Part 1:  Education Gaps, Career, Bias, Toilet Paper and Low Cost Funds

By Bob Peters || November 1, 2022

What I hope you take away from this blog post

-Finding your career in life is not always obvious with your academic pursuits.

-Each of us makes decisions that are influenced by biases.

-We all have knowledge gaps that will be necessary to close in order to have better outcomes.

-Biases, if not understood, can cause us to make poor decisions (financial and non-financial).

-Behavioral Finance helps us understand how biases can lead to poor financial decisions and help us understand how to make good financial decisions.

-The demand for toilet paper is an example of biases that impact decision making.

-Investing in broad based, highly diversified, low-cost Exchange Traded Funds can help you avoid the pitfalls of biases and, in so doing, accumulate wealth necessary to achieve Financial Security.

My worst college grades…not always obvious indicators of your career

It is a strange paradox…my three worst grades in pursuit of my undergraduate degree were in accounting and economics and yet I had a successful career in a field that required knowledge of both.  Although fifteen years later I went back to earn an MBA.  Go figure?

I don’t recall what I was actually thinking or doing back in the early 1980’s as it pertained to my classes in Accounting, Macro and Micro Economics, but I have a vague recollection.  Accounting, like math and foreign languages, requires you to learn each step along the way.  You can’t “skip over” a few days of content and just pick up and prosper without sequentially learning each step along the way.

While I had a strong desire to understand how businesses operated and I intellectually understood that accounting was the “language of business” and economics helped inform the implications to businesses (and consumers) of differing fiscal and monetary policies, I had a hard time keeping up on my daily homework.  I understood the value of the field of study but lacked the passion to pursue the rigor required to achieve high scores on my exams.  I came up short in deferred gratification to do what was necessary each day to achieve an average level of academic achievement (although I passed).

Instead, I thrived in reading, thinking, forming opinions, and articulating the field of international studies where my grades were above average. Where analysis, critical thinking and formulation of an opinion were valued.  Yes, the land of the “Blue Book” where tests were performed by your ability to write a coherent and compelling answer to a test question.

A big knowledge gap that needed to be closed

When I had my first job post college degree delivering mail in the international department of a bank, the degree was certainly “unnecessary.”  No need for a college degree to deliver mail.  When I later joined the “World Banking” training program which was populated with top ranked MBA’s from the University of Washington, it became evident that my knowledge gap needed to be closed…and fast.  Note:  I would not have had the opportunity to join the training program had I not obtained a four-year degree.

Fortunately, my managers understood this gap and provided me a path to attend accounting classes in the evening.  It made for a couple of years of long days but eventually I closed the accounting gap.  I suppose the passion to close the accounting gap was driven by a desire to obtain a better job and better pay.

Classical Economics vs. Behavioral Economics

When I was in college it was before there was a field that is known today as Behavioral Economics or Behavioral Finance.  We were taught Classical Economic theory from the likes of contemporary economists such as Milton Friedman.  It escaped me at the time, but classical economics essentially assumes that “agents” (think people) always make rational decisions to optimize their outcomes.  On paper, this seems very logical.  If it is in your personal best interest to make a decision that optimizes (or maximizes) your outcome you will make that decision.

Funny thing…people are not always rational and each of us have biases that influence our decision making.  The field of study in Behavioral Economics/Finance identified the many biases that exist and how each of us is susceptible to making decisions that do not optimize our outcomes.

Let’s look at an example.  Classical economic theory states that if demand remains unchanged and the supply of a good decreases the price of that good will increase.  As the price of the good increases, you and I will decide to purchase fewer of these goods.  When we (and everyone else in the market) decide to purchase fewer of these goods which is another way to say demand declines, the businesses that produce these goods will make fewer goods which better aligns with the decreased demand.  The price of the goods declines until the demand for the goods increases and the cycle repeats.

Toilet Paper and the Pandemic

Now let’s look at toilet paper in the heart of the pandemic lockdowns.  I think it’s fair to say that an individuals’ need for toilet paper did not change, “pre vs pandemic”, but the demand for toilet paper got a bit crazy.  Why?  Well, consumers were reading about supply shortages as manufacturing plants in all industries were negatively impacted by stay-at-home requirements.  Products on the shelves of grocery stores were noticeably less than “normal”.  As folks tried to assess their priorities, they concluded that toilet paper was pretty high up on the list.  Out of fear that they might run out of toilet paper, families began to stock up and buy a lot of toilet paper out of fear that the stores would run out.  In an attempt to limit this hoarding behavior, stores then limited the amount of toilet paper that any one person could purchase at a given time.  This story applies to face masks, Covid home tests, hand sanitizer, bleach and many other consumable products.

Classical economics would have concluded that the demand for these items would be curtailed as the supply was limited and prices rose.  I don’t recall that the price of toilet paper was the reason why demand ultimately declined.  Rather, it was fear that drove the desire to purchase toilet paper.

We all have fears, opinions, personal experiences aka biases.  These biases do impact our decision making.  It does not mean we can’t make a good decision but, we may not make good decisions if we do not acknowledge these biases.  You don’t have to be an old person to have had a memory of needing toilet paper and the fear of potentially not having toilet paper caused people to go a bit crazy.  The price of toilet paper was irrelevant, the demand was driven by a bias.

Diversified, Low-Cost Funds help insulate you from biases

You do not need to study Accounting or Finance to successfully invest to obtain Financial Security.  You do not need to perform an ongoing rigorous Intrinsic Value analysis necessary to assess if the price of an individual stock is attractive vis-à-vis its’ value.  You do not need to constantly monitor the price of a stock to figure out the time to sell or buy. Each of these decisions exposes you to biases that can lead to poor decisions.  These biases may cause you to own a poor performing stock because your bias is to “hold on” to your original decision to buy rather than selling a loser and moving the capital to a more promising investment.  The bias to “time” when to buy and sell is another major risk factor and yet we know that being in the market is much more important than timing the market…more on that in Part 2.

Diversified, low-cost funds help insulate you from biases.  Buying a predetermined amount each month is better than starting and stopping because you think you are smarter than the market.  Will this give you a dopamine hit like buying a meme stock that rockets up (and subsequently falls further)?  Nope.  But Financial Security is not achieved via dopamine hits.