Owning Your Financial Decisions

[MUSIC PLAYING]

Rick Lehman: You know, a layoff, it is clearly traumatic. And one of the things that behavioral finance teaches us is that not only are we flawed about making decisions in general, but we're far worse than normal when we're in high anxiety or grief or something of that nature. You're not going to make as good a set of decisions. And we should try and be in the best mental state to make financial decisions.

[MUSIC PLAYING]

Jill Finlayson: Welcome to the Future of Work podcast with Berkeley Extension and the EDGE in Tech Initiative at the University of California, focused on expanding diversity and gender equity in tech. EDGE in Tech is part of CITRIS, the Center for IT Research in the Interest of Society and the Banatao Institute.

UC Berkeley Extension is the continuing education arm of the University of California at Berkeley. We ended 2022 with a bit of upheaval in the job market. Mass layoffs at big tech companies were splashed across the headlines. And more organizations are speculating that layoffs may be part of their fiscal plan in the coming months, reacting to the possibility of a looming recession.

So in this episode of the Future of Work, we're bringing the workplace a little closer to home, making sure that you have a financial contingency plan if you don't already have one in place. To get some tried and true advice on weathering any potential upheaval in the future, we turn to UC Berkeley Extension instructor, Richard Lehman.

Richard is the author of Far from Random-- Using Investor Behavior and Trend Analysis to Forecast Market Movement. He has a Wall Street and financial industry background spanning 34 years and is the founder of behavioralfinance.com. He's also a frequent public speaker on behavioral finance at both individual and professional associations. At Extension, he teaches his favorite course about behavioral finance, a topic we'll get into in this episode. And he also teaches courses at UCLA and Cal Poly. Welcome, Rick.

Rick Lehman: Thanks, Jill. My pleasure.

Jill Finlayson: I don't even know what behavioral finance science is. Can you tell us a little bit about what it is and why you became interested in this topic?

Rick Lehman: Sure. Behavioral science is a relatively new science in the scheme of things. It's part of really psychology more than anything else. And it just happens to be applicable to various other disciplines like finance. But they're also using it in professional sports and entertainment and technology.

So behavioral finance really stemmed from the behavioral work of a couple of Israeli psychologists back in the 1970s so relatively recent. It was the discipline that gave Dan Kahneman a Nobel Prize-- a rather unique one. He got the Nobel Prize for economics, even though he is a psychologist and not an economist, which was pretty rare.

So it's about how we make decisions and about the behavior that stems from those decisions. So you can see where it can be applied to any number of different disciplines.

Jill Finlayson: I love that blending of two different disciplines. I think that's always fascinating when you see science and psychology coming together to both understand, and I guess to some extent, predict what people will do with their financial decisions. So how did you get involved in this topic? Why did this capture your interest?

Rick Lehman: My interest stemmed from the fact that I-- and by the way, I had zero psychology background. I was kind of a student of charts and technical analysis. My book reflects a lot of that. So I studied the past history of stock prices and tried to formulate predictions about where the market was going based on that.

And the curiosity always got to me as to what's behind this? What is the psychology behind the numbers that I'm looking at? Why did people buy at one point, sell at another? Why does buying and selling take on a sinusoidal pattern all the time?

And my curiosity led me to do research on my own, just poking around out there to see what psychologists may have said. And I just happened to hit it right at the time when Kahneman was publishing a lot of his stuff, and the science was just beginning to get traction. So I took a deep dive in it, and I never came out.

Jill Finlayson: Well, share with us. So we think we're logical people, and we make rational decisions we think. But is that true? How do people make financial decisions.

Rick Lehman: It's not true.

[LAUGHTER]

It's a big myth. It's a strong myth because you think you are a logical, rational being. And, in fact, many of the classic economic theories are predicated on us making rational decisions.

But what Kahneman and Tversky showed was that we don't, as a rule. We take a lot of shortcuts. A lot of emotion ends up feeding into our decisions. And people don't like to really admit that. It's not a comfortable thought to think we are sort of a product of our emotions. But, in fact, we are.

A lot of finance has to do with decisions that end up not being able to separate out the emotion. And that's where the science gets interesting. Still, some of the main theories that are used for portfolio judgment and financial analysis are based on the assumption that we are totally rational and that we will only do things in our best interest.

