In this episode, Mark and Shani explore two powerful personality types that influence how you save, invest, spend and make decisions.

Based on a concept shared by Christine Benz and originally coined by Nobel winning economist Herbert Simon, this mindset may explain why you’re either:

• constantly tinkering with your portfolio, OR

• avoiding financial decisions altogether.

They break down why too much choice (ETFs, super options, asset classes) makes us less happy, how maximisers can slip into overtrading, why satisficers procrastinate important tasks, and how to find the right balance. This is behavioural finance at its most practical and most relatable.

You can find Christine Benz’s article here.

You can find the transcript for the episode below:

Shani Jayamanne: Mark and I have had very different lives. Mark had his first investment before the age of 10. I started investing after I started full-time work. Our lives, financial goals and experiences have meant that we have very different investment strategies.

Mark LaMonica: We do have a few things in common, though. The first is that we’ve spoken to hundreds of investors about their journeys and understand what is most helpful for them.

Jayamanne: The second is that we both work at Morningstar because we’re able to do this with independence. We don’t have to recommend a particular product or asset class. Our only vested interest is in helping you achieve your outcomes.

LaMonica: The last is that although we have vastly different life experiences and differing investment strategies, the fundamentals and the underlying principles that we follow are the same. And it’s these principles that we take a deep dive into in our book, Invest Your Way.

Jayamanne: Invest Your Way is a guide to successful investing with actionable insights and practical applications. It focuses on the investor instead of the investments. You’re able to purchase a book and audio book through the links in the episode notes, through major bookstores or request a copy through your local library.

Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

LaMonica: So, Shani, our topic today is a little different. And we got this topic from an article from one of our colleagues in the US named Christine Benz.

Jayamanne: And Christine Benz is a huge name in US personal finance, specifically very focused on retirement.

LaMonica: So, Christine is also involved in the Bogleheads Conference, which is an investment conference in the US that caters to adherence of Vanguard founder John Bogle, who is the big passive investing cheerleader. And Christine was reviewing attendee feedback on different sessions at the conference and noticed that people’s opinions of sessions varied dramatically.

Jayamanne: And she attributed this contradictory feedback to investors falling into two categories. So, the first category was optimizers. These are people who want in-depth sessions on building the perfect portfolio and getting every allocation to each niche asset class correct.

LaMonica: Then there are satisfisers, which is a made-up word, but it was coined by an economist named Herbert Simon and combined satisfy and suffice. So, these people are looking for acceptable choices rather than the best possible one. These are people that are more into big picture items that are more focused on life outcomes than the intricacies of investing.

Jayamanne: And Christine encourages people to think about where they are on this spectrum between the maximizers and the satisfisers. So, let’s start with us. Where are you, Mark?

LaMonica: So, I think I’m more of a satisfiser, even if I can’t really say the word. But I think I’ve been moving more in that direction as I’ve gotten older. I just feel like I identify more with good enough instead of perfect with my finances. So, what about you, Shani?

Jayamanne: So, I think this is a challenging one for me to place myself. So, I think when it comes to things like minimizing taxes and saving money, I’m more of a maximizer. But I think when it comes to my portfolio, I’m more of a satisfiser. And just because I use mostly passive investments and set and forget my portfolio.

LaMonica: So, you know where else you’re a maximizer, Shani, and that is with saving money. So, if there is a deal on anything, Shani knows about it. Just last week, you saved me half off a sandwich that I got.

Jayamanne: Yeah, a good sandwich at Lucky Pickle.

LaMonica: Yes, it was a very good sandwich. The chili katsu sandwich, if anyone ever goes to Lucky Pickle. But I think one of the reasons why it’s important to think about where you fall on this spectrum is to think about some of the downsides of each approach. So, let’s go through the satisfiser first. So, why don’t you take this one, Shani? And it’ll be a good opportunity for you to air all of your dirty laundry.

Jayamanne: Okay, so one of the issues is that satisfisers can run into is letting inertia take over and not make changes that make sense because what they’re doing is good enough. And one area that you’ve written about is knowing you wanted to make a change to your super and then you waited a year to do it.

