This may be the last time you trust “reason” in a crowd.

There are many psychological defects that make us do dumb things with money. We chase performance in the stock market and feel pressure from the next house over to buy fancy cars.

If you’ve read any personal finance blog for more than a week, you’ve probably heard some sort of encouragement to “be different” and separate wants from needs, etc., and all that sounds like good advice.

Personally, I’m not so sure it is. Personal finance advice too often focuses on telling you what to do and encouraging you to do it. It sets up the “Do I buy a new Lexus?” scenario as a rational dilemma with a clear answer and path to follow while summarily dismissing wanting to look good in front of the neighbors as the silly purview of broke cattlemen with big hats.

I’m a much bigger fan of avoiding those defects, through using defaults (automatic savings, auto bill pay, auto portfolio re-balancing) rather than trying to counteract the defects will all that positive thinking. This post is meant to show why.

In short, I’m not so sure we can fight the herd.

ABC runs a show called “What Would You Do?” on Fridays. It’s one of those rare shows that’s actually lasted more than a few episodes, but you really only need the plot of one to know how the rest work.

In an episode I saw a few months ago, a few men and women were put through a mock frat or sorority initiation on a public street. The activities were rather extreme with over-the-top physical and verbal abuse. Hidden cameras were rolling to see if anybody would try to stop it or if, instead, people might even join in.

Most people simply ignored the spectacle, one or two joined it, and I can only remember a couple actually trying to stop the abuse. The show, of course, is meant to make all of us think “Of course I would make them stop!” while showing that most people don’t.

To a social psychologist, the show’s probably not surprising one bit. If you put the onlookers alone in a room with the abuse going on, they might speak up, but in a crowd, suddenly all sense of individuality disappears. If the rest of the mob is doing nothing, best to not stand out. If the mob seems OK with an activity, it must be normal to be OK with the activity yourself.

What Would You Do? was a set-up, but there are several infamous examples of the same phenomenon.

You see a murder from your apartment window. What would you do?

In 1964, Kitty Genovese was stalked and stabbed to death in Queens, New York. The murder didn’t happen at once. She was attacked, left to stumble around, and finally killed about an hour later. Neighbors heard screams, might have seen the attacker, but did nothing. A famous New York Times article began with this chilling line: “For more than half an hour 38 respectable, law-abiding citizens in Queens watched a killer stalk and stab a woman in three separate attacks in Kew Gardens.”

Some parts of the story were later discredited, but it’s since been taught in social psychology classes as evidence of the “bystander effect”. A few years after the Genovese murder, John Darley and Bibb Latane attempted to replicate seeming indifference to emergency situations in the lab.

In the Darley/Latane experiment, an undergraduate would be put into a room, alone, with an intercom. He or she was supposed to talk about difficulties of student life with other members of the group (who were supposedly in other rooms, kept private to protect their anonymity). As they took turns talking, one of them would mention that he suffered from seizures. Later in the conversation, the test subject would hear this:

I-er-um-I think I-I need-er-if-if could-er-er-somebody er-er-er-er-er-er-er give me a little-er-give me a little help here because-er-I-er-I’m-er-er-h-h-having a-a-a real problem- er-right now and I-er-if somebody could help me out it would-it would-er-er s-s-sure be-sure be good . . . because-er-there-er-er-a cause I-er-I-uh-I’ve got a-a one of the-er-sei–er-er-things coming on and-and-and I could really-er-use some help so if somebody would-er-give me a little h-help-uh-er-er-er-er-er c-could somebody-er-er-help-er-uh-uh-uh (choking sounds). . . . I’m gonna die-er-er-I’m . . . gonna die-er-help-er-er-seizure- er-[chokes, then quiet].

Seriously. It was in the script.

So guess how long it took the students to, you know, leave the room and tell somebody that someone else on the conference was having a seizure?

First problem: If there were 6 people on the call (subject, victim, and four others), only 31% ever reported it.

Second problem: Even if they did, it took the subject a full 2 minutes and 46 seconds on average after hearing that to go seek help.

If there were fewer people on the conference, the rates and speed of reporting went up. Being in a group of non-doers is was kept people from intervening.

You see someone about to jump off a building. What would you do?

September 2008. A 17-year old, suffering from a bad breakup, threatens to jump from a parking garage. Police negotiators spend three hours trying to talk him down. The crowd acts a bit differently. Here’s a quote from a security guard who was there: “The police did a fantastic job at the incident and were not helped by a baying crowd, some with children, calling for the lad to jump.”

The teenager jumped.

Or how about August 2001. A 26-year old jumped from the Seattle Bridge, after some members of a crowd taunted “Jump bitch jump!” Or February last year, the mob taunted a jumper in San Francisco.

It’d be easy to pass off the cases as meanness or a lack of awareness of how serious the situations were. Part of it, however, is just herd mentality. If someone individually ran across a jumper, he’d probably call the police. Put in a group, that sense of responsibility dissipates. And once one person starts yelling out at the jumper, the rest feel more inclined to do it themselves.

I have the same visceral, disgusted reaction that you probably do. But sometimes I wonder if but for the grace of God, I could have been in that crowd.

(For a great post on the subject, check out You Are Not So Smart.)

And you think you stand a chance in personal finance?

John has a hot stock tip. Everyone at the barbecue nods in agreement.

Mary guilts you into coming to a charity auction. The bidding gets pretty heated.

You hear about money pouring into stocks or gold or whatever. And you wonder if you should come along too.

Or conversely, you feel like too much of your money is at risk in the stock market, but no one else seems to be concerned.

So tell me, what would you do? And are you so sure now that you see even in extremely terrible situations, so many people checked reason at the door and surrendered to the herd?

