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Traditional or Roth

ArticleRichard Connor | Aug 29, 2026

THE CHOICE BETWEEN a traditional retirement account or a Roth is a frequent topic on HumbleDollar. The choice is generally framed as a choice between paying taxes up front (a Roth), or deferring taxes until withdrawal (traditional). I thought it would be interesting to evaluate a real-life example of how this choice might work out. In December of 2016 my wife and I had an opportunity to each open a Roth IRA. My wife took a partial sabbatical that year, and that, combined with maxing out our 401k accounts, gave us a chance to each open a $4,500 Roth IRA. The maximum allowable contribution that year was $6,500 for those 50 and over. Up until then we had assumed that our marginal tax bracket would likely be lower in retirement, and focused on contributing to our employer’s traditional 401k plans. Despite that, we decided to move forward with opening a Roth IRA. I thought it would give us some tax diversity, and the opportunity to do Roth conversions when, and if, it made sense in the future. In December of 2016 we opened Roth IRAs at Vanguard and invested the $4,500 in their S&P 500 Index Fund. Those initial funds have been invested for almost 10 years. Over that decade we have added some additional funds, and have done a few conversions. I recently did a quick analysis to see how my Roth experience would have compared to investing in a traditional IRA. In 2016, our marginal tax bracket was 28%. To contribute the $4,500 required $6,250 of pre-tax income. Due to some financial engineering over the last year, including selling our second home in late 2025, I expect our 2026 marginal tax bracket to stay within the 12% bracket. I’ve been looking at this closely because I’m considering doing a Roth conversion later this year. The table below shows the comparison between the Roth performance, and what a traditional IRA would have produced. The annual rate of return was determined using Nick Maggiulli’s S&P 500 Historical Return Calculator. Roth vs Traditional

The table shows that the Traditional IRA would have been the better choice, producing about $3,500 more in available funds, or about 22% more. This demonstrates that the primary driver in choosing between a Roth and a traditional qualified account is a consideration of the tax rates at the time of contribution and at the time of distribution. There have been a number of changes to the tax code in the last decade that have contributed to the result, but I certainly didn’t predict any of them. If you guess wrong, you pay the price in a higher tax bill. In the example above, the extra $1,750 invested in the traditional account produced an additional $6,143.31 in earnings. The lower tax rate at the distribution of the traditional IRA results in the $3,500 in extra funds. Even though the Roth IRA had tax free earnings growth, the initial larger tax rate overcame that advantage, when compared to the traditional IRA. Because of my pension and my wife’s social security benefit, 85% of her social security benefit is taxable income, so that is not a consideration in our tax calculation. I used Dinkytown’s 1040 Calculator to run a series of estimates of our 2026 tax return to assess if we want to execute a Roth Conversion this year. We are still 4 years from taking RMDs, and I will start my Social Security in a year when I turn 70. My current thinking is a conversion of about $40,000 will keep us in the 12% bracket. There would also be a small NJ state tax impact. My simple analysis reinforces what I’ve been taught. Roth contributions make the most sense when you think your current tax bracket is lower than when you expect to withdrawal the funds. There are secondary considerations, like no tax diversification, no RMDs, and uncertainty about future tax rates. If you intend to pass the funds to heirs, it might make sense to perform Roth conversions today at the 22% tax bracket if you intend to pass these accounts to heirs who may be in their peak earnings years. Not sure? I believe I recall several HumbleDollar contributors write something about splitting the difference? Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

The Intentional Spendthrift

Mark Crothers | Aug 21, 2026

"Great story. We’ve always been frugal when it comes to everyday things, such as groceries. Why pay over $5 a gallon of milk when Costco or BJs sells it for under $3. But not on bigger important things, like helping the kids buy a home, going on vacation, or buying something where quality is important. As one commenter mentioned they did, we’ve already prepaid a 12 day trip the end of November/early December to Italy, Zurich and Germany to see their holiday celebrations. Booked first class flights for us and my son and his spouse. Train tickets (one from Milan to Zurich through the Alps) and certain events are already paid for. So it appears frugality and spending can exist."

- Boomerst3

Bad Maths, Good Fire.

Mark Crothers | Aug 28, 2026

"My favorite fire was always the one where we burned turf from my grandparents' farm. My grandfather would cut turf the old-fashioned way in the peat bog, stack it to dry, and have a shed full for the winter months."