But they've come to realize that it's flawed. It's a good approximation, but it's not absolute reality. Because in absolute reality, we do use a lot of emotions in our decision-making.

Jill Finlayson: And is that good or bad, that emotions play a role?

Rick Lehman: Well, that's an interesting question because you need emotions to make decisions. People that have had brain injuries, where the emotional center of their brain is not usable, can't make a decision.

You could ask someone like that what they want for breakfast, and they actually can't tell you. They would wax and wane about all of the different things they could have for breakfast, but they couldn't tell you.

So you need the emotion to actually cross that line and create a decision. So in that sense, we need emotions. But from the sense of financial decisions, they get in the way. And we become way over-reliant on our emotions for making decisions. And that's where we go astray.

Jill Finlayson: Why do you think we become over-reliant on emotions?

Rick Lehman: It's really just the way we're built and our brains work. Our brains are designed by evolution. And evolution introduced emotions as part of decision-making. And we can't absolve ourselves of that. We can't get rid of that. Kahneman says, you just can't turn that part of your brain off.

So we're stuck with it. The best we can do is to recognize it and to, in some cases, account for it. In other cases, work around it. And in other cases, to be honest, use computers to make decisions instead of making them ourselves.

Jill Finlayson: Yeah. Well, say a little bit more about that because you mentioned earlier shortcuts. So emotions and kind of making a gut decision is one shortcut. What other shortcuts do we take? Why are we taking shortcuts? And how might machines help us?

Rick Lehman: Well, we do. We take a lot of shortcuts. We do what is called satisficing, which is coming up with a quick decision just to have a decision, even when we know we're taking a best guess or approximating it. We don't always have all the information we need to make a decision. So if we're going to make a decision at all, we have to introduce the ability to take a guess.

We're also programmed to make fairly quick decisions. That happened way back on the savanna when survival depended on making quick decisions, and that stayed with us. So in order to make quick decisions, we take these shortcuts where we'll guess at an answer.

We'll try to approximate something by using something else that we know about that we think relates, even when it doesn't necessarily relate. We'll use emotions to make the decision. This includes big decisions-- decisions like where we want to work, where we want to go to school-- lots of emotion and lots of shortcuts in those decisions, which can be a little scary.

Jill Finlayson: For many of us, it's not our core competence. We're good at our job, but we're not necessarily financial experts. So it's hard to take on complex topics when you don't have a lot of resources.

Rick Lehman: Exactly. And financial literacy comes into play here. Most of us do have other expertise that we need for our careers. And that doesn't necessarily have to be financial.

And we don't get a lot of financial education as part of our normal degree programs. We kind of fumble around. And people in the financial industry, of course, get a lot more training, a lot more education, a lot more experience and exposure to it. So they definitely get better at it.

They also have the tools. They have the software. They have the data history. They have the rules, and they have the experience that they've dealt with to make better decisions.

So we'd like to think we're really smart about investing and saving, but we make a lot of mistakes. And if you look at aggregate statistics, the average investor who invests for themselves, doesn't use an advisor, way underperforms the markets over time.

Jill Finlayson: Yeah. If you could wave a magic wand and create financial literacy education in high school, what do you think people need to get at that stage of their life?

Rick Lehman: You need to get a basic understanding of all the ways in which your life revolves around finance. You're going to have income. You're going to pay taxes. You're going to need insurance. You're going to need credit. You're going to need a mortgage. most likely at some point.

And unfortunately, we're left to learn those things by talking to friends, or just finding out when we go about these things how they work. We don't really get a formal education in them ahead of time. And that's very unfortunate because it leaves a lot of people in the lurch making bad decisions-- or let's just call it decisions that aren't in their best interest, and they suffer accordingly.

Jill Finlayson: And this is a lot of risk involved in dealing with money because you're making trade-offs, but you don't have complete information. How do you help people be more comfortable with that sort of risk aspect of dealing with their finances?

Rick Lehman: That's probably the biggest challenge any financial professional deals with is dealing with all the uncertainties of the market, and the economy, and the world situation, and bringing it back into some kind of financial plan for somebody.

And then, of course, understanding that particular person. Because financial plans will differ, and investment plans will differ according to individual needs, individual wants, individual goals, age. Even culture and gender enter into the question. So it's kind of a science to itself, and behavior is a big part of that science.