All the self-motivating, I-can-learn-my-way-out-of-anything things you think are going to bring you to financial fulfillment don’t hold a candle to the deep, deep psychological underpinnings that separate us from the machines.

You’re not going to reason your ways out of these problems. You need to learn why “reason” has nothing to do with them.

And can I contradict myself in a week?

When I was in college, I dressed like a homeless person. Now, I dress like I’m in college. It’s not that I can’t afford nicer clothes. Thankfully I’m well beyond the “no money” years. It’s just that I never really “upgraded” to the stuff most of my peers are wearing nowadays.

So I should be patting myself on the back, right? Living like a poor person—when you’re not—is one of those tried and true personal finance adages that mark classics like The Millionaire Next Door. The millionaires live like they’re not rich. They buy used cars. They eat at home. Then they retire early or spend retirement travelling the world because they’ve saved so much gosh darn money.

But sometimes left out of the discussion of saving, is how much is too much when you’re retirement planning.

To take it to an extreme and keep things simple, let’s say we’ve got a 25-year old making $60,000. He’s totally bought into saving like a madman and maxes out a Roth IRA and a 401k every year until he retires. Based on one, mainstream retirement calculator, that would give him about $8,900 per year per month once he retired at age 66—almost two and a half times what he used to live on at age 65.

He could fund two of his retirements, and still have half a retirement left over. Should we celebrate that?

The concept of “consumption smoothing”

I think most people would say “No.” The 25-year-old self was cheated out of current pleasures…his trip to Norway, his “grown-up” clothes…that would have been perfectly fine for him to buy. Instead, his 80-year-old self either goes on a spending binge, leaves a large inheritance, or tries to pay off St. Peter.

Instead, many economists consider the ideal savings amount to be that which “smooths” your consumption over your lifetime. In short, you want your quality of life in your 60s and beyond to be about as high as it was in your 30s.

At some point and to make things simple, personal finance gurus started to back out savings targets—like 10% or 20%—that would achieve consumption smoothing as long as the stock market hit certain rates of return.

Laurence Kotlikoff, a Boston University economist, a few years ago took it so far as to create an extremely comprehensive retirement calculator, that can show you how much you should consume every year into and through retirement based on the assumptions you put in. (Here’s the more basic, free version.)

Can you save too much for retirement? Yes! But in personal finance circles, it’s generally not “cool” to spend. A recent Wall Street Journal column derided people who buy iPad 2s (or is it iPads 2?). The logic: It’s really costing you $2,000 since you could have invested it instead! By that logic, I should really feel bad about my $5 lunch today—that could have been $20, after inflation, in 2041. This year, I will blow $7,200 of my future money on lunch. I’m such a moron.

The columnist’s logic assigns little to no value to present enjoyment, in favor of future enjoyment. That makes no sense.

Don’t get me wrong, this doesn’t apply to most people. Most Americans will retire with little to no savings. And those people shouldn’t be buying iPads. But given that you’re reading this blog, I’m betting you’re putting at least a bit away already, or at least thinking about putting a bit away.

Throw uncertainty into the mix, and suddenly saving “too much” seems impossible.

The idea of consumption smoothing has a major flaw, of course: uncertainty. We don’t know what stocks will return over the next decades. We don’t know where tax rates will be or if we’ll be in a car accident or if the roof will need to be replaced, etc.

Or perhaps a more dire situation: Imagine you’re a 53-year old staring down the newly proposed Republican budget. In 12 years, you were expecting Medicare. Bzzzzz. Wrong. Maybe you could have seen some sort of Medicare reform coming, but you probably didn’t predict the fairly random age-55 cutoff that would probably allow you to save thousands in insurance costs if you had only been born in 1956.

There are two ways to react to that uncertainty: To save as much as you can in case a worst-case scenario comes along or to save for a best-guess scenario and risk having to cut consumption if the dice come up snake eyes.

I’m saving for a “best guess”, with the reasonable safety measures of a year-long emergency fund, an annuity, etc. Sure, fate could frown on me, but I’m not willing to make a guaranteed sacrifice of reasonable happinesses today just to prepare for a possibly scary future. There’s a chance, my 66-year old self might be unhappy with the current me, but he’s going to have to deal with it.

Thousands of Americans are doing it.

Have you read the news lately? Soon-to-be retirees have saved almost nothing for retirement. No doubt that means we’ll soon have homeless Baby Boomers begging for change on the subways!

Ok, the second part might not happen. But given the press that this recent Employee Benefit Research Institute report has gotten, you’d be forgiven for thinking so.

Make no mistake, the numbers are terrible. Only 44% of Americans have more than $25,000 in savings. About 54% of workers older than 45 have more than $25k. And of actual retirees, only 46% have more than $25k in savings.

Using the rule of thumb that you can draw down 4% of your nest egg in retirement’s first year—faulty, but it’s a starting point—$25,000 in savings gives you about $1,000 in income. With Social Security, you’re probably talking $14,000 per year, which is puts you in the ballpark of the incomes in countries like Libya and Panama, depending on how you’re making your comparison.

And yet, these soon-to-be retirees and actual retirees are in the United States. Which begs the question: How are they doing it? And is life really so bad for poor retired people?

The life of a retired non-saver

First, let’s look at actual incomes of retirees as clues. A 2005 report by the Census found that the median income of someone aged 65 and older in 2003 was about $24,000—or $29,000 in today’s dollars. That’s a pretty severe drop off from the median $49,000 income that people aged 55 to 64 had.

Those age 65+ are also taking less of an income as they age. The same report found that the median household took about $33k in income between 65 and 69, but by age 75, the median household had an income of only $19,000.

