4 money lessons from Fred Flintstone

Shermer notes that our brain chemistry is hard-wired to recreate such pleasurable experiences. "The dopamine-rich centers of the brain that are involved in reward and reinforcement are there to get you to do the same things over and over."

The good news: In much the same way that friction slows the speed of a moving object, you can squelch a spending spree. If you take time after that initial purchase -- to eat lunch, clean the kitchen or drive somewhere far, far from stores -- you're less likely to keep shopping.

Why do we blow our tax refunds?

Technically speaking, money is fungible. That means, cash is cash is cash. Over the course of a lifetime, according to classical economics, people would ideally treat all cash the same, distributing their earnings, assets and savings more or less evenly over the years.

Economists called that income smoothing, before they realized that almost nobody ever did it.

In reality, people tend to divide their cash, mentally, into different accounts, according to the behavioral-life-cycle theory of consumption, which was introduced by Hersh Shefrin and Richard Thaler 20 years ago and further developed by other researchers since.

That means you're more likely to get that tax refund check, raise or bonus and think, "Bermuda!" -- rather than rationally integrate the windfall with your total financial picture and save it to smooth out income and expense bumps down the road.

Shermer notes that the primal urge to seize one's resources also comes into play when the market plunges. People respond to panicky signals from the brain's primal core, the limbic system. "If you can get the cortex to kick in and override the limbic system, you won't make such short-term decisions," Shermer says.

The good news: You can fool your prehistoric urge to capitalize on resources in the short term by turning a step toward tomorrow's goal into today's triumph. Use a windfall to wipe out your smallest debt. Create a separate savings account and call it an emergency fund.

Why a DVD today trumps retirement tomorrow

If you were to save $100 a month for the next 30 years in a retirement account, you would end up with a stash of about $117,000, assuming a 7% return.

You would think that $117,000 would be enough of an incentive to get people to save that $100, instead of spending part of it on a "Superbad" widescreen edition, but often it's not.

According to a 2006 survey of 2.6 million employees by Hewitt Associates, only 68% had enrolled themselves in a company 401(k) plan. Nearly a third of employees had not.

Why, why, why?

Because of hyperbolic discounting. "Human beings evolved in a resource-poor environment," Shermer says. "Anything you have now is worth a heck of a lot more than what you don't."

Thus it's easier to grasp the worth of $100 in the hand than believe that someday, with compound interest, it will be worth a whole lot more.

The good news: You can appeal to the more rational side of your brain by calculating the long-term gain of saving now. That's why humans evolved the prefrontal cortex -- and are able to use neato online retirement calculators like this one. By doing the math and placing a call to your human-resources office to increase (or start) your 401(k) contributions by even $100 a month you already know how much richer you'll be.

Why we're paralyzed by choices

Have you ever wondered about your deer-in-the-headlights response to the open enrollment period for your benefits package?

Something about the gazillion variations on your health plan, 401(k) and health-savings account can put you in a financial coma.

You're not alone, and you're not pathetic. This is what researchers have dubbed the paradox of choice, after the seminal 2004 book "The Paradox of Choice: Why More Is Less" by Barry Schwartz, a professor of social theory at Swarthmore College in Pennsylvania.

Though human beings love to have options, having too many alternatives doesn't make us happy. It drives us nuts and often leads to inertia instead of action, says Shermer.

"If you go to the store and find 57 different toothpaste choices, there is no way to calculate the merits of them all," he says.

The good news: Instead of trying to be a maximizer, weighing the pros and cons and parameters of every choice, in this modern world it's often smarter to be a satisfier -- someone who can make a good-enough choice and move on.

If you find that too many choices leave you overwhelmed, frustrated and unable to push forward financially, remember that treading water rarely pays off. Even if you feel uncertain, take a single step in the right direction.

A personal example: It took me years to get past the inertia that paralyzed me every time I tried to make a decision about how to invest my individual-retirement-account funds.

I was afraid of making a bad choice, but meanwhile, my money was stuck in a low-yield money market account.

Finally I decided to pick a Fidelity life-cycle fund -- the 2040, if you're interested (see "1 earner, 2 retirements? Yikes!") -- and the account, including my contributions, has nearly doubled in the past two and a half years.

Yabba dabba do.

Published Feb. 6, 2008

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