Investing

Bob Pisani’s book “Shut Up & Keep Talking”

(Below is an excerpt from Bob Pisani’s new book “Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange.”)
Most people like to think that they’re rational. But — at least when it comes to investing — that’s not always the case.

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Way back in 1979, Daniel Kahneman and Amos Tversky noted that human beings did not act the way classical economics said they would act.
They were not necessarily rational actors. They did not buy low and sell high, for example. They often did the opposite.
Why? Kahneman and Tversky proposed a theory, which they called prospect theory. Their key insight was that individuals don’t experience gains and losses in the same way. Under classical theories, if someone gained $1,000, the pleasure they feel should be equal to the pain they would feel if they lost $1,000.
That’s not what Kahneman and Tversky found. They found that the pain of a loss is greater than the pleasure from a gain. This effect, which came to be known as loss aversion, became one of the cornerstones of behavioral economics.
In later years, Kahneman and Tversky even attempted to quantify how much stronger the loss was. They found that the fear of an emotional loss was more than twice as powerful as an emotional gain.

That went a long way toward explaining why so many people hold on to losing positions for so long. The opposite is also true: people will tend to sell their winners to lock in gains.

You have more biases than you think

Over the years, Kahneman and many others went on to describe numerous biases and mental shortcuts (heuristics) that humans have developed for making decisions.
Many of those biases are now a common part of our understanding of how humans interact with the stock market.
These biases can be broken down into two groups: cognitive errors due to faulty reasoning, and emotional biases that come from feelings. Loss aversion is an example of an emotional bias.
They can be very tough to overcome because they are based on feelings that are deeply ingrained in the brain. See if you recognize yourself in any of these emotional biases.
Investors will:
Come to believe they are infallible when they hit a winning streak (overconfidence).
Blindly follow what others are doing (herd behavior).
Value something they already own above its true market value (endowment effect).
Fail to plan for long-term goals, like retirement, because it’s easier to plan for short-term goals, like taking a vacation (self-control bias).
Avoid making decisions out of fear the decision will be wrong (regret aversion bias).

There’s also cognitive errors

Cognitive errors are different. They don’t come from emotional reactions, but from faulty reasoning. They happen because most people have a poor understanding of probabilities and how to put a numerical value on those probabilities.
People will:
Jump to conclusions. Daniel Kahneman, in his seminal 2011 book “Thinking, Fast and Slow,” said that: “Jumping to conclusions on the basis of limited evidence is so important to an understanding of intuitive thinking, and comes up so often in this book, that I will use a cumbersome abbreviation for it: WYSIATI, which stands for what you see is all there is.”
Select information that supports their own point of view, while ignoring information that contradicts it (confirmation bias).
Give more weight to recent information than older information (recency bias).
Convince themselves that they understood or predicted an event after it happened, which leads to overconfidence in the ability to predict future events (hindsight bias).
React to financial news differently, depending on how it is presented. They may react to the same investment opportunities in different ways or react to a financial headline differently depending on whether it is perceived to be positive or negative (framing bias).
Believe that because a stock has done well in the past it will continue to do well in the future (the gambler’s fallacy).
Overreact to certain pieces of news and fail to place the information in a proper context, making that piece of news seem more valid or important than it really is (availability bias).
Rely too much on a single (often the first) piece of information as a basis for an investment (such as a stock price), which becomes the reference point for future decisions without considering other pieces of information (anchoring bias).

What’s the takeaway?

People have so many biases that it’s tough to make rational decisions.
Here’s a few key takeaways:
It’s possible to train people to think more rationally about investing, but don’t expect too much. With all this brilliant insight into how people really think (or don’t), you’d think that as investors we wouldn’t be repeating the same dumb mistakes we have been making for thousands of years.
Alas, investing wisdom and insight remains in short supply because 1) financial illiteracy is widespread. Most people (and sadly most investors) have no idea who Daniel Kahneman is, and 2) even people who know better continue to make dumb mistakes because overriding the brain’s ‘react first, think later’ system that Daniel Kahneman chronicled in “Thinking, Fast and Slow” is really, really hard.
The indexing crowd got a boost from behavioral economics. Billions of dollars have flowed into passive (index-based) investing strategies in the past 20 years (and particularly since the Great Financial Crisis), and with good reason: unless you want to endlessly analyze yourself and everyone around you, passive investing made sense because it reduced or eliminated many of those biases described above. Some of these passive investments can have their own biases, of course.
Stocks can be mispriced. Psychology plays a large part in setting at least short-term stock prices. It is now a given that markets may not be perfectly efficient and that irrational decisions made by investors can have at least a short-term impact on stock prices. Stock market bubbles and panics, in particular, are now largely viewed through the lens of behavioral finance.