About 17% of those 65+ live in or close to poverty, which is about the same as the population as a whole, but that was skewed by those over age 75. The real old-timers had a near poverty rate of almost 20%.

But on average, their living arrangements were fine according to the report…most had furnaces, A/C, a full kitchen, etc.

No, you’re not working until you die.

You might have heard somebody say something to the effect of “I’m probably going to work until I die”. Either that’s been a conscious choice (no point in saving!) or it’s a “reality” they’ve come to as 65 neared and they hadn’t saved nearly enough.

Except that’s not what actually happens. According to the Labor Department, fewer than one in five workers over age 65 have a job or are looking for work. Once you get to age 75, only 7% or so fits that profile. Slightly sadder, most of that 7% is looking for work but doesn’t actually have a job.

Age discrimination might be part of it. But so could mental or physical disabilities and the generally weak job market right now.

Whatever it is, most Americans older than 65 are unable or unwilling to hold down a job as they age.

Quick! Picture your perfect retirement.

Close? No? Well, when you ask people to picture a perfect retirement, most people have at least something related to travel.

Unfortunately, retirees aren’t actually doing it, at least not any more than the rest of us.

According to the Labor Dept., older Americans (65+) spent about 400 hours—or 16 days—on average on “Other Leisure” time, which basically includes anything that’s not T.V., socializing, relaxing, and reading. Even if all of that leisure time was devoted to travel, that’s not any more than the three weeks of vacation you’re probably earning by the age of 30. So much for that round-the-world trip!

So what are they spending time doing? They’re watching T.V.—about 4.4 hours of it per day. That’s quite a bit higher than the 3.3 hours Americans of all ages watch on a weekend day. By comparison, the older Americans spent less than an hour per day on average with friends.

So, let’s try that again. Quick! Picture your probable retirement!

You can file that under Sad, but True.

It’s not about “Your Number”. It’s about how you want to live.

Once you hit age 50, your chances of being jobless start to rise rapidly. You don’t get to choose when you retire. The job market or your ailing body will decide for you. Most retired Americans are getting by on incomes that you’d probably consider appropriate for the Third World. And even if they wanted to work until they died, they can’t.

Social Security allows them to live adequately, but not richly, and certainly not in the ways you dream about.

That’s why you’re saving for retirement. It’s not so you can retire. It’s so your retirement looks more like white beaches and blue skies than Monday Night RAW.

Or, why I still haven’t bought a mattress

I’ve intended to buy a new mattress for, oh, about a year now. I’ve actually gone to Macy’s and lain down on probably 20 or so mattresses to figure out what I like and don’t like. I’ve looked at reviews of mattresses online, and at one point was pretty close to pulling the trigger.

But I haven’t. This is probably a 10-year investment, and I feel a lot of pressure to make the right choice. So instead I’ve continued to sleep on my too small, cheap Sealy that gets way too hot in summer and is surely less comfortable than even the least comfortable mattress I’ve tried out.

Even if there is a better mattress at a better price out there for me, getting a less-than-ideal mattress is better than the status quo. So why can’t I make a decision?

One problem might be that I simply have too many options to pick from.

In the mid-90s, Columbia professor Sheena Iyengar and Stanford’s Mark Lepper set up a tasting booth with jams at Draeger’s Supermarket in Menlo Park. One day, they set up a booth with a limited selection of six jams. Another day, they set up a booth with an extensive selection of 24 jams.

Customers could sample as many as they wanted, but on average, no matter which booth they encountered, they tried between one and two jams.

The stand with the extensive selection attracted more shoppers than the limited-selection booth, but the limited-selection booth was far more effective in getting people to purchase. In fact, while 30% of shoppers who tasted at the six-jam booth ended up buying a jar, only 3% of shoppers at the 24-jam booth bought one.

In a separate study, they had undergraduate psychology students watch Twelve Angry Men and gave them the option to complete an essay in response to it for extra credit. (The undergrads didn’t know they were part of a study. “Intro to Social Psych” students, take note!)

One group of students could choose from six essay topics. The second group chose from 30 topics. But while 74% of the six-topic students ended up completing the assignment, only 60% of the 30-topic students turned it in.

In both cases, you’d think that having a lot of choices would be viewed by the subjects as a good thing. Indeed, the test subjects reported enjoying making decisions more when they had more to choose from.

But having a lot of choices also made them think more about the consequences of making a “bad” choice or passing up potentially “better” options.

“Maybe jam #15 would taste even better than jam #7! Ah, I’ll just think about it and come back later.”

Don’t let “great” be the enemy of “good.”

There are several theories as to why we can’t make decisions when presented with too many choices. Some people think it’s not the presence of a lot of choices themselves, but the absence of information about the choices. Maybe if those jam-tasters had put all 24 jams in their mouths they wouldn’t have had a problem picking one.

Likewise, maybe it’s so hard to get people to invest because there are seemingly endless companies with which to open accounts and then even more mutual funds to choose from.

But here’s the thing. Investing in any mutual fund is probably going to be better than cash. Your simple stock/bond allocation matters much more than whether you choose the S&P 500 ETF or the S&P Value ETF.

Likewise, almost any mattress will be better than the cheap-o mattress I have. Those jam tasters, assuming they liked one of the jams they tried, would be happy eating it. And those college students who couldn’t pick from 30 topics would have gotten the extra credit had they picked any of them.