LaMonica: Yes, that is true. I’m guilty of that. But I think the lesson here is if you’ve identified something that makes sense to do with your finances, try not to procrastinate too much.

Jayamanne: A good life lesson. So, let’s move on to maximizers.

LaMonica: Well, I think one issue is that if you are a maximizer, you may be more inclined to constantly tinker with your portfolio. So, we talk a lot about over trading and how that leads to poor investing outcomes.

Jayamanne: And I will say I have to actively stop myself from doing this. Every time a new product comes out that has slightly lower fees, I feel the need to switch. But I do have to hold myself back because I know overall when taxes taken into account, to account that’s just the wrong decision.

LaMonica: We have to talk about happiness. So I think that’s another important component of this, which means we need to dive a little bit into economics. So historically, economics has been based on something called rational choice theory. And the idea is to think of life like a buffet where all of your choices are available. And this isn’t just any buffet. It’s a buffet where you’ve had each of the items and know how good everything is. And that allows you to make relative choices between all of these different items.

Jayamanne: And in economic speak, it means that you know the costs and benefits associated with each choice, which allows you to assign relative utility to each. Being able to do this allows you to maximize your outcomes.

LaMonica: And we’ve talked about behavioral economics, which is a field of study started by two economists, so Amos Tversky and Daniel Kahneman. They show that humans routinely violate rational choice theory for all sorts of reasons. But what we want to focus on today is one of the underpinnings of rational choice theory, which is the notion that you can never have too many options.

Jayamanne: And remember that rational choice theory says that humans can assess each option and make the best decisions. Naturally, this means that more choices are better because the new option added might be the perfect one for you. And most people tend to think that this is true and always want as many options as possible.

LaMonica: But it turns out that lots of different studies show that this isn’t true. People actually have more satisfaction with their choices when they choose from less options. So it’s suspected that one reason for this is avoidance of potential regret. The more options you have, the more you may second guess your choice, which takes away any pleasure from actually making that choice.

Jayamanne: And we’ve talked about loss aversion, where having a share you own goes down and that provides more psychological distress than the joy that you get from going up. This is regret aversion, where you are less likely to be happy with your choice if there are more options. And the other issue people run into is that the more choices you have, the more difficult it is to gather information on each choice so you can pick the right option for you. You might be able to research and feel good about your choice if you have four options, but it becomes very difficult if you have 200 options.

LaMonica: So in a research paper titled Happiness is a Matter of Choice, and this is from the Journal of Personality and Social Psychology. The authors listed three issues that arise with an overabundance of choice. There is a problem we have talked about with trying to gather adequate information on each option. There is a problem that our standards about what an acceptable outcome is increases when we have more choice. And there is the issue that we tend to blame ourselves for bad outcomes more when they occur in a situation with lots of choices. So the implication is that more choice hurts our mental well-being.

Jayamanne: So how does this relate to investing? Well, just look at the huge increases an ETFs offered on the market, and that’s one example. We can run through those three issues and relate them to ETFs. So if there are hundreds of ETFs to choose from, how do you do the research needed to pick one? It’s impossible. With abundant choice of ETFs, we either suffer analysis paralysis because our standards of which ETFs to buy are too high, or we constantly turn our portfolios as we choose one and then another. And finally, we tend to blame ourselves if one of our ETFs goes down because at least some other choice has probably gone up.

LaMonica: And I think there is one more issue that occurs that specifically relates to the idea of maximizers. So many people like to imply that there are right and wrong decisions to make with your money. In some cases, this is obviously the case. It’s better to save money than go into massive amounts of debt. But we are sold this notion often by the financial services industry because they are trying to sell you on becoming a maximizer. Maximizers trade more to always have the perfect portfolio and brokers profit off of how much you trade. Maximizers seek out the smartest professionals to run active portfolios. But if you aren’t careful as a maximizer, you can start to get into an investment approach that assumes you have a crystal ball. But of course, none of us do.

So you won’t know the best financial decision except in hindsight, and that’s what makes investing so difficult to do. So thank you guys very much for joining us. A little bit of a different topic today, but we hope you enjoyed it. And if you have any questions or comments, my email address is in the podcast notes.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

If anyone would like to support this project you can buy the book now. Thanks in advance!

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