Behavioral economics wins the Nobel Prize

At least the world at large is recognizing the contributions the behavioral economists have made.
Daniel Kahneman won the Nobel Memorial Prize for Economic Sciences in 2002 for his work on prospect theory, specifically for “having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.”
Other Nobel awards for work in behavioral economics soon followed. Richard Thaler, who teaches at the University of Chicago Booth School of Business, won the Nobel Memorial Prize in Economic Sciences in 2017. Thaler, too, had demonstrated that humans acted irrationally, but they did so in predictable ways, giving hope that some form of model could still be developed to understand human behavior.
Yale Professor Robert Shiller won the 2013 Nobel Memorial Prize in Economic Sciences (with Eugene Fama and Lars Peter Hansen) for his contribution to our understanding of how human behavior influences stock prices.
Bob Pisani is senior markets correspondent for CNBC. He has spent nearly three decades reporting from the floor of the New York Stock Exchange. “In Shut Up and Keep Talking,” Pisani shares stories about what he has learned about life and investing.

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Wells Fargo also agreed to pay a $1.7 billion civil penalty, which marks the largest fine ever doled out by the Consumer Financial Protection Bureau.
$1.3 billion of the $2 billion in consumer redress already has reached 11 million accounts, according to the CFPB.
If you are among the customers affected, the bank will contact you.

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People owed a piece of the $2 billion that Wells Fargo has agreed to pay to customers affected by some of its banking practices could soon receive those funds.
The nation’s fourth-largest bank reached a settlement with the Consumer Financial Protection Bureau, announced Tuesday, to resolve customer abuses related to auto lending, deposit accounts and mortgage lending, affecting about 16 million accounts.

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Wells Fargo also agreed to pay a $1.7 billion civil penalty — the largest ever doled out by the CFPB.
“We have already communicated with many of the customers who may have been impacted by the matters covered in the settlement, and those efforts are ongoing,” a Wells Fargo spokesperson told CNBC.

In other words, if you are among the affected customers, you may already have received your share of the $2 billion, or you will automatically hear from Wells Fargo. You do not need to take any action, the bank said.
The CFPB said that customers of the bank were illegally assessed fees and interest charges on auto and mortgage loans, had their cars wrongly repossessed and had payments to auto and mortgage loans misapplied. Additionally, Wells Fargo charged consumers unlawful surprise overdraft fees and applied other incorrect charges to checking and savings accounts, and improperly froze some accounts, the CFPB said.

$1.3 billion has already reached 11 million accounts

More than 11 million customer accounts already have received more than $1.3 billion related to auto loan issues. Another 5 million customers with deposit accounts are receiving $500 million in remediation, including $205 million related to surprise overdraft fees, and thousands of customers with mortgages will receive a piece of at least $195 million, a CFPB spokesperson said.

The amount that each harmed consumer will get (or already got) depends on the specifics. For customers whose vehicles were wrongly repossessed, the remediation includes $4,000, but could be higher. For deposit accounts that were wrongly frozen, the settlement calls for $150 for each affected customer.
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“As we have said before, we and our regulators have identified a series of unacceptable practices that we have been working systematically to change and provide customer remediation where warranted,” said Charlie Scharf, Wells Fargo CEO, in the company’s press release about the settlement.
“This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us,” Scharf said.

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As the economy falters, nearly a third of millennials are turning to their parents for financial support, according to a recent report.
For parents, however, supporting grown children can be a burden when their own financial security is at stake.

As the cost of living skyrockets, many adults are turning to a familiar safety net: mom and dad.
Nearly a third of millennials and Gen Zers, over the age of 18, get financial support from their parents, according to a new survey by personal finance site Credit Karma. The site polled more than 1,000 adults in October.