Here are some other common “enemy of the good” scenarios I see frequently from myself and others:

— Waiting for the perfect moment to ask for a raise.
— Waiting for the right economic climate or set of personal circumstances to start your own business.
— Waiting for the low-point of the market to start investing.
— Trying to find the perfect diet or workout regimen. In the meantime, continuing to eat ice cream and hot dogs.
— Looking for the right time to change careers and the perfect career to change to (assuming they’re unhappy in their current spot)

In all these scenarios, simply doing anything would probably lead to a better result than doing nothing.

Limit your choices to inspire action.

Let’s return briefly to my mattress problem—which my occasionally aching back and droopy eyelids can attest is all-too-real. What I should have done (and what I should do) is set a scope of research to carry out before making a decision.

So say I decided to visit three stores and then return to my favorite and buy it. Would I get the best mattress ever conceived by man? Probably not. But that’s enough testing to get me to a pretty darn good mattress without leaving endless possible Googling, review reading, and shopping.

In the same way, maybe you can set a deadline for yourself to ask for a raise. If the opportune time hasn’t arisen by, say, May 20th, just ask and get the ball rolling.

Anyway, if you have other ways to avoid decision paralysis, let’s hear them. My back will thank you.

The difficulty with an improving economy

Every once in a while, I run across a comment on a blog or news story that reads something like this: “If you’ve been unemployed for more than a year, you’re not looking hard enough.”

It’s mean, but I’m sure the writer believes what he says. They probably have a job and run across “Help Wanted” signs every once in a while, and can’t reconcile that with the fact that more than 6 million people have been out of work for more than 26 weeks.

But now the jobless face another problem. If you do have a job right now, you have more job security than at any time in the last decade.

On Friday, the Labor Department released its monthly report on the number of openings, hirings, and firings that employers posted in January. It’s a little different than the regular unemployment report that comes out at the beginning of the month. That one tells you how unemployment overall moved in the previous month. Whereas this one tells you how much hiring and how much firing added up to the overall unemployment figure.

The last few months of reports have been mostly the same. Firings have basically stopped. In fact, they’re at their lowest point since the government started tracking them in 2000. But hirings haven’t picked up at all, which leads to this worrisome conclusion (as stated by an analyst): “Generally speaking, all the data seem to suggest that if you already have a job, the labor market probably doesn’t seem so bad, but if you’re looking for a job, there’s been almost no job market improvement over the last few years.”

In other words, if you have a job, this economy doesn’t feel so frightening anymore. If you don’t, it’s still scary as hell.

When long-term unemployment becomes a fact of life

America’s traditionally been a country with rapid layoffs but rapid hiring. You’d be much more likely to lose your job at any given moment, relative to a country like France. But unlike the French, an unemployed American could get his job back quickly.

In fact, unemployment in countries like France, Greece, and Spain has been at 8% or so or higher for years. And at any given time, most of those people tend to have been out of work for more than six months.

Yet, you don’t get the sense of urgency in fixing the problem that you get here. At one point, unemployment stopped getting worse in those countries, and the governments and populace settled into complacency. Maybe 8% unemployment was as good as they could do.

We don’t yet know when and if the job-creation machine will revive in the U.S. But we’re already starting to see congressmen and some economists declare that the government can’t continue extending help to the long-term unemployed in the name of fiscal austerity.

It’s going to be much easier for them to focus on the debt if the average man on the street no longer fears that he’ll lose his job.

Unemployment is moving from “our” problem to “their” problem.

I have a job. And that BLS report I referenced tells me that job’s safer than it has been in 11 years. So now, unemployment isn’t so much an imminent threat that I want government to urgently address, but the problem of an ambiguous group of people who I only know through friends of friends or family.

Pretty soon, simply telling people that the unemployment rate is 9% isn’t going to make people bat an eyelash, and I wouldn’t be surprised if some politicians or jobseeker services start taking a lesson from foreign NGOs.

Are you more heartbroken by the estimated 925 million people who lived in hunger in 2010, or by this?

I

It’s no accident that the narrator said the name “Michelle” six times. No accident either that once you start giving, you’ll get a picture of the child and updates on his or her progress.

Economist George Loewenstein and Deborah Small ran an experiment where they presented potential donors a letter that requested money for a house being built for a family by Habitat for Humanity. In one version of the letter, which described the families, they were told that the family “will be selected” for the home. In the other version, they were told that the family “has been selected” and was just waiting for the donation.

Donations to the home for the family that “has been selected” were significantly greater. The reason? The economists think that making the beneficiary concrete and identifiable was all it took to pump up the giving.

I hope it doesn’t reach the point that we need to run commercials with panicked jobseekers in order to keep them in the public consciousness. But as time goes on, let’s not forget that one in 10 of the people we pass on the street every day are probably out of work.

The pain of being paid by the hour.

Would you work less time for less money?

I would. I’d take a 20% pay cut to never work another Friday again without hesitation.

I don’t get paid hourly, but if I did, I might answer differently. In a study of U.S. Census data a couple years ago, Stanford professor Jeffrey Pfeffer and University of Toronto prof Sanford DeVoe found that workers who get paid hourly would work more to get paid more, if given the choice. That answer held true even when the professors controlled for income, age, marital status, gender and educational attainment.

What might be happening? When you work hourly, it seems you think of time in terms of billable hours. When a lawyer watches his kid’s baseball game, he’s ticking away in his head the $100 an hour he could be earning by working.

We non-hourly folks don’t have as strong a connection between the hours we work and the money we earn. No time cards to file. No overtime to earn. But no penalty for working less time than usual either.

But Pfeffer and DeVoe found that you could make exempt employees (that’s HR-speak for “salaried”) feel just as harried as the hourly workers, simply by making us calculate our hourly wages. So somebody who makes a $100,000 per year salary is more likely to opt to work more for more money if you tell him he’s making $48 per hour.