- David Mulligan

Inflation Hedge

ArticleAdam M. Grossman | Aug 29, 2026

THE OPEN KITCHEN restaurant has been a fixture in Charlotte, North Carolina for 75 years. The restaurant has an old-time feel, with memorabilia, including menus from years gone by, lining its walls. Those old menus provided David Enna, a financial journalist, with a laboratory for examining the effects of inflation. What did Enna find? The oldest menu on display is from 1963. To state the obvious, today’s prices make those from the 1960s look quaint. Back then, spaghetti and meatballs cost just $1.10. Today, it’s $15.50. But, as Enna points out, that was more than 60 years ago, so increases are to be expected. Over the past 60 years, the Consumer Price Index (CPI) has averaged 3.8% per year. That isn’t unreasonable, especially since that average includes the 1970s, when inflation sometimes topped 10%. What’s of more concern, though, is what consumers have experienced more recently. Since 2020, prices across the economy have risen 29%. And though those increases have slowed, the Fed is still struggling to ratchet inflation back to its preferred 2% level. This has given investors renewed interest in strategies to defend against inflation. At first glance, this doesn’t seem like it should be such a difficult problem. The U.S. Treasury offers an investment specifically designed for this purpose: Treasury Inflation-Protected Securities (TIPS). These are bonds that are guaranteed by the federal government to increase in value with inflation. And though I hesitate to use the words “bond” and “exciting” in the same sentence, today many investors are finding the return on TIPS compelling. The 30-year TIPS is now paying close to 3% on top of inflation. If inflation averages 2.5%, for example, over the next 30 years, this bond will end up returning a total of 5.5% per year, and with minimal risk. That sounds good in theory, but do these bonds make sense for your portfolio? It’s worth taking a closer look. The first thing to note is that this seemingly attractive 3% yield only applies to 30-year TIPS. Yields on shorter-term bonds are lower. So unless your investment horizon happens to be exactly 30 years, these bonds may be of limited practical value. Putting aside the yield question, though, a more fundamental challenge with individual TIPS—and individual bonds in general—is that they’re a cumbersome way to build a portfolio. Even if you didn’t mind the process of buying bonds one by one, which can be tedious, there’s the fact that it’s hard for most people to be able to forecast their cash flow needs each year into the future. That’s a problem because choosing maturity dates is the foundation on which bond portfolios are built. Ideally, if you can align the maturity dates of the bonds in your portfolio with your future cash needs, then you can hold bonds to maturity, which is when the issuer would promise to pay you back in full. But that redemption value is guaranteed only at maturity. Buy a 20-year bond and sell it after just 10 years, and there are no guarantees. A bondholder could easily lose money selling an individual bond before maturity. Given these challenges, would a TIPS fund be a better choice? To be sure, bond funds are much simpler to purchase and to manage, but they typically offer even less protection from losses than individual bonds. Most recently, shareholders in TIPS funds were disappointed by how they performed in 2022, when inflation spiked to 9%. Investors expected that to be the year when TIPS rewarded investors, but instead, diversified TIPS funds such as the Vanguard Inflation-Protected Securities Fund (ticker: VAIPX) lost nearly 12%. Why did funds like this fare so poorly when inflation was running so high? The problem is that, at the end of the day, TIPS are still bonds. And though they receive a bump in value when inflation rises, a countervailing force is that they lose value when interest rates rise. In 2022, the Federal Reserve raised interest rates aggressively to fight inflation. The negative impact from those rate increases far outweighed the benefit TIPS received from inflation being higher. That puts investors in a difficult position. If TIPS provide inflation protection in theory, but both individual TIPS and TIPS funds carry limitations, what other options are there? The good news is that not all TIPS funds are the same. Some hold only short-term bonds, and they have historically held up much better than more broadly diversified TIPS funds because short-term bonds are more resilient when interest rates rise. Over the past five years, a fund like Vanguard’s Short-Term Inflation-Protected Securities ETF (ticker: VTIP) has outperformed a comparable fund (ticker: VGSH) holding standard short-term Treasury bonds every year, as well as this year to-date. It’s important to note, though, that this is relative performance. In 2022, when the entire bond market was under pressure, even short-term TIPS funds like VTIP did still lose money. They just lost less than funds holding conventional bonds. The bottom line: We should never become too wedded to any one strategy. No investment can promise reliable and complete protection against inflation in every market scenario. That said, I do still recommend TIPS and would specifically recommend a short-term fund like VTIP. But I also suggest taking a diversified approach to inflation protection. Here are other steps to consider. If you’re in your 60s and considering when to claim Social Security, that decision offers a powerful lever. Because Social Security benefits increase with inflation and also increase with each year you delay claiming, it’s maybe the most effective way to build additional inflation protection into your plan. What else can you do? Fortunately, you may already own one of the most effective—and underappreciated—inflation-fighting instruments: stocks. While rising prices in recent years have been frustrating for consumers, the result has been that companies have been able to maintain their profit margins. That, in turn, has helped to support their stock prices through this period of inflation. To be sure, some companies have more of an ability to raise prices than others, but overall, stocks are, in my view, a good way to keep pace with inflation. The one thing I wouldn’t do is to buy gold. Despite its reputation, various studies have confirmed that gold really isn’t a reliable inflation hedge. In a paper titled “The Golden Dilemma,” researchers wrote: “Over practical investment horizons, gold is an unreliable inflation hedge,” though they acknowledge that it may be more reliable over longer timeframes—“if the investment horizon is measured in centuries.” Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