So you now have-- the industry has recognized that financial advisors need to understand behavior. And it's on the major exams and certifications that financial professionals need these days. They need to understand that.

Jill Finlayson: What do we need to understand personally about our own behaviors or tendencies? Are we correctly confident, or correctly lacking confidence?

Rick Lehman: I think we need to understand that we're human and what that means. And what it means is we're subject to a whole host of emotions. And it means that our brains take shortcuts. And it means that we're not terribly good at doing math in our heads. Surprise, surprise.

So all those things end up creating flaws in our logic. But that's what makes us human. And we appreciate that in many other ways. But when it comes to finance, it's not really a strength. It's a weakness that we have to try to overcome.

Jill Finlayson: I mean, when I am unsure I often go to friends, or I look at what's trending. Is that a reasonable resource, or is that a bad path?

Rick Lehman: That's what's called herding-- following the masses, or following friends, or following even things you read in articles in the media these days, which also can be misleading. And herding, in general, is not the best practice because it's not thinking.

It's like, I'm just going to go with what the crowd's going with. Well, if the crowd goes off a cliff, I'm going with them. Herding isn't it isn't a great thing. And a lot of the other things we tend to naturally do in our thinking process aren't great for us either.

So the first thing we need to do is just recognize that being human is being somewhat flawed. We're not computer perfect about making decisions. And if you understand that, then you can begin to dig in a little bit about your own flaws and weaknesses in making decisions, and where you should get help, and where it's OK to take a shot yourself, and where you might have misleading or information that's not in your best interest. And the more you can dig in and find out those things, the more effective you're going to be financially.

Jill Finlayson: Let's bring this back to the Future of Work. So let's tie this financial decision-making into the life cycle of a career. So when you first are offered a job, what kind of financial decisions are you being-- are you making when you're offered a job? What kind of things should you be thinking about when you start a new position?

Rick Lehman: Well, when you start a new position, like anybody else, you're going to calibrate your life to your income. Everything gets based off of that. Your expenses, things that you'd like to buy, your style of living all are going to be predicated on your income.

So there's an exercise that should happen, but generally doesn't in a formal way, where people should sit down. They get their first real job and say, OK, I need a budget. Here's what I make. Here's the money that's going to come in every month. Yes, I can rely on that for a while. But where is it going to go, and where does it need to go, and where am I best putting it?

So the idea of doing a budget, which should include, by the way, some savings somewhere for that rainy day or that potential layoff down the road, or change of career, or marriage, or any of the other things that start taking a lot more money away from us. And unfortunately, it doesn't.

That's another way we shortcut things. We just sort of march through life building those things as they go. And very few people actually sit down and create a detailed budget.

But it would be a really healthy thing to do in order to see things you normally wouldn't see, like how much money do I really spend on gas each month? Or how much money do I spend at Starbucks each month? Or how many times do I eat dinner out? And how did how does that add up?

If you don't know it, you're bound to tend to overspend. And that's when people start getting into trouble and racking up credit card bills. And you set yourself down a path where it gets difficult to dig out of. So clearly, one of the things is to create a budget.

I think the other main thing when you take on a new job is to understand the benefits that are offered to you by your employer because those can be really important financially. The health benefits, of course, any insurance that comes with it, if there's 401(k)-- those are all big pluses for people, and they should be taken seriously.

And you should maximize them to the degree you can because you can consider it essentially a gift. None of those benefits are going to cost you more money. They may cost you money, but it's still going to save you from what you would have if you didn't have the benefit.

So maximizing your benefits is important. And it's good to keep in mind because if you do change jobs or change careers or you get laid off, those benefits are going to have a big impact.

Jill Finlayson: Well, I was fortunate to have a parent who told me when I got my first job start the retirement fund, even if you're only putting in $5 a month. Now, $5 a month doesn't seem like very much when you're a young adult, and you're-- like, this isn't going to be money I can retire on. But is that a good first step? And how do people think about retirement when they're just starting out?

Rick Lehman: It is absolutely a good step, even if it's only $5 a month. The principle is you'll be in the plan and creating the habit of putting money away. You can always increase it as you start making more money. But if you don't put any in, not only don't you have any savings going toward retirement, but you don't have the habit of saving for retirement.

And that habit is important to create. You'll probably get frustrated after a while that it's not growing fast enough and put more in, which is a good thing.