More than half of parents with adult children said their kids are living with them. Another 48% said they pay for their kids’ cell phone plan, car payments or other monthly bills. Nearly a quarter also said they provide their adult children with a regular allowance, pay some or all of their rent or have them as an authorized user on their credit card, the report found. 
“What used to be paying your kid’s cell phone bill every few months has now turned into a much more extensive set of expenses for many parents,” said Courtney Alev, Credit Karma’s consumer financial advocate.
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Multigenerational households can be a way to save

During the pandemic, the number of adults moving back in with their parents — often referred to as “boomerang kids” — temporarily spiked to a historic high.
Most said they initially moved in with their parents out of necessity or to save money. Hefty student loan bills from college and soaring housing costs have put a financial stranglehold on those just starting out. The surging cost of living and sky-high rents are making it harder to move on.

The number of households with two or more adult generations has quadrupled over the past five decades, according to a separate report by the Pew Research Center based on census data from 1971 to 2021. Such households now represent 18% of the U.S. population, it estimates.
Finances are the No. 1 reason families are doubling up, Pew found, due in part to ballooning student debt and housing costs.

Arrows pointing outwards

Now, 25% of young adults live in a multigenerational household, up from just 9% five decades ago.  
In most cases, 25- to 34-year-olds are living in the home of one or both of their parents. A smaller share live in their own home and have a parent or other older relative staying with them.
Not surprisingly, older parents are also more likely to pay for most of the expenses when two or more generations share a home. The typical 25- to 34-year-old in a multigenerational household contributes 22% of the total household income, Pew found. 

How to achieve financial freedom

For parents, however, supporting grown children can be a substantial drain at a time when their own financial security is at risk.
In an economy that has produced the highest inflation rate since the early 1980s, the cost of providing support has risen sharply. According to Credit Karma, 69% of the parents who help their adult children said it causes them financial stress.
“It’s essential that parents do what they can to first take care of themselves financially, before offering financial support to their adult children,” Alev said.
“Like with anything, make a budget for your income and expenses, factoring in savings, debt repayment and, if possible, contributions to a retirement fund,” she advised.
“Once you’ve done that work, see how much you have left over to feasibly help your adult kids and set that expectation with them. You might even consider setting an expiration date to give your adult children a timeline for when they need to be back on their feet.” 
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With little to no safety net, lower wages and shorter credit histories, young adults are struggling to manage high-interest debt, according to a new report.  
18- to 24-year-olds in minority communities face even greater financial distress.
These moves can improve your financial standing.

Americans across the board are struggling with credit card debt. Those just starting out are particularly vulnerable.
With limited financial resources, lower wages and shorter credit histories, young adults are struggling to manage high-interest debt more than other age group, according to a new report by Urban Institute. Nearly one in five adults between the ages 18 and 24 with a credit record in the U.S. currently have debt in collections.

“Young adults are particularly vulnerable,” the authors of the report wrote. “The high cost of borrowing coupled with limited income makes it difficult to manage debt in this stage of life.”
Overall, credit card balances are surging, up 15% in the most recent quarter, the largest annual jump in more than 20 years. At the same time, credit card rates are now over 19%, on average — an all-time high — and still rising.
But for new applicants for credit, APRs are typically even higher, as much as 30%, according to Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.
“When you have poorer credit, you have to pay more to borrow, which can make taking on debt even harder to pay back,” said Kassandra Martinchek, a research associate at Urban Institute and co-author of the report.
“Because young adults have this unique vulnerability, it’s easier for a financial shock to happen and throw you off your path,” Martinchek added.  

Minorities face greater financial distress

Those living in communities of color are even more likely to struggle with credit and hold past-due debt.
Young adults in majority-Black and majority-Hispanic communities have nearly twice the rate of credit card delinquencies as young adults in majority-white communities, Urban Institute found.
These young adults also have lower average credit scores than their white counterparts, according to a separate Urban Institute analysis based on Vantage scores. And they are more likely to see their credit scores deteriorate over time.
“Disparities by race and ethnicities emerge from this legacy of constrained access to wealth building pathways,” Martinchek said.