Americans and their credit cards

R Quinn | Aug 24, 2026

"David, did you check the source data for the AI’s figures? My first thought is that it's mixing up nominal and real wage increases. A 28.2% real growth figure already has inflation subtracted out. That means wages actually outpaced inflation by 28.2% over those four decades, rather than lagging behind it."

- Mark Crothers

How Did You Find Paid Work After Retiring from Your Primary Career?

Jeffrey Chan | Jul 31, 2026

"Good for you."

- Patrick Brennan

The Wrong-Sided Man

Dennis Friedman | May 8, 2025

"I too walk early in the morning and now I carry a small can of pepper spray. It might be a vicious dog, wrong-way man as you describe, or a wayward hobo looking for an easy roll."

- art winslow

This would be a great posting on a web site with the name “HaughtyDollar.”

R Quinn | Aug 28, 2026

"t"

- Mick

You Heel!

Michael Flack | Aug 24, 2026

"Counterpoint- I purchased a brand new pair of Bostonian oxfords, maroon in color for about $20, about 25 years ago. I liked them so much I bought a black pair, but they were only reduced to $35. The black ones were go to shoes for my work environment for a couple decades. I spent ~$150 combined to replace the leather soles and rubber heels multiple times. I wondered if it was a prudent decision to keep spending so much more than the original cost. Then I shopped for equal quality and comfort in new shoes, and I found they were around $250 and could not be re-soled due to the rubber soles. I therefore succeeded in exercising my frugal muscle and got the maximum value out of a relatively paltry investment. And I supported small local businesses, making a modest living for their family. I call that a win-win. I've trashed the black shoes as I felt they were no longer worth repairing, or needed for work. I'll be wearing the maroon ones (original heel/sole) later this year in my son's wedding."

- John Verlautz

A Place At The Table

Andrew Clements | Aug 26, 2026

"Thank you, William. I’m glad you enjoyed it. The Philippines has taught me quite a bit, and often it’s the small, everyday experiences that have left the biggest impression on me."

- Andrew Clements

Blood Money

Michael Flack | Mar 28, 2026

"I agree with you about KO but XOM is involved in climate deception since it knew about global warming risks 60 years ago and ranks as one of the top global greenhouse gas polluters."

- Nick Politakis

Feeling TIPSy?