Jill Finlayson: Absolutely.

Rick Lehman: Yeah. And it's really important because one of the flaws we have in our logic is we tend, as young people, to think about getting old. We don't think about when might we want to retire, how long might we live.

Nowadays, you're going to probably have a life span that encompasses a period of nonworking years at least equal to your period of working years.

Jill Finlayson: Wow.

Rick Lehman: That's a long time to have to support yourself later in life. People don't realize it because young people just don't think about it. And we can all relate to that. Because I know I didn't when I was 22 or 23 in my first job.

But the fact that they have 401(k)s now, and the fact that companies sometimes even contribute is a great thing. And the earlier you get in, and the more you participate, it's certainly something you're going to be thankful for later in life.

Jill Finlayson: And it is a way of gaining financial literacy. Because when you sign up for one of those programs, one of the first things they ask you is, what would you like to invest in? Do you want to be in an aggressive portfolio or a conservative portfolio? So it starts you thinking about these different options.

Maybe there's something we should explore around setting it and forgetting it because that's another thing that happens. So, say, you've been at the job for five years, and you never went back and rebalanced. What do we need to understand about choosing how you want to invest your retirement money?

Rick Lehman: Well, as you mentioned, rebalancing is something that everybody should consider. If you put half your money into, let's say, bonds and half into growth stocks, the growth stocks very likely will perform better over time. That's what they're designed to do.

And maybe over a few years, instead of having 50% in each one, now you've got 75% in growth stocks and 25% in bonds. That may be more risk than you want to take.

The principle of rebalancing is kind of maintaining a certain risk level throughout the years, which may change. You take on a little bit more risk when you're younger, and you pull back as you approach retirement.

But, in general, it accommodates the fact that different assets and different asset classes are going to appreciate differently over time. And rebalancing kind of brings it back into kind of a-- not a risk-neutral position, but the risk position that you prefer.

Jill Finlayson: Yeah. As you think about that, obviously, if you're getting married or having a kid, that might cause you to think about revisiting your portfolio. Are there other things that should be triggering people to take a look? How often should they be looking at their investments?

Rick Lehman: That's a good question. I think that will vary by person. You shouldn't labor over it every day, though some people do. I think if you just watch it on a monthly basis, you get a pretty good sense of how it's growing, what it's in.

And at the same, time, you can balance that against the things that are going on in your life. As you said, if you have a child, you may start thinking differently about risk, as well as periodically taking a tap on the economic situation.

So, I mean, right now you may look at your 401(k), and you may have been in growth stocks for the past five years and done great. And now, you're looking at it and saying, hmm, we're supposed to have a recession this year. Maybe it's not good to be 75% or 80% in growth stocks. Maybe I ought to pull that back. So looking at it, I'd say, on a monthly basis it gives you a reasonable sense of where it is in terms of your own life plan, and where it is in terms of the economic environment.

Jill Finlayson: Well, we started out this conversation talking about the fact that there were a bunch of layoffs. Let's talk about layoffs. Obviously, no one expects a layoff. It's a pretty traumatic event when it happens. What has been your experience working with people who have experienced this? And how can people weather this event more easily?

Rick Lehman: Yeah, for sure. It's an issue that's cropping up again. A layoff-- it is clearly traumatic. And one of the things that behavioral finance teaches us is that not only are we flawed about making decisions in general, but we're even far worse than normal when we're in a compromised mental state, let's say, like high anxiety or grief or something of that nature.

And when you get laid off, you're definitely going to be in a high anxiety position. You're going to feel a lot of pressure. You're not going to make as good a set of decisions as you would if you made those same decisions in a more stable environment while you were still working and when it wasn't as pressure-laden.

We should try and be in the best mental state to make financial decisions. And waiting until you get laid off-- and sometimes it is going to be a surprise. But waiting till you get laid off and dealing with heavy duty financial questions, in addition to the pressures of how am I paying my bills this month, becomes a big challenge and only adds to your anxiety.

So one of the things I think we all need to recognize is try to make big financial decisions when you're not under severe pressure, or anxiety, or grief, or any of the other major emotions people get subjected to in their lives, which is to say, if you have any inkling at all that you might lose your job to a layoff or any other reason, that's the time to start thinking about the planning and what are going to be the implications?

