The Anchoring Effect


In theory, consumerism is a basic concept. Whether it’s food, clothing or electronics, you decide what product you need and how much you are willing to pay for the good. Large items, such as houses, automobiles and recreational vehicles, have long been negotiable. Retail store goods, however, come at a fixed price. For years, consumers were tasked with deciding whether or not the good in question was worth that set cost. Retailers began using sales techniques to move products off the shelves for various reasons, ranging from boosting quarterly revenue to clearing space for the next year’s models.

As the retail industry evolved over the years, however, its marketing strategy became more sophisticated. Not only were retailers spending more money on advertising, but they also began capitalizing on their consumers’ cognitive spending biases. As a result, sales have increased to such an extent that it’s impossible to walk into a department store like Kohl’s or Macy’s without seeing sale prices on a large variety of items.

If you consider yourself a rather astute shopper, as I do, then you won’t allow yourself to be swayed by the immediacy of today’s sale on those shoes or long-sleeve tee, knowing full well that such a price will unlikely be limited to a one-time occasion. As it turns out, the illusion of a unique sales event is not as important as the concoction of a random original price. It doesn’t matter if Kohl’s never had any intention of selling that button-down dress shirt for $49. What matters is that the consumer fixates on that price first. Retailers have found that more people are willing to buy a $34 shirt if its marked down 30 percent from $49 than the same exact shirt originally priced $34 with no discount.

Say hello to the anchoring effect.

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Stay the Course: Nasdaq at 5,000

You may have heard the news last night or this morning that the Nasdaq composite index finished above the 5,000 mark for the first time in over 15 years and for only the second time ever. Big news, right? Maybe, maybe not. I believe stocks are a tool to be used primarily for long-term investments (5+ year horizon), so I have never been one to get caught up in the day-to-day, week-to-week swings of the Dow, S&P 500 or NASDAQ indexes.

The Nasdaq’s breakthrough on Monday is valuable in highlighting the stock markets’ role in your retirement portfolio. It’s also reminder to stay the course. So many people my age allowed their emotions to get the better of them in at least one of the market crashes over the past 15 years. Instead of taking the time to understand what the economic downturns actually meant, they pulled their money out at the worst possible time. Despite knowing the old adage to sell high and buy low, they did the opposite out of fear. Many are now blaming Wall Street for their languishing portfolios.

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The Percentage-Based Budget

Several hundred publicly traded companies will report their quarterly earnings this week. Some of the names are ones you might recognize, such as Domino’s Pizza, Hewlett-Packard and Home Depot, while most others are companies you didn’t know existed, starting with Aixtron SE and ending with ZAGG Inc.

All of these companies, regardless of sector or size, share one distinct commonality: a detailed balance sheet. In layman’s terms, all publicly traded companies share their budgets, plotting total assets and against total liabilities, for regulatory purposes and shareholder examination.

Fortunately, our personal finances are not held up to such intense scrutiny, although it may not be a bad thing. Income level aside, if your accounting practices were held up to the light, would your budget pass the Securities and Exchange Commission’s test?

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Refocusing Amidst the Chaos

The sun rises slowly at our house. My preferred alarm clock most mornings is the creak of a bed down the hallway, followed by the soft thud of my four-year-old daughter’s feet hitting the floor. Next comes the pitter-patter that you often read about in books and hear about in songs, although the sound is even more pure when it’s your child in your home. The footsteps grow louder with each passing second, like an oncoming freight train, although in the early morning hours, my daughter is more fleet of foot than any rolling cylinder of metal. Rarely is there a better way to start the day than with the soft whisper of a child asking, gently, “Daddy?”

She comes to my side of the bed not because she loves me more, but because she knows I require less convincing. Even at her young age, she can effortlessly coax me out of bed to fetch apple juice and a cereal bar as a precursor to breakfast; an appetizer, of sorts. The sensible adult decision as I stagger downstairs in my predawn fog would be to reach over and turn on the Keurig before opening the refrigerator and absorbing that temporary, yet harsh burst of light. Time is at a premium these days. Just read any handful of blog posts and articles detailing the importance of multitasking in manufacturing 26 hours in a 24-hour clock. An early morning start would help accomplish just that.