Easy credit options can be a ‘trap’

The Credit CARD Act, which passed in 2009, restricted card companies from issuing credit to new, young customers unless they can demonstrate the ability to make payments or have a co-signer.
And yet, “young people, and college students in particular, still receive unsolicited preapproved credit card offers,” the report found.
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Further, younger consumers are increasingly turning to buy now, pay later payments. “An attractive alternative to credit cards, BNPL products offer quick credit approvals and little to no interest,” the report said.
However, the more buy now, pay later accounts open at once, the more prone consumers become to overspending, missed or late payments and poor credit history, other research shows.
“It’s a slippery slope,” Rossman said. “Sometimes it can work, but sometimes it ends up being a little bit of a trap and a ticket to overspending.”
“That can be an early sign of financial distress,” Martinchek also said.
Without much regulatory oversight, the BNPL market currently exists in “a legal gray space,” according to Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School.

How to build good credit

Credit cards are still considered the best way to begin a credit history, which is important to young adults just starting out.
Good credit paves the way to low interest rates on mortgages and auto loans and can even make it easier to get an apartment rental.
The best way to improve your credit comes down to paying your bills on time or reducing your credit card balance, Rossman said. 
Rossman advises borrowers to keep revolving debt below 30% of their available credit to limit the effect that high balances can have. Asking for a higher credit limit or making an extra payment in the middle of the billing cycle can help.
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Americans have been bracing for a new reporting change for third-party payment networks like Venmo or PayPal.
Sens. Bill Hagerty, R-Tenn., and Joe Manchin, D-W.Va., will propose to raise the tax reporting threshold to $10,000 from $600 for 2022.

U.S. Senator Bill Hagerty (R-TN), listens to testimony during the Senate Banking, Housing and Urban Affairs Hearing to examine the President’s Working Group on Financial Markets report on Stablecoins in Washington, February 15, 2022.
Bill O’Leary | Pool | Reuters

Sen. Bill Hagerty, R-Tenn., will file an amendment to the $1.7 trillion spending package, to increase the threshold for Form 1099-K, according to Sen. Joe Manchin, D-W.Va., the proposal’s lead co-sponsor. The tax reporting threshold applies to transfers using third-party payment networks including Venmo and PayPal.
Manchin told CNBC the amendment would increase the payment threshold to $10,000 from $600 for the 2022 tax season.

Before 2022, taxpayers received 1099-Ks with more than 200 transactions worth an aggregate above $20,000. But the American Rescue Plan Act of 2021 dropped the threshold to just $600. Currently, even a single transaction over $600 may trigger the form.
“This is the best relief we can get for people,” Manchin said, referencing the $10,000 threshold as “the best way to approach it.”
He believes that raising the threshold to $10,000 has broader support than delaying implementation of the new rule.
This is breaking news. Please check back for updates.

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U.S. Supreme Court justices have scheduled the high-profile arguments over President Joe Biden’s student loan forgiveness plan for Feb. 28.
The justices will consider the lawsuits brought by six GOP-led states and a conservative advocacy organization.

Activists hold a student loan forgiveness rally near the White House on April 27, 2022.
Anna Moneymaker | Getty Images News | Getty Images

The nine justices of the U.S. Supreme Court have scheduled high-profile arguments over President Joe Biden’s student loan forgiveness plan for Feb. 28, meaning borrowers suspended in uncertainty about the fate of their debts will at least know more soon.
Since Biden unveiled his plan to cancel up to $20,000 in student debt for tens of millions of Americans, Republicans and conservative groups have filed at least six lawsuits to try to halt the policy, arguing that it’s an overreach of executive authority and unfair in a number of ways.

Two of those legal challenges have been successful in at least temporarily stopping the president’s plan from going forward. The Biden administration has appealed those decisions, and the country’s highest court has announced it will have the final say on the policy, which will remain on hold until then.
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The justices will consider the lawsuits brought by six GOP-led states, which argue that forgiveness will disrupt state entities that profit from federal student loans, as well as a lawsuit backed by the Job Creators Network Foundation, a conservative advocacy organization, featuring two borrowers in Texas who are partially or fully left out of the president’s relief.
The fact that the justices have agreed so quickly to take both cases suggests that they’re eager to deliver a decisive ruling on the policy involving more than 30 million Americans, said Laurence Tribe, a Harvard law professor.
Like other legal experts, Tribe doesn’t have much hope that the plan will survive the Supreme Court.