And that will seriously stress you out.

But let’s get back to your kid’s baseball game. You should be enjoying time spent watching your son or daughter, not stressing over income that you lose by not working at that moment. Unfortunately, that’s exactly what hourly workers supposedly do.

Another Pfeffer/DeVoe collaboration discovered that getting a raise made people more impatient. If the value of your time goes up, you felt greater pressure not to waste it.

So, in effect, that lawyer has less fun at the kid’s baseball game if he makes $150 per hour than if he makes $100 per hour, because now he values his time more.

I’m waiting for the study that shows a causal link between making more money and spending less time on frivolous, “low value” activities, like watching T.V. Maybe it’s the high salary that keeps people from sitting in front of the tube, rather than the T.V.-watching that leads to the low salary.

One solution? Delegation.

Since I began a new job several months ago, I’ve felt much more time pressure. I do get paid more, but I’d like to think I actually have less time, too.

So far, I’ve dealt with it in a few different ways. Method number one was that self-imposed penalty if I didn’t work on the blog that I’ve talked too much about.

While I did complete the six-month term of that contract while hitting my goal of two posts per week, it made clear to me that my time scarcity was not just an illusion brought on by poor focus but an actual time crunch.

I’ve done a few things to try to rectify that.

— I cut cable (but getting a gift of Netflix did not help one bit).

— I’ve pushed back just a tad at work, not doing things at home that I’d normally have done just to get ready for the next day.

— Lastly, I’ve tuned down the number of posts on this blog to one per week, and I haven’t really put much effort into growing it by writing guest posts, etc.

It’s the cutting down on PopEc, that bothers me the most, because I really enjoy doing it. So I’ve been trying to think of ways to cut down on the other stuff to bring some of the Pop back.

If you feel like you’ve cut out as much work and as much low-value fun time as you possible can, the only other solution is to farm out some of the necessary stuff to somebody else. So for the first time, I’ve (gulp) started to use a personal assistant.

My first month with an assistant

No, it’s not the hard-core, $35,000-per-year dedicated kind. Instead, I pay $35-per-month for an assistant to take 15 tasks off my hands that can be done over the phone or internet. I picked FancyHands in part because I saw the owner give his spiel in person, but there are a lot of options out there.

If you haven’t used a personal assistant before, you won’t believe how difficult delegation is at the beginning. It’s not a natural thought process to think, “My assistant could do this,” instead of just doing it yourself.

My first tasks were simple restaurant reservations. Yes, it takes me about as long to type out the request in an e-mail as it would take to call myself. However, it lets me decide when to spend time to make that reservation. I can write out the task at 3 AM and let someone else remember to call the restaurant when it opens the next day.

I’ve also tried them out for more intensive tasks. Last month, I was in the market to buy a limited edition print by a certain artist as a gift. Galleries are notoriously bad about listing current inventory online and almost never post prices. So the assistant called up nine or so galleries in the NY area to see what was available and at what cost. That would have taken me hours and was worth more than $35 in itself.

It’s still a process though. If you’re similarly clueless about delegating, check out this great How-To by Inc. or hilarious narrative in Esquire where the writer literally delegated his entire life to assistants in India.

My Fancy Hands assistants are based in North America—communicating with native English speakers saves a lot of explanation time. Anyway, check them out, if getting those extra hours back in the day is worth the money to you, too. (N.B. That’s a referral link that gets me a free month of service, rather than money, if you sign up.)

Didn’t mean for that to be a long commercial. But maybe, just maybe, a little delegation will help me get back that last hour in the day and spend more time here.

In the meantime, how do you get back hours in your day? I’m obviously looking for ideas.

Daydreamers, distractions, and new ideas

I once worked at a company that had a computer policy from the dark ages. Dozens of websites—from Gmail to Amazon and even some news sites like Huffington Post—were banned. If you tried to access one of them, you’d get a warning message that continuing would automatically send a note to your supervisor. The idea was to eliminate distractions so we’d focus on work.

Not only did it make employees feel they were treated like toddlers, the “no distractions” policy might have helped stunt our creativity, according to a few recent studies.

It turns out, the most distracted among us might also be the most creative. And letting our focus go, from time to time, can lead to better ideas and higher quality work.

Holly White of Eckerd College and Priti Shah of the University of Michigan have done a lot of work measuring the creativity of people with attention deficit hyperactivity disorder (ADHD). ADHD starts when you’re young and makes it extremely difficult to focus and ignore distractions.

Recently, they took 60 undergraduates, half of whom had the disorder, and asked them to fill out a questionnaire, listing their achievements in creative areas, such as humor, writing, and invention.

Surprisingly, the students with ADHD ended up scoring higher across the creative categories.

The results mirrored one of their earlier studies. But lest you think those two were flukes, a separate study from Harvard and University of Toronto researchers found that those of us who are prone to distraction are also prone to come up with great ideas.

In that one, 86 Harvard undergrads were measured on their ability to ignore distractions, like the humming of an air conditioner or a nearby conversation. The kids who didn’t filter out all of those bothersome stimuli were seven times more likely to be rated as “eminent creative achievers” based on their past accomplishments.

A wandering mind recharges itself

My previous employer’s policy might have hurt its employees in another way: By sapping our abilities to focus.

Next time you walk into a coffee shop, pay attention to the smell. Nice, right? Now, sit down and read through this blog post again. By the end of the post, you might not even be able to pick up the smell anymore.

Why? Your mind had gotten used to the stimulus and is now discarding it as irrelevant information. That happens with other senses, too. If you focus your eyes on an object, objects in your peripheral vision will gradually “disappear” from your field of vision until you blink again.

