The Tragedy of Impulse Saving

As any reader of this blog knows, I enjoy nothing more than tweaking the nose of personal finance conventional wisdom. Well, joy of joys, yesterday’s New York Times had an article, in the science section no less, that spits in Reading_glasses Cropconventional wisdom’s face, knees it in the groin and then kicks it as it rolls on the ground.

The piece discussed the work of Ran Kivetz and Anat Keinan, two professors of marketing from Columbia and Harvard Business Schools respectively. (Marketing professor is, incidentally, the same line of work as the authors of The Millionaire Next Door.)  They have discovered a new malady to avoid: saver’s remorse.  It’s just what it sounds like: that sad feeling you get with money in your pocket that you could have spent in some enjoyable way but, in a moment of weakness, chose to save.

This is just so awesome.

The sober professors don’t call it saver’s remorse.  I think John Tierney, The Times’ science guy, came up with that.  They use the term hyperopia, literally excessive farsightedness.  Sufferers of hyperopia “deprive themselves of indulgence and instead overly focus on acquiring and consuming utilitarian necessities, acting responsibly, and doing ‘the right thing.’” (K&K 2006 p.274)

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The Great AIG Witch Hunt

AIG is (was?) one of the largest insurance companies in the world, with a finger in nearly every line of business that could be called insurance, including, fatally, credit default swaps, or CDSs.  A CDS is a form of insurance in which the issuer (AIG) guarantees that a bond will be paid off even if the borrower defaults.  AIG wrote massive amounts of this insurance on bonds backed by American residential mortgages, allowing holders of these bonds to treat them as very safe and stable AAA rated investments.  In the clarity of hindsight,Midnight_torches crop AIG was amazingly foolish.  They apparently did not consider that if the real estate market went south then all those mortgage bonds would be in trouble at the same time.

Of course it did go south, and AIG had hundreds of billions of dollars of insurance claims that it could not pay.  This being one of the most extreme examples of Too Big To Fail that could be imagined, the US Government stepped in, took AIG over, and proceeded to pump in enough money to make good on its debts.  There may have been, at first, a hope that AIG could be saved as a going concern, but it soon became clear that the only practical game plan was to stabilize the situation long enough to sell off the many sound operations that AIG owns and wind down, in as orderly and cheaply a way as possible, the CDS business.  The money thus raised and saved won’t be enough to make the taxpayer whole, but it’s a lot better than nothing. 

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How the Wall Street Journal Covers the Economy

There’s a great bit of unintentional media self-mockery at  It’s a profile of, and video interview with, one of the principal economics reporters at the Wall Street Journal.  She’s 23, perky, suspiciously videogenic, and has 18 months of professional experience.   She explains her job thusly:

I take really jargon-heavy reports and turn them into ‘No one is ordering U.S. products. So that’s why U.S. manufacturing jobs are being cut. So that’s why your cousin is out of a job.’

Sometimes the blog just writes itself.

Is Owning or Renting Best?

There was a time when owning the roof over your head was considered an attainable and wholesome mark of prosperity for American families.  See, for example, the higher calling for which George Bailey gives up his youth in It’s a Wonderful Life.  (In retrospect, George was making sub-prime loans from a dangerously over-leveraged and illiquid bank.  It was a simpler time.)  Over the decades conventional wisdom on home ownership morphed from Victorian House wholesome goal to sound idea, then to great idea, and finally to such a great idea that it was practically free money.

Then it all went kablooey, and conventional wisdom started denying that it ever said any such thing.  It’s really not clear what mainstream advice on home ownership is right now.  Big time gurus like Suze Orman and David Bach (author of, among other bestselling titles, The Automatic Millionaire Homeowner) now spend time cautioning people about the dangerous waters of home buying and contradict, without apology or even acknowledgement, advice they gave a few years back to jump in with both feet.  (See excellent article on this at the Wall Street Journal here, and my discussion of Orman’s latest book here.)

So perhaps now is as good a time as any to step back, push aside the headlines of the day, and reconsider if owning the place you live in is a good idea in principle or if maybe renting has gotten a bum rap all these years.  Moreover, it’s worth asking if owning vs. renting is a question that should have a general one-size-fits-all answer.

Read more » Taken to Task

I’m just back from a week’s vacation, all rested and ready to blog.  The big event while I was gone was a really positive post about Bad Money Advice on Get Rich Slowly, which I earned by taking several cheap shots at it the week before I left.  The mention brought a significant bump in traffic, which was unfortunately met by the blog equivalent of a “Gone Fishin” sign.  Sorry about that. I’m back now, and I’ll have a real post up first thing in the morning.

In the meantime, one of my newly acquired fans sent me a link to a post on CreditMattersBlog that’s right up Bad Money Adivce’s alley, about some very sloppy journalism at, an outlet that really ought to know better.

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