“It’s basically put the program in deep freeze until it proceeds to most likely dismantle it,” Tribe said.

Higher education expert Mark Kantrowitz agreed that an eagerness to make a ruling doesn’t bode well for proponents of the president’s plan, “because ruling against forgiveness is less complicated.”
Dan Urman, a law professor at Northeastern University, also predicted the Supreme Court will rule against Biden. He said the conservative justices believe government agencies exert too much authority and “violate the separation of powers.”
Yet Tribe said the plaintiffs are dressing up their frustration with seeing students get relief in legal arguments about the separation of power.
“They think of this as elite, selfish kids getting at the head of the line when others have had to repay their loans,” Tribe said, adding that Republicans have not challenged when other groups get relief.

A report last month found that one of the plaintiffs in the Texas lawsuit was the beneficiary of more than $45,000 in debt cancellation under the Paycheck Protection Program, which provided loans to small businesses hurting from the Covid pandemic.
The Biden administration insists that it’s acting within the law with its student loan forgiveness plan, pointing out that the Heroes Act of 2003 grants the education secretary the authority to waive regulations related to student loans during national emergencies.
The U.S. has been operating under an emergency declaration since March 2020.
By Jan. 4, the Biden administration will have to submit to the court its opening brief in the cases. Responses from the plaintiffs are due around a month later.

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“Secure 2.0” is a collection of provisions intended to build upon the retirement-system improvements that were implemented under the Secure Act of 2019.
Some of the provisions include requiring automatic enrollment in some workplace plans, increasing “catch-up” contributions that older workers can make and boosting part-time workers’ access to retirement plans.
There also are provisions related to increasing employees’ ability to create emergency savings and access emergency funds.

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Another round of changes to the U.S. retirement system appears to be on its way.
A collection of retirement-related provisions known as “Secure 2.0” is included in a 4,100-page, $1.7 trillion spending bill — which would fund the government for the 2023 fiscal year — that was unveiled Monday night. Approval by both the Senate and House are expected by the end of this week.

“It’s headed for passage,” said Paul Richman, chief government and political affairs officer for the Insured Retirement Institute. “I don’t believe there will be further changes to [Secure 2.0].”
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The Secure 2.0 provisions are intended to build on improvements to the retirement system that were implemented under the 2019 Secure Act. Those changes included giving part-time workers better access to retirement benefits and increasing the age when required minimum distributions, or RMDs, from certain retirement accounts must start — to age 72 from 70½.

This time around, some of the many provisions that are in the massive appropriations bill include:

Requiring automatic 401(k) enrollment: Employers would be required to automatically enroll employees in their 401(k) plan at a rate of least 3% but not more than 10%. Businesses with 10 or fewer workers and new companies in business for less than three years are among those that would be excluded from the mandate.

Increasing the age when RMDs would need to start: The current bill would increase it from age 72 to age 73 in 2023 and then to age 75 in 2033. Additionally, the penalty for failing to take RMDs would be reduced to 25%, and in some cases, 10%, from the current 50%.

Creating bigger “catch-up” contributions for older retirement savers: Under current law, you can put an extra $6,500 annually in your 401(k) once you reach age 50. Secure 2.0 would increase the limit to $10,000 (or 50% more than the regular catch-up amount) starting in 2025 for savers ages 60 to 63. Catch-up amounts also would be indexed for inflation. Additionally, all catch-up contributions will be subject to Roth treatment (i.e., not pretax) except for workers who earn $145,000 or less.

Broadening employer 401(k) match options: A proposal would make it easier for employers to make contributions to 401(k) plans on behalf of employees paying student loans instead of saving for retirement.

Improving worker access to emergency savings: One provision would let employees withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the typical 10% tax penalty for early withdrawal if they are under age 59½. Companies also could let workers set up an emergency savings account through automatic payroll deductions, with a cap of $2,500.