The same blindness can hurt your performance on tasks if you apply relentless focus to them, according to Alejandro Lleras of the University of Illinois. He found that brief diversions, like checking e-mail, let your mind “reset” and give the previous task newfound energy.

Taking a break wipes the slate clean of all those details that you were taking for granted, kind of in the same way that it’s always a good idea to take a break from a draft before proofreading it. You’re always going to gloss over the same errors if you just focus relentlessly on the paper.

Lleras tested the idea by having a couple sets of students stare at a screen that flashed numbers and measuring when their attention span died. One set of students was told to memorize numbers and note when their number appeared on the screen. The other set was just supposed to focus on everything.

The second set’s attention span died after about 20 minutes, while the set with memorized numbers could pay attention for longer. Seeing the memorized numbers apparently broke up the monotony just enough to keep their attention going.

Reconciling the need for creativity with the need for productivity

There’s no doubt that some of this research butts up against earlier research on how distractions can destroy productivity. A UC-Irvine study, for example, found that after being distracted from a task, it took workers an average of 25 minutes to return to it.

It’s not that they’re contradictory…it just suggests that “being productive” and “being creative” can be mutually exclusive goals. Productivity can be task-oriented, whereas creativity lends itself well to deconstructed space.

How can you make sure you leave room for both? I’m thinking about trying these tactics.

1. Limit distractions. Sure, let your mind wander from time to time. But don’t let distractions force your mind to wander.

The classic distraction I can eliminate: The pop-up notification that I’ve received new e-mail. Nine times out of ten, new e-mails aren’t something I need to address immediately. Some don’t need to be addressed for hours. The catch: There are some e-mails I’d want to know immediately about. I just need to find a way in my inbox to ensure those senders still get prompt attention.

2. Instead, break focus on a schedule. One of my current problems is that I’m prone to mindlessly search for distractions. I click through my blog feed reader, CNN, Facebook, and Gmail, and less than 5 minutes later do the exact same thing even though the likelihood of anything having changed is extremely low.

There are services that can limit access to websites you select to certain times of day. Might not be a bad idea to give this a shot.

3. Have “creative” time and “productive” time. Let’s face it. There are times when you don’t need to be creative—you just need to get things done. If you are putting off painting your bedroom walls, it’s unlikely that a few minutes on Facebook will lead you to a creative way to get it done faster.

Similarly, I’m not sure how creative I want my accountants, airline pilots, and bus drivers to be when they’re supposed to be focused on their core functions.

On the other hand, most of us have jobs that require at least a modicum of creativity. I’ve come up with some of my best ideas while taking a walks around the block, daydreaming at lunch, and, yes, checking Facebook. It’s important to leave a couple hours in the day for that kind of stuff.

Finding the right balance of productivity and creativity is probably what separates geniuses from World of Warcraft addicts. And it’s amazing how little we know about what that balance is.

The “crisis” that never comes

The recent deficit talk has people rightly concerned about whether or not Congress and the President have the cojones to bring our fiscal house in order. There are basically four ways to cut the deficit: grow the economy, cut spending, raise taxes, or print money.

Option one is the fun way to get out of it. If we sell more goods and services, government collects more taxes while citizens make more money, and everybody’s happy. However, the economy right now is growing slowly.

Options two and three are where all the debate is happening. However, political risk is frightening most politicians from addressing the beasts of healthcare and Social Security that need to be tamed for any real progress to be done.

Which leaves option four as the default way to pay. If Congress does nothing to fix the deficit, the government can “print money” to devalue those debts, which drives interest rates up and the dollar down. Bad for savers. Good for debtors.

While you might understand how all that could eventually affect inflation and the prices you pay for goods, you might be left scratching your head about just how much of a knock on your savings that last solution could translate to.

Here’s an attempt to explain it without getting too wonky or insulting your intelligence. But first, let’s set one thing straight.

Inflation is not here yet.

I’m kind of tired of the “is there or isn’t there” inflation debate going on right now. The government’s official inflation measure showed that prices rose by about 1.6% over the last 12 months. Food and energy prices accounted for more than two-thirds of the increase.

Inflation of less than 2% is extremely low, especially when you’re including food and energy prices, which swing up and down sharply based on crop yields, hurricanes, etc. Critics like to counter with nice-sounding anecdotes about how their personal grocery bills are rising. But even if we were to accept anecdotal evidence as valid, there’s reason to think those anecdotes are wrong.

Here’s the average grocery store purchase at a Hy-Vee in Des Moines, according to Mint:

Go to Mint’s data feed yourself and play around. Grocery bills aren’t going up. Unless people are eating less, or deciding to make multiple trips to the store in order to keep their average order down (diabolical!), it’s simply not true that grocery prices are already on the upswing.

But it could happen soon. As the WSJ points out today, the prices for some things are rising faster, and inflation is already much worse in places like China, where there’s not a bad economy to weigh against price increases.

I’ve written before about good and bad inflation fighters. But today, I want to write specifically about how rising interest rates could affect stock prices.

Starting with a risk-free rate of return

If you wanted there to be no chance for your investment to lose money, where would you put it? FDIC-insured bank accounts come to mind, but you’d do slightly better by investing in 10-year Treasury bonds, which yield about 3.6% a year right now. Don’t get me wrong. If interest rates rose while you had your bond, the price would go down in the interim. But as long as you held onto them for the entire 10 years, you couldn’t lose a dime unless the federal government were to default.

That’s about as close to risk-free as investors can get right now. And that means that anything they invest in that carries more risk needs to pay out more than 3.6% a year to make sense as an investment.

