don’t doubt the truth of these vignettes, or even the sentiments.  Work is the central way our society offers people to discover and develop themselves.  And it has become virtually the only way we have of connecting with others.  Indeed, in our world, work has eclipsed all other meaningful activities.  As a result, the person who finds a way to keep working may well be looking forward to a better life.

But not everyone can find suitable work in retirement or can continue with their old jobs.   Moreover, the process of finding financial security is fraught with anxiety.  The loss of old jobs and the identities associated with them is often full of pain.  Fragmented families have fewer resources to provide support.  Age leads to diminished energy and mental acuity, and often illness and depression, and the prospect usually only worsens as one gets older.

And, of course, the problem exacerbates the growing disparity between the rich and the poor.  Those retirees who have money in the bank not only have less to worry about, they have more choices about the kind of work they want to pursue.

Our society has created a profound contradiction.  Work has become virtually our only source of meaning and value.  And yet the demands of our economy put countless obstacles in the way of finding jobs.  Economic competition means that organizations must become “leaner and meaner,” reducing benefits, downsizing, outsourcing, squeezing greater productivity out of the workforce.  Work is becoming a scarce commodity.

We need to face this contradiction, not paint over it.

Another Look At Managing Risk

“Any sufficiently complex, tightly coupled system will fail sooner or later,” argues Charles Perrow, emeritus professor at Yale. Complexity makes it likely that some essential feature will be overlooked.  Being tightly coupled means that the failure of one part will drag down the rest.  In other words, according to Perrow, accidents are “normal.”

This combination characterizes financial systems and nuclear power plants, as Tim Harford recently pointed out in FT.  To better understand the problem – and what can be done about it – he visited the Hinkley Point B nuclear power plant in the UK, and talked with the engineers.  With their help, he offered a graphic account of the meltdown at Three Mile Island.

“More than 100 alarms were filling the control room with an unholy noise. The control panels were baffling: they displayed almost 750 lights, each with letter codes, some near the relevant flip switch and some far. Red lights indicated open valves or active equipment; green indicated closed valves or inactive equipment. But since some of the lights were typically green and others were normally red, it was impossible even for highly trained operators to scan the winking mass of lights and immediately spot trouble.”

Harford asked the head of nuclear installation safety at the International Atomic Energy Agency what was learned from the Three Mile Island meltdown. “When you look at the way the accident happened,” he replied, “the people who were operating the plant, they were absolutely, completely lost.”

Similarly with the 2008 financial meltdown, all the signals and alarms went off at once.  The complex derivatives that many did not understand collapsed in value as mortgage defaults increased, the insurance taken out against losses was over-extended, the shallow assurances of the ratings agencies turned out to be unreliable, the assumptions of economists about self-correcting markets proved false, and financial models did not take into account the interconnectedness of events or the vast extent of the shadow banking system.  (See, “What We Can Learn From a Nuclear Reactor.”)

These all were failures of understanding, human failings not mechanical ones.  As at Three Mile Island, there were indicators and models that risk managers checked out, systems they set up and believed in.  But in many cases the confidence was misplaced, the complexity of the system poorly understood.  They had constructed a Rube Goldberg machine, too busy cranking out the profits or the power – too willing to take for granted that the checks in the system worked.  They were not mindful of the whole.

Harford points out the need to simplify the system, decouple it, or reduce the consequences of failure.  Information has to be organized to be useful.  Or the elements of the system have to be isolated, smaller.  If accidents are normal, we have to be more aware of what is happening or minimize the danger.

The point is gthat we have to think about failure, the inevitability of accidents.  If we could get used to the idea that accidents are “normal,” we might be able to take a hard look at how they are going to occur, and not keep fooling ourselves into thinking they won’t.

(Originally published at Mindful Money)