Increasing part-time workers’ access to retirement accounts: The original Secure Act made it so part-time workers who book between 500 and 999 hours for three consecutive years could be eligible for their company’s 401(k). Secure 2.0 reduces that to two years. Companies already have been required to grant eligibility to employees who work at least 1,000 hours in a year.

Boosting how much can be put in a qualified longevity annuity contract: Currently, the maximum that can go into a QLAC is either $135,000 or 25% of the value of your retirement accounts, whichever is less. Secure 2.0 eliminates the 25% cap and increases the maximum amount allowed in a QLAC to $200,000.

Changing the required minimum distribution rules for Roth 401(k)s: Currently, while Roth IRAs come with no RMDs during the original account owner’s life, that’s not the case for 401(k)s. Starting in 2024, the pre-death distribution requirement would be eliminated.

Broadening uses for unused college savings money: A provision would allow for tax- and penalty-free rollovers to Roth IRAs from 529 college savings accounts, under certain conditions.

The bill also includes incentives for small businesses to set up retirement savings plans for their workers, encourages individuals to set aside long-term savings and makes it easier for annuities to be an income option for retirees.

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High inflation outpaced a record Social Security cost-of-living adjustment this year.
Here’s the prices that rose the fastest for households ages 65 and up.

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Amid record high inflation, stretching Social Security benefit checks became more difficult in 2022.
Even as a 5.9% cost-of-living adjustment went into effect in January, the record high annual benefit increase still fell short, according to new research from The Senior Citizens League.

The average retiree benefit increased to $1,656.30 in 2022 from $1,564 in 2021 — a monthly boost of $92.30, according to the nonpartisan senior group. Yet in every month this year, a bigger increase was needed to keep up with soaring costs due to inflation, the research found.
The average retiree benefit fell short by an average of $42.35 per month, or 46%, the research found. Over the course of the year, that added up to $508.20.

Social Security’s annual cost-of-living adjustment, or COLA, is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The annual change is calculated based on the index’s average for the third quarter, which is compared to the third-quarter average for the previous year.
The 5.9% annual increase for 2022 was the highest bump to benefits in 40 years when it was announced in October 2021.
In January, beneficiaries can expect to see an even higher increase — 8.7% — that will top last year’s record.

Yet as inflation outpaced the COLA for 2022, households ages 65 and up found it more difficult to pay for everyday items.

‘Even the simplest of foods are harder … to afford’

The fastest-growing cost was home heating oil, which spiked 68% from October 2021 to October 2022, according to The Senior Citizens League.
That was followed by airfares, which climbed 42.9% in that time frame; flour and prepared mixes, which rose 24.6%; health insurance, 20.6%; and natural gas, 20%.
Other key categories that saw big price jumps included oil changes and coolant, canned fruits and vegetables, soups, turkey, and pet food.
“Even the simplest of foods are harder for people to afford,” said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.

For low-income retirees who have spent down their retirement savings, absorbing those higher costs may be particularly difficult, she noted.
Medicare Part B also saw higher increases in 2022, with the standard premiums going up by 14.5% to $170.10 per month. Those monthly premiums are typically deducted directly from Social Security checks.
As 2023 approaches, Social Security beneficiaries will be poised to see more of the record 8.7% increase that goes into effect, as standard Medicare Part B premiums decline by 3% to $164.90.
“The good news … is people are realizing 100% of the 8.7% lift,” David Freitag, a financial planning consultant and Social Security expert at MassMutual, recently told CNBC.
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The average retiree benefit will go up by $146 per month, to $1,827 in 2023 from $1,681 in 2022, the Social Security Administration said in October. (This is higher than the average retirement benefit amount from January that The Senior Citizens League used in its calculations. The average retiree benefit tends to change throughout the year as new beneficiaries start receiving benefits, according to Johnson.)
The agency is currently sending statements to beneficiaries that include the exact amounts of their increases for next year.
“The COLA is going to boost their benefits really by a record amount,” Johnson said.
“This is the biggest one that most retirees alive today have ever received,” she said.
Just how far that extra money goes next year will depend on how inflation fares in the coming months.
If higher prices subside, that may point to a lower cost-of-living adjustment for 2024, Johnson said. An exact measurement will be based on CPI-W data for the third quarter of next year.

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