The bonds of Warren Buffett’s Berkshire Hathaway, for example, would seem to be extremely safe. It’s a big, established company that’s generating a lot of cash. But the yield of a Berkshire bond I’m looking at that matures in 2021 is 4.2%. That means that as safe as Berkshire is, investors want another 0.6 percentage points to take on the ever-so-slight risk that Berkshire goes belly-up before the bond matures.

As you can imagine, once you start getting down to auto companies, those bond yields start to get really high.

What it means for stocks

Stocks also have a yield, though personal finance magazines like to make it appear more complicated than it actually is. The “price-to-earnings” ratio that you read about all the time is really just an earnings yield in reverse. A stock with a P/E of 15, for example, has an earnings yield of 6.7% (1 divided by 15).

Since stocks are more risky than bonds, investors want to pay a price on a company’s stock that reflects the additional risk they have to take on. The price-to-earnings ratio of Berkshire Hathaway, for example is 17.6, which translates into an earnings yield of about 5.7%. (Admittedly, a P/E isn’t the best way to evaluate a holding company like Berkshire.)

So, what happens when the interest rates on Treasury bonds rise? Let’s say the interest rate on a 10-year Treasury bond went to 10%, as it was in the early 1980s.

An investor could earn 10%, while taking no risk, by buying Treasury bonds. So if he considered buying a stock, which carries a lot more risk, instead, he’d want to get a yield that’s better than that.

The earnings yield of the S&P 500 right now is about 4.3% (which is a P/E of about 23). So to get even close to the 10% yield of a Treasury bond, you’d need stock prices to fall by more than half.

In reality, the drop would be much less sharp—earnings would rise, too. But P/E compression, as the phenomenon I just described is called, is a very real fear that investors haven’t had to face for 20 years, since during that time bond rates kept dropping.

Long story short…

If investors fear inflation, and start to demand higher yields from Treasury bonds, that will mean that stock prices will have to make a corresponding drop, all else being equal. Stocks have benefited from a 20-year or so long-term drop in Treasury yields. But that party’s over.

Is there anything you can do to protect yourself from it? Not really. You could choose stocks that already have low P/Es, with the idea that those prices won’t compress as much when interest rates rise. However, buying individual stocks carries so many other risks, that it’s probably not worth your time, effort, or emotional fortitude to go through all that.

It’s just one of those things that you should save more to prepare for and to understand once it does start to happen. This deficit monster is probably going to extend its tentacles into more aspects of our finances than we can even conceive of.

I, for one, am hoarding piles and piles of gold bullion in an undisclosed location. So when Zimbabwe-like inflation causes food riots, I can…eat it…or something.

Do you think God wills you to succeed?

Lady Gaga thinks she’s been chosen by God for fame. So do Eminem, Aaron Rodgers (Packers QB), and Snoop Dog. At least, so says a story in the Wall Street Journal this weekend.

The article posits that the presumption of some that they are God’s chosen ones vaults them to galactic stardom, rather than so-so stardom. And of course, it carries that all-to-common journalistic disclaimer that scientists haven’t studied a link between God-believing and fame.

I’ll try to avoid the theology of whether or not God cares so much that you sing well or throw a perfect spiral. I think he’s more interested in your soul, brother.

But there’s something to be said about the confidence that believing in a divine helper gives you, and how that alone can make you more probable to become a success.

It’s an important question for teachers, coaches, and managers. If you want your students, athletes, and employees to succeed, how much does making them “feel good” about how they’re doing translate to actual success?

Lifting students up by their heart strings

A decade or so ago, a couple college professors at Florida State University used a survey of more than 4,000 students to gauge their intellectual and social confidence, their expectations for success, their motivation to succeed, past academic accomplishments, parental education, and so on.

Admittedly, a lot of the variables were interlocking. But the study concluded that having a high expectation that you’d succeed was the strongest predictor of actual high performance. Self-confidence was also correlated to doing well in school.

They didn’t ask where those expectations came from. There’s a good chance that part of them came from past academic performance. There’s also a good chance that they came down from the parents.

Yale law professor Amy Chua made a splash a few weeks ago with a book excerpt about her drill sergeant-like routines for her children. In short, her children were allowed little playtime and were expected to be perfect in school. That set off a fierce debate on parenting styles that is kind of superfluous to this blog post.

Part of her story did strike a chord. Her children were expected to be perfect. And they often were perfect. Put aside the insane hours of practice and study that got them there. I’m willing to bet that even if Chua stepped aside, the simple instillation in her kids of the belief that they could achieve perfect piano playing or math scores would go a long way to good practice and study habits on their own. If you think all that study will lead to a great grade, it seems more worth it.

Taking risks isn’t always a bad thing

I’ve written about overconfidence—especially in investing—a lot. I personally don’t like taking a lot of risk with investments, because the consequences of messing up can set you back in your savings by a very large amount.

But my opinion of taking risks in other areas, like entrepreneurship and career motivation, is a lot different. While the risk of being turned down when you ask a stranger to mentor you is pretty high, the consequences of being turned down are almost nil—just a little hit to your ego, maybe.

And that leads to a nice side effect of confidence in career-related matters. Even though some career moves are long shots, being crazy enough to take them anyway gives you a chance of scoring big.

Entrepreneurship can cost money. It doesn’t have to. A lot of times, it just takes a lot of hard work after your day job. If I told you that you’d definitely make a sustainable business after putting in, say, 20 hours per week for one year on top of your current work schedule, I bet a lot of you would take me up on it. Of course, I can’t say that, and I bet that’s why a lot of people, including me, don’t put in that time.

Does confidence make you run faster?

In high school gym, oh so many years ago, our coach gave a demonstration to try to show us how important “positive thinking” was. He called a student up to the front and had him try to hold his arms straight out like wings while the coach tried to push them down.

