One of several recurring sub-themes here at Bad Money Advice is that some givers of personal finance advice, particularly the mass market gurus, say things that can only be justified assuming an irrational audience incapable of acting in their own best interest.
So, for example, when Suze Orman tells her readers that they should absolutely never borrow from their 401k account to pay off a credit card balance, I give her a hard time for giving terrible advice based on the assumption that her audience has no willpower and will merely run up the credit card balance again.
But when I criticize the gurus for giving bad money advice that is, in fact, bad psychotherapy, I do not mean that everybody ought to be able to behave in a perfectly rational manner around money. Quite the opposite. We are all merely human, not uber-logical Vulcans. We act sub-optimally around money (and everything else) for a variety of emotional and behavioral reasons.
But the Ormans and Ramseys of the world don’t make this situation better in the way they take psychology into account, they make it worse. First, they rarely disclose that the advice they peddle has a psychological spin. In moments of reflection they may remark that what they do is more about emotions than mere logic, but when giving advice they almost never reveal that what they are saying only makes sense in the context of some assumed shortcoming in the listener.
Indeed, they often concoct spurious arguments that attempt to justify the advice as being perfectly rational. In other words, not only is the advice not labeled as being for those who can’t manage the hard and logical path, it is falsely labeled as that logical path.
So Orman argues against borrowing from a 401k because it is "just too risky" in the current economic environment, not because she thinks you will be unable to resist the temptation to go deeper into debt. And when David Bach pushed the Latte Factor he didn’t say it is a small gain for a small sacrifice, and that is just part of being a responsible grown-up. He exaggerated the benefit so that even a caffeine addled slacker with neither foresight nor willpower could get excited about it.
To his credit, Dave Ramsey does admit, occasionally, that his snowball plan for debt reduction is “more concerned with modifying behavior than correct mathematics.” But he gets only partial credit. Using the term "mathematics" obscures the point that he is telling his listeners to do something that will cost them more money than taking another, relatively obvious, route.
My second objection to the way that the gurus deal with money irrationality is that they implicitly make the assumption that their entire audience shares the same foibles. Indeed, listening to them you get the impression that they believe these problems to be universal to the human condition. Ramsey does not argue that credit cards are dangerous for a few people, he argues they are a bad idea for everybody, himself included, and makes the extraordinary claim that rich people don’t use them. (Total Money Makeover, p.42.)
I believe that we are all imperfect in our money behavior, but that the nature and degree of this imperfection varies greatly from person to person and even from time to time. In contrast, the personal finance mainstream apparently believes that everybody is impulsive and lacks either the foresight or the willpower to save for the future and avoid going into debt frivolously. As an empirical matter, this is not true. Recent work has shown that there are sizable numbers of consumers with the opposite problem, that they save too much.
Moreover, by continually saying that being foolishly shortsighted is natural and ordinary behavior, the gurus reinforce that behavior. Everybody likes to be normal. Not paying off your credit card balance every month is a lot easier to rationalize if you have been told that this is what everybody else does.
Which brings me to my third and most important objection. The gurus presume that these bad habits are incurable. Learning to conquer your natural tendency to spend more than you have is impossible, so don’t bother trying. It makes more sense to hamstring yourself by limiting your future options, for example by not having a credit card at all or by paying down your mortgage early.
Hence, the root of my first objection, that the mainstream personal finance advisors rarely own up to giving advice that makes sense only if the listener has a behavior problem. If you think that these problems are universal and unfixable, then there is no sense in upsetting the patient by telling him that he is crazy. Better to use smoke and mirrors to make him think that your instructions are what a sane person would do.
I am not an expert in psychology so I am not going to express an opinion on how curable these problems are. But it seems obvious to me that many people who have trouble with this kind of self control could learn to act more maturely. And that that learning is not going to happen if those people are either not told that they have a problem or, if they are told, that the problem is a natural and incurable part of being human.
Telling a person with a spending problem not to own a credit card is like telling an alcoholic with a history of DUI not to own a car. Selling the car may be an immediate fix, and for some it may turn out to be the only thing that works, but it is both drastic and doesn’t confront the core of the problem. (And, of course, Ramsey thinks we are all alcoholics, so nobody should own a car.)
I believe that the primary driver of our personal finance problem is not psychology and behavioral flaws but sheer ignorance about the ways of money. Of course the psychological factors are real and important, but allowing them to dominate the conversation, allowing advice meant to counteract a behavioral problem crowd out simple rational advice, makes the situation worse, not better.
[That's Sigmund Freud on the Austrian 50 shilling note, BTW.]