What are the things you can change, and what things you can't. Where might you tap money to pay your bills? What can you do to lower your expenses?

I mean, all those things, if you're dealing with them in addition to dealing with the trauma of losing your job, can become really overwhelming. And you'll tend to make decisions based on extreme emotions, which generally is not good. You'll tend to make them fast because you kind of want to get them off your plate. And making them fast without really researching them or finding out what alternatives might exist is also not good.

So the best advice is try to plan as much for that contingency before it happens as you can. And then when it does happen, you'll find, OK. I've thought about this. I know what I'm going to do here. And I've thought about that, and I'm not so worried about that.

So my burden is less. I have fewer things to worry about. And I can spend more time figuring out how do I get my next job.

Jill Finlayson: Exactly. It can take several months to get another job. So when you think about, how do you turn that time into opportunity, what are the elements of a good contingency plan?

Rick Lehman: A few months is actually optimistic. I mean, I've gone through a lot. And the financial industry is a good place to experience layoffs, and I've had several. And some of them have lasted upwards of a year. It's not easy necessarily, and it's time-consuming to make that kind of change.

Most of the time what I did was I ran out and got part-time work. Because after I realized the first time or two that it's not just going to be a few weeks or a month, it's going to be months, maybe longer, I realized that I need to really put my foot to the pedal in terms of finding a new job.

But it does take time. And it might involve a change of location. It might involve a lot of big changes in my life. In the meanwhile, I don't want to be idle. I want to be getting something in.

So my first gig was always to go out and earn some money. And I've done a lot of restaurant work when I was in college. And so for me, the easiest thing is go get a waiter's job. At least you have money coming in. And most of the work is at night, so that left my days free to look for work and interview.

Now, that may not be everybody. But I think it is important to recognize that what if it is more than a couple of months? A month is a lot of income. We base a lot of things on our income-- paying bills, paying rent, paying mortgage, buying food, transportation-- a lot of basic stuff that you can't immediately get rid of.

So a couple of months, if you've got a few months worth of savings, OK. But you don't know that it's going to be a couple of months. So the best thing to do is probably to overplan and to overcompensate. Because it's relatively easy to quit a job waiting tables at night to go back to a full-time job.

And it may not be comfortable. And if you're the kind of person that's a loyal employee, you won't feel good about quitting after three months. But it may serve you a lot better than not working and going months without income. And then all of a sudden running out, which becomes a real problem.

Jill Finlayson: And I think you're hitting on another thing, which is a lot of people's identity is wrapped up in their job as well. How do people deal with that kind of blow to their identity?

Rick Lehman: Yeah. That's a tough one, and it's not financial. I think it's important to be well-grounded in that sense. And you can ground yourself in a number of different ways.

First of all, you're going to ground yourself in terms of the kinds of jobs that you're looking for, and make sure that you're-- you want to aim high, but you also want to aim for something you have more confidence you might be able to get, even if it's a side step, or even a step down in your career ladder just to get back into the game. And that's that involves some tough decisions, but I think sometimes those are necessary.

Another thing that I think is important when you are out of work is to think about the non-financial implications. What can I be doing now to help my chances of getting another job, or enhance my career, or give me more opportunities? And that might be education. It might be a credential. It might just taking a course.

I found those things to be really helpful in terms of grounding myself when the time comes that you're out of work-- gets your mind off the pressure, and puts your mind on opportunity. What kind of an additional opportunity can I create for myself if I take another course, or I get a credential?

Jill Finlayson: I love that opportunity to be constructive and to reframe it as an opportunity to pivot, to maybe turn to something that you've had more interest or passion about as an opportunity for a restart. I think that sort of reframing mentally is huge.

Rick Lehman: Yeah. It's not easy, but it's definitely something that, if you can put in, I think you really benefit from.

Jill Finlayson: Now, of course, some people are better equipped to weather the storm. I'd love to get some of your thoughts about generational wealth, inequality. How do we address the fact that some people have a safety net and others don't? Some have training and education around finances, where other people haven't had that opportunity. What can we as a society do to level that playing field?

Rick Lehman: Well, that's-- that gets back to the education and the financial literacy issues, as well as having an advisor. I'm kind of mixed on having an advisor. I think it's certainly good for most people when they start accumulating enough wealth that somebody needs to help them look after it.