For the first part of the test, he criticized the kid’s strength and, generally, tore him down. His arms gave out pretty quickly. After a few minutes of rest, they did the test again, while the coach gave words of encouragement. The kid kept his arms up for much longer.

I remember thinking that the coach must not have been pushing as hard the second time.

Faux experiment aside, there is empirical research linking the confidence of athletes to how they perform.

In one study from the 1970s, a couple researchers had volunteers arm wrestle. One group was subtly encouraged in their strength while one was not. The encouraged arm wrestlers performed better.

Similarly, researchers have found that confident swimmers swim faster and confident gymnasts score higher. Put simply, winners think they’re winners.

And that’s why it astounds me whenever I hear about a boss berating a problem employee in front of peers or writing scathing criticisms in an e-mail. While it’s important for someone to know he messed up, there are long-term implications of shattering someone’s psyche.

Instead, I wonder what would happen if he or she put them on an easier project or teamed them up with stronger workers. Getting a few successes under their belts might go a long way to improving performance.

The yard and white picket fence have lost their sheen.

I don’t own a home and don’t think I ever will in the extremely expensive city in which I live. That’s more a happenstance than a conscious decision.

But it seems I lucked out. Owning a home has always made some people less mobile. Now, it’s a veritable anchor keeping many owners stuck in place.

As home prices start to drop again, most Americans have probably already wised up to the painful lesson of the housing bust: A home is not a piggybank.

Some Americans thought they were going to rely on home equity to fund part of their retirement. Wrong. Others probably thought by buying a home right out of college, rising home prices would let them sell and “upgrade” to a bigger and better home. Wrong again.

That makes it no surprise that more renters today say they’re more likely to keep renting rather than buy, according to Fannie Mae.

On the other hand, you’ve got mortgage rates near all-time lows, and seemingly smart investors saying that if you can buy a home right now, you’d be crazy not to.

I wouldn’t blame you for being completely confused as to whether homeownership nowadays is a good thing or a bad thing. But here’s how I’m thinking about it.

Boom times in the “Peace Garden State”

The recession did hit North Dakota. Its unemployment rate rose 0.8 percentage points between December 2007 and 2010.

But with 3.8% unemployment, you’d think residents in other states might be eyeing a move, if their employment situations truly were desperate.

North Dakota is going through an oil boom right now, which increases the need for petroleum engineers, drill operators, and all the retailers, doctors, and so on that would support them.

Granted the state is remote. It’s cold. It likely doesn’t have the cultural opportunities of a Miami or New York. When it comes down to it though, of the 15 million or so unemployed people out there, there’s got to be a bunch of families who decided to make the move, right?

Over the last few years though, the state has been literally begging people to come and take their jobs. The state has about 14,000 jobseekers, and the state-run employment website has 14,000 openings listed. You’d think that’s a boon for the state, but the truth of the matter is, it’s facing the kind of situation that makes businesses wary. If you can’t hire people, you can’t grow your business.

Where are all these movers to the Peace Garden State? (Seriously. That’s its nickname.)

Well, there’s a chance they’re stuck in Florida, California, Nevada or any one of the dozens of states that experienced huge drops in home values. Not only can they not sell their homes, if they did, they might owe money on their mortgages.

So even if they did become unemployed and desperate, they might not be desperate enough or have the ability to afford to forgo the tens of thousands of dollars it’d cost to leave.

Interstate migration was already on a downward slope before the recession started. I haven’t seen any research (yet) that analyzes how much that downward slope has shifted due to the recession, if at all. In fact, it could be that foreclosures are balancing out any homeowners who are underwater and anchored.

But that doesn’t mean it’s not happening on an individual basis. The anchor-home phenomenon is something we’ll be talking about as long as home prices continue to drop.

Do home prices have farther to fall? Is that even worth thinking about?

Over very long periods, home prices tend to track inflation. But at any one time, they might be below or above the trendline, leaving you wondering whether or not now is a good time to buy.

Sometimes the bust makes us forget how strong the boom was. During the housing boom, home prices grew nearly 20% per year on average—about 6 times faster than what you’d expect from inflation. That means, they could have even farther to fall. To get back to that historical trendline, you’d need to see home prices fall another 20% this year.

Even if you put down the full 20% on a new home, that scenario would wipe out all your equity and possibly leave you underwater. It doesn’t seem so crazy, given that there are still so many foreclosed homes for banks to worth through.

Sure, it might not happen. But that’s another thing keeping me from buying right now.

A broken maxim: Buy if you’ll stay for 5 years.

There’s a commonly held belief that buying makes sense as long as you don’t plan on moving for at least five years. That gives you time to build up equity—the first several years of a mortgage have a disproportionate amount of the payment going to interest.

Thing is, nowadays, who can be sure that you’re going to stick around for five years? Especially for young people, job changes can be rapid and frequent. It is said that the average Gen Y-er will hold seven jobs in his or her first 10 years of work.

It’s hard to reconcile that with a home purchase. Let me re-phrase the maxim: Buy a home only if you know you won’t lose your job, get transferred, or find a better job elsewhere. AND you have to say the same thing will be true of your spouse. Oh, and you probably shouldn’t buy a home if you think you might get a divorce (sadly common) also.

That’s a lot of ifs. And for me, it’ll probably keep me from buying for a while.

Granted, I’m skipping all the benefits of a home purchase. If prices go up, it makes living cheaper. There’s psychic benefit in having property. You can also remodel and repaint in ways that renters are restricted from doing. Does that outweigh the risk?

Anyway, looking forward to arguments for or against.