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The Hidden Benefit of the Roth IRA

If the 401(k) is the granddaddy of retirement investing, then the Roth IRA is the cool kid next door. The 401(k) emerged from the Revenue Act of 1978, which included a provision that employees would not be taxed on a portion of their income they elect to receive as deferred compensation. The money you funnel into your 401(k) is sliced off the top of your taxable income, thereby lowering your current tax bill, and those funds are tax-deferred until you withdraw them after 59 ½. The Roth IRA arrived nearly 20 years later in the Taxpayer Relief Act of 1997 and was named after its chief sponsor, Senator William Roth of Delaware. Contributions are not tax-deductible, although the beauty of the Roth IRA is that withdrawals are tax-free after 59½.

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Post-Holiday Credit Card Blues

If you were one of the millions of Americans frantically purchasing gifts for family and friends in the chaotic days leading up to Christmas, your day of reckoning is upon you. Now that the December billing cycle has come to a close, the reality of your purchases come to fruition with the credit card due date that hits around the start of February.

The pure evil genius behind credit cards has gradually been exposed over the last four decades. One example of the dangers of plastic is explained in a paper by MIT economists Drazen Prelec and George Loewenstein published in 1998 – “The Red and the Black: Mental Accounting of Savings and Debt.” At the crux of their findings was the pain of paying concept; the notion that cash purchases “undermine the pleasure derived from consumption.” If you walk into a store with only a $20 bill in your pocket, your selection process for how to spend that money will likely be meticulous and at times stressful. It’s a rite of passage for high school boys to gather their part-time job savings for date night only to have the available fund balance detract from the evening due to constant calculations. Splurge on the molten lava cake for dessert, or save money for popcorn at the movie theatre? Put an extra gallon of gas in the car or use that extra $3 for a shared Coke and say a prayer that you don’t have to call her father to explain why you ran out of gas after curfew?

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Marriage & the Gender Pay Gap

I won’t waste time in rehashing the overwhelming study data and anecdotal evidence that details the gender pay gap. What we do know is that women were paid 78 cents for every dollar a man was paid among full-time workers in 2013. We also know that women are less likely to ask for a raise than their male counterparts. Only one in four professional women asked for a raise over a 12-month period ending in 2013, according to a recent study .

One critical aspect of the gender pay gap that hasn’t received enough attention, however, is the fact that women earn roughly 90 percent of what men are paid until they reach the age of 35. After that benchmark, the pay gap dramatically increases on average. It’s no coincidence that age tends to be when marriage and children are the focal point of women’s personal lives.

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Reliving Your Glory Days

I was early in my formative years in the spring of 1985, although my palate for rock music was already well-defined. Having older teenage brothers has that effect. My most vivid music memory as a child was listening to Dire Straights’ “Walk of Life” over and over again on my Fisher Price turntable record player. The angst I felt in trying to position the brown center knob just right so it wouldn’t fall down while playing my collection of three 45-rpm records was replaced with masculine pride as I belted out verses about topics I knew nothing about.

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Stay the Course in 2015

Happy New Year!

What better way to kick off 2015 than with advice from investment wiz Warren Buffett?

In one excerpt of the Berkshire Hathaway CEO’s 2014 annual letter to shareholders, Buffett talked about focusing on the future productivity of your assets instead of the day-to-day fluctuations. People watch CNBC 24/7 and panic over one percent drops in the stock market, yet pay no mind to slight variances in their home prices. Why? Because most of us buy homes for extended periods of time and take out 30-year mortgages to do so. I’m not overly concerned with the valuation of my home today, as I have no plans to move for another 4-5 years. House price data is also not slammed in your face every evening on the local news.

That’s not the case, however, with the stock market. Every dip and rise is news worthy because so many attempt to time the market and attempt to make significant profits in short order. It doesn’t work, folks.

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How Much Money Do You Need in Retirement?

Financial advisors have long recommended that you need to save enough to reproduce 80 percent of your current salary for retirement income. If anything, that suggestion serves as a starting point, but what does it really mean? Let’s assume I make $100,000 a year. If I retire at 65 and expect to live to 90, then I would have to accumulate $2 million in savings, not counting Social Security or pensions, before pushing away from the work desk for good to meet that 80 percent threshold.

Easy enough, right?

Unfortunately, our income-driven society and the corresponding financial planning often leave out one equally important variable in determining how much money you need to live on after freeing yourself from the daily work grind – your expenses. There’s income and there’s outgo. As destructive as inflation can be to the future dollar value of your nest egg, lifestyle creep might be even worse. As your income rises, so does your spending level. As we progress through our careers, our promotions and raises are all too often visible in the form of bigger homes, nicer cars and high-end clothing and not in the size of our savings accounts.

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