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Neuroeconomics in 2012 Townie Meeting & Vegas by Douglas Carlsen, DDS

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by Douglas Carlsen, DDS

Day 1
While on an animated flight on April 25 from Denver to Las Vegas for the annual Townie Meeting, I commenced examination of the brainmoney connection. Would my financial ego survive? Could I overcome my amygdala? Would I retain anything academic or financial?

Jason Zweig, personal finance columnist for The Wall Street Journal, senior writer for Money magazine and author of Your Money and Your Brain (Simon & Schuster, 2007) provides insight on emotion and money.1

Greed/Anticipation: Zweig posits that we react more strongly to the anticipation of profit than when we actually receive it. Why? Jaak Panksepp of Bowling Green University calls it “the seeking system.”

Over eons of evolution, the thrill of anticipation put our senses on high alert, in case something uncertain, yet quite tasty, ventured along.

Yet, as Zweig reveals, this seeking system can be both a blessing and a curse. The future often feels better than when it reaches the present.

An example for a young dentist is the thrill of the potential million-dollar practice and accompanying high income. Yet many of us, after reaching the goal, lament for the simple days of yore: fewer employees, less insurance control of the practice, fewer accounts receivable to chase, less involved treatment plans, fewer accountants, financial planners and attorneys.

Are we really happier than we were while anticipating the lucrative practice? Many of us would give up the iPad/intra-oral camera/dual monitors in each room and a staff of eight for less employee drama and some time on the golf course and to attend more of our kids’ soccer games.

Regarding investing, Zweig comments, “When possibility is in the room, probability goes out the window. It’s no different when you buy stock or a mutual fund. Your expectation of scoring a big gain elbows aside your ability to evaluate how likely you are to earn it. That means your brain will tend to get you into trouble whenever you’re confronted with a opportunity to buy an investment with a hot – but probably unsustainable – return.”2

Anyone heard of Madoff, dot-coms, hedge funds, technical analysis and options trading? There’s always that “certain” shortcut to retirement fund success.

Day 2, morning; Vegas
Where did greed/anticipation fit in? According to a couple of bald guys I met at the opening Wine and Cheese party on night one, anticipation of the Cosmopolitan Hotel’s Chandelier Bar the first night held more anticipation than any casino windfall. Yet, the future felt much better yesterday than when it reached today’s hangover.

Fear
It’s all your amygdala’s fault. Your brain’s reflexive alarm system can destroy your best investment intentions in a moment. Zweig reports that the stock market’s crash of 23 percent on one day in 1987 caused investors to sell off stocks in huge numbers. In fact, it took until 1991 for stock sales to reach 1987 levels. Unfortunately for those scared away, the stock market made big gains over those four years.

Studies indicate that fear of loss is much stronger than greed. Even when the market is riding high, people fear that they didn’t get in at the right time. In other words, negative emotions eat you up even when things are going well.

In 2012, with the S&P 500 doubling over the last three years, two fear camps remain: those who are sure that things will tank again at any time, similar to the fear memory of 1987 and 2002, and those who are afraid that they didn’t get back into the market in time to regain what many others have since 2009.

Overall, the only ones who come out ahead are those who escape fear. Amongst dentists, you might identify them as brave, inane, just plain stupid, lucky, comatose, really regimented with a plan, having an overbearing and cheap spouse or incarcerated. For more on white matter and green matter, a Zweig 2012 video can be found at www.youtube.com/watch?v=3aKV5Htl1qw.

Day 3, morning; Vegas
After that video, I didn’t notice anything red, black or with fruit pictures last night. The Townie James Bond party was epic. What happens here, stays here.

For more insight on investing behavior, Gregory Salsbury, PhD, author of Retirementology – Rethinking the American Dream in a New Economy, provides us with several common, harmful mistakes.3

The House Money Effect
“Encouraged by rapidly rising home values, millions of homeowners fell victim to the wealth effect, which caused them to develop an inflated perception of their net worth. The wealth effect gives rise to what I call the house money effect, a concept based on the mindset of gamblers who experience big wins and are consequently willing to take more risks because they’re playing with house money.”