In the beginning, when they don't have a lot of wealth, and they're just trying to get some savings going, you may not necessarily need, nor would an advisor even take you on because you're not going to mean a lot of money to them. But if you don't get an advisor, you should definitely get some education, and get what an advisor would be giving you.

And there's a ton of books out there. And there's a ton of courses-- just individual courses-- you don't even have to get a degree-- that would take you a long way towards improving your financial literacy and tailoring it to whoever you are in your situation.

Clearly, somebody who's 55 and gets laid off is in a very different position than somebody who's 25 and gets laid off. The chances are, they have more wealth, but they also have a lot more expenses.

And culture definitely ends up playing into it. Gender plays into it. Your marital situation plays into it because if one spouse loses a job, now there's pressure on the other one. Maybe there's kids involved. And then the question is, who takes care of the kids? And it just swirls into all kinds of other issues.

And yes, it's different. Different cultures view finance differently. They view savings differently. Certainly, the generations differ. Older generations-- a bit more-- I was going to say a little bit more conservative, but that's not always necessarily the case.

You do get more conservative as you get older because you move more into preservation of wealth mode than accumulation of wealth mode. It's more important to you at 60 to just keep what you have as you approach retirement. It's more important when you're 25 to get something accumulated, so you take more risk. And that's fine. You can do that. And advisors will tell you to do that.

But yeah, it definitely differs. And culture and gender and age all play into it. And that's where you need to either work with an advisor who understands the differences and can work with you as an individual, or educate yourself. And there's lots of good resources out there.

Jill Finlayson: You've had the opportunity to work with a lot of students. Some of them are young, and some of them are professionals who are returning. What would you say surprised you most when you're teaching this class that you thought people would know, but they didn't know?

Rick Lehman: Well, the course is one big aha moment, really. Because people who study finance, or in many cases, people who studied other disciplines-- engineering or the arts or building construction or a million other things and are moving into finance-- none of them ever realized how much psychology plays into finance and how it affects us.

But when you teach it there are these aha moments when they open up their eyes and they go, yeah, I get it. Because yeah, now that I think about it, I did make that decision based on more emotion than I thought.

Whole course is an eye-opener. We talk about around 25 different biases that we have in our thinking that come from just the way our brains work, and our emotions, and those kinds of things. And that's a pretty good list of stuff people never thought about before.

Most of them come into that class without much of a clue at all about how much that stuff affects the decisions they make. And regardless of where they came from, those decisions become really intriguing aha moments.

Jill Finlayson: Amazing. And as you now reflect, what would you say are the three most common mistakes people make when it comes to their finances?

Rick Lehrman: I think herding is definitely in the top. It's the notion that I don't have time to study all this stuff. I'm going to go with who I think is smart, or where I see the masses going, or where somebody I trust tells me to go. And that's very, very common.

Herding is one of the biggies in terms of things that we do as individuals that aren't necessarily in our best interest. And it's because we very often don't have the time to do all the research we need to do. And so we just rely on somebody else.

Another real biggie that's come out in studies is the idea of overconfidence. We tend to be very overconfident. We're drilled on confidence as a young person. Oh, we can really do this. You're really talented. You should continue along this line because you're doing this great.

As children, and as we grow up in school, we're taught confidence. We're taught to be confident, and our parents usually pump us up along that line. The problem is we get into life and beyond school, and we carry a little bit of overconfidence with us.

And we think we're great at lots and lots of stuff, particularly if we get a great job out of school. You think, wow, I just got a job as a lawyer, or an engineer, or a doctor, or an investment banker. I am good. I am educated. I know what I'm doing.

And then you start investing for yourself and you realize, hmm, that wasn't one of the expertises I learned. And unfortunately, you will learn that the hard way. You learn it by losing money. So overconfidence is another one that's cited very frequently by people that do behavioral studies.

And another one with kind of a funny name is called representativeness. Representativeness is when you need to make a decision that needs to be relatively fast because we're inclined to make fast decisions. And you don't have the information you need. So you draw upon something else you think will represent the same basic circumstances that you're asked to make the decision on, even if it doesn't really represent the same circumstances.

So you draw from experience, but often that experience is ill-founded. You're basing it on the wrong comparison, in other words. And so we make a lot of wrong comparisons.

