LISTEN: How a Short Attention Span Can Hurt Your Financial Progress (mp3audio) (11:04 min)
Here’s an interesting financial transaction. See if you can follow this hypothetical example:
- You borrow shares of stock XYZ from someone else’s portfolio.
- You then sell the shares of XYZ and put the proceeds from the sale in your own account.
- Over the next few days, you watch as the share price for XYZ goes down. You buy shares of XYZ at the reduced price, and use them to replace the shares you borrowed. You keep the profits (the difference between what you received for selling the borrowed shares, and the cost of replacing them).
Got it?
This is a simplified illustration of a short-sale. A short-sale is a way for an investor to make money on a stock he doesn’t own by speculating that it will lose value. Depending on your perspective, short selling can be ingenious, sneaky or evil.
Short-selling has a long and controversial history in a variety of financial markets. Some historians have found that North American fur raders were early practitioners of short-selling, and short selling appears to have triggered the implosion of the Tulip Bulb market in Holland in the 1600s. In recent financial history, short-sellers have become famous for their profits and infamous for bringing exaggerated financial losses on others. Because of the extreme volatility that can result, financial regulators have often suspended the practice during periods of financial turmoil crisis. Napoleon supposedly declared that short-sellers were “enemies of the state,” yet a May 4, 2010 Wall Street Journal article found that several members of Congress held investments that made short-sales during the 2008 financial crisis, and renowned investor Warren Buffet has defended short-selling as a “counterweight to Wall Street bullishness.”
So, in regard to short-selling…what’s next?
Reading the opening paragraphs probably took less than a minute. But perhaps because short-selling is an unfamiliar topic and the explanation is a bit complex, it wouldn’t be surprising if your attention started to drift, even in that brief period of time. We live in a short attention span culture, and most of today’s communication mediums emphasize quick bursts of information and constantly changing inputs. When it comes to concentrated thoughts on complex ideas, most of us don’t get much practice. And that can be a problem, particularly when it comes to finances. We are conditioned to look for “what’s next?” without even being sure about what just was.
Life is complex and integrated. So is money.
Short-selling is just one idea in the financial universe. But it’s a good example of what the financial universe is like, and it also illustrates why many people struggle to obtain their financial objectives. In order to succeed, you must embrace the complex and integrated nature of the financial world. Maybe this sounds sort of metaphysical, but there are practical applications – especially if you don’t pay attention.
At first glance, short-selling seems counter-intuitive. But short-selling is actually the product of integrated thinking; you take several investing strategies, and connect them. This formula of integrating ideas to create complex and sophisticated systems is the foundation of human progress, and reflects the nature of life itself.
Complex financial transactions are part of everyday life in the United States. Variable-rate mortgages, insurance, tax-deferred retirement accounts and hundreds of other financial vehicles are comprised of integrated ideas and substantial details. There are very few “simple” financial products in the marketplace.
Given the evidence for complexity and the fact that money plays such a large role in determining our material circumstances, why do so many people seem to have a short attention span when it comes to making good financial decisions?
Does Complex Technology Make Us “Shallow Thinkers?”
Part of the challenge may be 21st-century technology. In his recently released book, The Shallows: What the Internet Is Doing to Our Brains, author Nicholas Carr says our forms of communication affect how well we handle complex thinking. “The Internet encourages the rapid, distracted sampling of small bits of information from many sources… We are becoming ever more adept at scanning and skimming, but what we are losing is our capacity for concentration, contemplation, and reflection.” Similar charges are made against television and video games. Sampling, scanning and skimming might be considered higher-level mental functions, and operating a game controller certainly requires some complex manual dexterity. But when there’s no “concentration, contemplation or reflection” to accompany these tasks, the chances for success seem less probable.
This “short attention span” dilemma is pervasive. An example is the Congressional leader who said “We have to pass the bill so that you can find out what is in it.” The final version of the bill was 2,409 pages, and many legislators admitted they didn’t read it before they voted to approve it. Regardless of your perspective on the issue, it seems like the process for reviewing and debating the bill could have been a bit more “thoughtful” if more people took the time to read it, instead of saying “we’ll figure it out after we approve it.”
Consequences
A Short Attention Span Could Mean Missed Opportunities. An Example: whole life insurance is a complex financial product; even the best life insurance representative couldn’t accurately explain all the features and benefits in five minutes or less (don’t believe it? See the next article). In contrast, there are hundreds of TV commercials for term life insurance, all conveying their message in 60 seconds. And for those dispensing financial advice to the masses, their message is to buy term. As one “expert” puts it “Keep it simple and buy term life insurance.” That is simple, isn’t it? Sounds like perfect advice for “short attention span” types.
However…in the long run, your financial situation may favor using whole life. Unfortunately, selecting term life insurance today – because it’s simple and quick – could possibly preclude obtaining whole life later. The time to pay attention is now!
A Short Attention Span Could Result in Financial Loss. For more than 20 years, Bernie Madoff’s investment operation was so complex, no one knew he was actually running a scam. Or more to the point, no one seemed to be able to pay attention long enough to figure it out. In 2000, broker Harry Markopolos said he knew in “five minutes” that Madoff’s operation was a fraud, and he reported this assessment to the SEC – in written detail. Unfortunately, it was eight years before the authorities would follow through on Markopolos’ fndings. How much money was lost because people had a short attention span?
Remember, not every complex idea works. Some projects fail because of flawed principles, others because the complexity is hiding fraud or other bad behavior. Those with an unwillingness to examine the details of their financial transactions are at great risk of being undone by their short attention spans.
Okay, I Get It… What’s Next?
How about a three-hour tutorial on the history of interest rates and inflation? That might provide some real insight into what’s next for the economy. Just kidding. If you’ve made it to the end of this article, you deserve a few summary bullet-point comments, just so you don’t suffer complexity overload.
- If you take the time to understand it, financial complexity can be a great asset.
- One of the best ways to achieve financial complexity is to use the knowledge of others. Most of the time, successful complexity is group effort. Only geniuses do it alone.
- Your best financial strategies are the ones that integrate all of your financial components – what you earn, what you own, what you owe, what you want.
- People who live in the shallows may see their financial progress go off the deep end.
WHAT’S NEXT? How about a review of your financial program, and the chance to see if a little complexity and integration could make a positive difference in your life?