According to Salsbury, Americans subsequently used their homes as ATMs to buy anything and everything, and felt their homes would fund retirement. He further points out the “deepseated emotional attachment people have to their homes” and that in reality, a home is shelter, not an investment. He further posits that a mortgage in retirement significantly diminishes one’s life style.

For dentists, it might make sense to consider either paying several hundred dollars more per month while approaching retirement or to downsize to a significantly less expensive home. A $3,000 monthly mortgage in retirement provides the difference between virtually no travel nor golf, and several cruises, a trip abroad and all the golf you can handle.

Layering
Salsbury says layering provides a psychological disconnect that makes money more opaque. Credit and debit cards, electronic bank statements and electronic trading provide layers between where the money was earned and where and how it is spent. Using a credit card for purchase provides one layer, having your receipt sent to your e-mail provides another and then having Quicken reconcile your statement provides another.

For dentists, one example is the auto lease. You lease your auto with little work on your part as the dealer’s finance department makes it quick and easy. Forty months later, you “trade up” to another auto with even more ease.

In comparing a new vehicle cash purchase versus leasing that same vehicle with fees equivalent to 14 percent per year,4 the doctor saves $257 per month for a $40,000 car. That $257 invested conservatively (50/50 stocks to bonds) for a 35-year dental career becomes $300,000 in 2012 dollars, or $12,000 in income per year for life. Two cars: $24,000.

Combine the two savings totals above and a retired doctor that never leases and carries no mortgage into retirement has $60,000 per year more income. A $60,000 increase per year buys a lot of travel, golf, tennis and nursing home security.

Last night in the Entertainment Capitol of the World: I layeredup to see Cirque del Soleil’s Beatles. $160! Was it a dumb investment? Not at all; it was budgeted entertainment… and beat the Cosmo bar with the bald guys.

 Bottom Line: What can a dentist do to combat the tendency to “buy something, then always worry about how that something was bought?”
  • Investing: Keep it dull. The thrill can kill. That sure thing usually isn’t. Don’t mix speculation (single stocks, sectors such as commodities) with investing (broad diversification over the entire market). Don’t use CNBC for advice – it’s all about trading. Individuals can’t beat the big boys’ super computers’ algorithms.
  • Don’t be afraid of the stock market. Long-term, it beats any other investment.
  • Don’t rely on your home for retirement.
  • Keep your plastic under control. Do not keep a monthly balance.
  • Read your monthly financial home and business statements. At least check the bottom total and compare to the previous month.
  • Read Consumer Reports and anything by Clark Howard.
  • If the words debt, owe, loan, statement, IRS, tax, economics, or Carlsen make you nervous, listen to Dave Ramsey on Fox Business Channel or on iTunes. He’s even tougher!

My amygdala kept me at a distance from any casino action. The only button, chip, or die I got near was on my James Bond Townie party outfit, at lunch, or at the Cerec lecture.

But the party brain was on fire; Vegas has great music, restaurants, the Bellagio fountains, weird street urchins, and of course, Howard Farran. I’ll be back in 2013.

References
  1. Downloaded from http://money.cnn.com/2007/08/14/pf/zweig.moneymag/index.htm on April 26, 2012.
  2. Ibid.
  3. Gregory Salsbury, Ph.D., The Psychology of Retirement Planning, Journal of Financial Planning, July 2010, 44-47.
  4. Dave Ramsey, Total Money Makeover, Thomas Nelson, Nashville, TN, 2007, 35


Author's Bio
Douglas Carlsen, DDS, has delivered independent financial education to dentists since retiring from his practice in 2004 at age 53.

For Dentists’ Financial Newsletter, visit www.golichcarlsen.com and find the “newsletter” button at the bottom of the home page. Additional Carlsen Dentaltown articles are at www.towniecentral.com. Search “Carlsen.” Videos available at www.youtube.com/user/DrDougCarlsen. Contact Dr. Carlsen at drcarlsen@gmail.com or 760-535-1621.
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