People do this frequently in the markets. They'll say-- and you'll see it all the time in the media. They'll say something like, well, the last time the Fed raised rates this happened. I hate to read those articles because they're just so full of representativeness. It's basing a decision on too little information, or something that's statistically not relevant.

I mention in my book that to make a statistically relevant decision with a high degree of confidence, basically you need approximately a few hundred data points. So when you get financial people or media people saying, well, the last two times the Fed raised rates the markets did this-- it's totally insignificant from a statistical purpose.

And it's misleading because you tend to look at that and go, oh, yeah, the last couple of times this happened. I'll bet it's going to happen again. But it doesn't because if you look at the last 100 times it happened, you'd get a whole different result. So I think herding, overconfidence, representativeness certainly would be up there amongst the top three things that we tend to do.

Jill Finlayson: So let's flip the script then. As you know, even the pros are having a difficult time, as you say, figuring out what's going on, what's going to happen in the future. So what would be your final advice for people?

You've talked about getting education, educating yourself, possibly enlisting an advisor if you're at that point. But sort of pragmatically, what are three things they can do, looking at their finances today, that will improve their situation?

Rick Lehman: OK. I would say one would be sit down and do a budget. Really understand where your money is going and whether or not you're saving anything, much less enough. And truly understand your situation.

Don't just take it for granted, and don't just take it from your memory of, gee, how much I spent last night or last month. I think most people couldn't tell you exactly how much money they spent on food last month, or even some of their basic utilities. So do a budget. Look at how much money you really spend, and do a budget.

A second thing is be very, very wary of the media-- the mainstream media. It's become so misleading. It's full of so much filler. And it's written, in many cases, by young, inexperienced people who are paid to just write something, anything, fill space, generate an ad.

If you're going to use information, and you should, and you need to, find a good source of information. That could be an advisor-- a professional advisor. It could be a really good newsletter. It could be some kind of mainstream media that has pretty good reputation, like a Wall Street Journal or a Fortune.

Stay completely away from ads you see on YouTube or on any of these other social media for people that say they made a fortune doing x. Most of that stuff is entirely bogus.

And number three, I can't say enough about saving for retirement. There are some great vehicles out there that give you tax benefits. And, in many cases, if it's a corporate 401(k), you'll actually get a bonus where the company will match you. That's like getting 100% return on your money. You can't beat that.

So you should maximize that to the hilt, even if you don't think of it as, well, OK, it's retirement. It's going to be 40 or 50 years before I see that money. You can get that money sooner if you need it.

I used my 401(k) to buy my first house. You can do that. You can borrow against your 401(k) in many cases. You can take money out in your 50s-- 59, actually. Even if you're still working, and you're still working at the same company, you can pull that money out.

So it's not as if you only need to think of it as retirement. It could serve as a tax-free savings vehicle, or tax-deferred savings vehicle anyway, that could really help you in a number of different ways. And I think everybody who has 401(k) should just max it out to the best of their ability because it will only benefit you.

Jill Finlayson: Well, thank you, Richard, so much for these tips today. I think making this less scary and more approachable, and making it more self-aware of how we're making decisions and how that plays into our financial choices, and the opportunity to really see this as an opportunity, as opposed to a task that must be done, but more of an opportunity to grow and learn about how we can manage our future, I think has been tremendously helpful. I appreciate the emotional side to this, and how we help people to be aware and manage their emotions and behaviors around finances is super important.

Rick Lehman: Great. And I hope people will take this to heart and say, you know, yeah, maybe I ought to learn something about that. Because there's any number of good, fairly easy to read books out there on the topic. Just go do a search. You'll see them. I think it'll really be meaningful to your financial literacy and just your personal well-being to learn a little bit more about the behavioral finance science.

Jill Finlayson: And it sounds like even a little bit goes a long way in helping you make better decisions. And with that, I hope you enjoyed this latest in a long series of podcasts that we'll be sending your way every month. Please share with friends and colleagues who may be interested in taking this Future of Work journey with us.

And make sure to check out extension.berkeley.edu to find a variety of personal finance courses, including Richard's upcoming Behavioral Finance class, to help you thrive in this new working landscape. And to see what's coming up at EDGE in Tech, go ahead and visit edge.berkeley.edu.

Thanks so much for listening. And I'll be back next month to talk about the value of creating community at work, whether you're doing it in person or remotely. Until next time.

[MUSIC PLAYING]