ArticleSanjib Saha | Aug 22, 2026

NOT TOO LONG ago, Treasury Inflation Protected Security (TIPS) was a relatively obscure investment for safe long-term fixed-income investments. For the first twenty years of the new century, consumer prices were mostly stable or rising at a too-slow-to-notice rate. Why bother with anything related to inflation? Sadly, persistently low inflation made us complacent on the biggest long-term risk of bond investments -- the insidious unexpected inflation that robs us of the purchasing power of our “safe” investments. Yes, let’s not forget that the biggest risk of bond or bond-like investments is unexpected inflation. Any bond or CD with a maturity beyond a few years must either offer a sufficiently high interest rate to compensate for sudden bouts of inflation, or have its principal adjusted for the inflation actually realized. The former is nearly impossible to find without sacrificing safety. The latter is what TIPS is for. To be clear, the market and investors always expect some level of inflation. Therefore, a bond’s effective interest rate - measured by its YTM (Yield to Maturity) - must be high enough to not only compensate for “expected” inflation and the uncertainties around it but also provide a meaningful increase in the purchasing power of the original principal. A concrete example might help. Consider a 10-year US Treasury nominal bond with a face value of $1,000, selling at $1,000 and paying 5% annual interest. The interest rate reflects the expectations about inflation and other factors over the next 10 years. The rate would be lower if market expected lower inflation, and higher if market expected the opposite. The omnipresence of inflation means we’re likely to lose some purchasing power when we get our $1,000 in 10 years. It won’t buy what $1,000 buys today. By how much? That’s the thousand dollars question (pun intended). There isn’t a readily available number that explains why that 10-year Treasury Bond yields 5% instead of 3% or 7%. Investors essentially take a leap of faith that annual inflation stays low enough over the 10-year period for the interim interests to compensate for the purchasing power loss, plus some changes. Most of us are perfectly comfortable assuming that inflation won’t be as high as 5% for 10 years. But are we fooling ourselves? I suggest using an inflation calculator to see for ourselves. Spoiler alert: Late 1960s through early 1980s can be an eye-opening period. How’d we feel if the next 10 years turn out to be something similar? Think about how you might feel when you safekeep your money in a so-called secure investment, give up higher returns available from risky investments, and then encounter an inflationary regime. Your minimum expectation was that your purchasing power would remain intact and perhaps improve a little by the time your bond matures. Instead, unforeseen inflation erodes your purchasing power and compromises the financial goal the fund was supposed to cover. Your “safe” investment fails you completely. You realize that it wasn’t safe at all. If unexpected inflation is so devastating, why are we so lax about it? I can think of two reasons. First, our minds haven’t adapted to the reality that, unlike to a “real” asset like a bag of rice or a gallon of gasoline, money in its current form is inherently self-eroding. It slowly loses its worth over time. A hundred dollars sitting around will still be a hundred dollars next year, but it won’t buy the same amount. We don’t intuitively perceive the continuous loss of purchasing power. Even when we do internalize it with some effort, we get used to the “pace” of the loss. In other words, we view inflation as steady and unexpected inflation as highly unlikely. Alas, all it takes is a single prolonged inflationary period to change that perception. By then, however, the damage to existing fixed income investments may already be done. Frankly, I’d be very wary of keeping my long-term “safe” money -- fund that I need to preserve beyond a three-year horizon - in any form that isn’t protected against unexpected inflation. For bond investments, the most meaningful option would be TIPS. Why? Because, in addition to being secured by the full faith and credit of the US Government just like any other Treasury securities, TIPS provides three important assurances upfront. First, it provides protection against unexpected inflation, which is a realized inflation that differs from what we expected when purchasing it. If the actual inflation averages 12% instead of the expected 2%, the principal is automatically adjusted to reflect the actual inflation. No guesswork or unexpected risk involved. Second, it provides a “real interest rate” upfront that tells us how much the purchasing power of the investment will increase over time, regardless of what the actual inflation turns out to be. Buying a 10-year TIPS with real 2% annual interest means the investment’s purchasing power will grow 2% per year over the holding period, before considering taxes and other factors. The third aspect is more nuanced. It involves the possibility of inflation being lower than expected, or even negative inflation (aka deflation). Let me elaborate. If a regular nominal 10-year Treasury Bond offers 5% annual yield and an equivalent TIPS offers a real annual interest rate of 2.75%, the market-implied inflation, the breakeven inflation rate, is roughly 2.25% (5% minus 2.75%). Actual inflation, of course, will be known only after 10 years when the bond matures. Suppose the actual inflation turns out to be only 1.25%. The nominal Bond investor would end up with more purchasing power than the TIPS investor because the TIPS principle would be adjusted by only the actual 1.25% inflation rate. The primary objective of the TIPS investor would still have been met: preserving and improving purchasing power by about 2.75% annually. But there would be a “missed opportunity”. The nominal Treasury investor would end up with even greater purchasing power. Does it mean that a TIPS investor can face an unlimited opportunity cost if inflation turns out to be negative? What happens if the actual inflation is, hypothetically speaking, negative 5%, in a severely deflationary period? Does the TIPS investor get back proportionately reduced principal at maturity? Thanks to the third assurance of TIPS, the answer is NO. TIPS guarantees that the principal returned at maturity will never fall below the original face value. During periods of deflation, the inflation-adjusted principal can fall below its face value and the interim interest payments will decline accordingly. But at maturity, the principal is floored at the original principal amount. Therefore, the breakeven inflation rate, the difference between the yield of a nominal Treasury bond and the real yield of an equivalent TIPS, represents the maximum annual yield advantage that the nominal bond can have over TIPS in an unexpectedly low inflation regime. To summarize, a TIPS investor gets unlimited protection against unexpectedly high inflation, while accepting a limited opportunity cost should the actual inflation be low or even negative. The magnitude of that trade-off is reflected in the breakeven inflation rate at the time of the TIPS purchase. An aside: given the destructive impact of deflation on economy and society, policy makers are generally more concerned about preventing prolonged deflation than about preventing modest inflation. Therefore, prolonged deflation is usually considered less likely. Still, we cannot ignore deflation risk altogether and should be prepared for the possibility that TIPS can underperform a nominal bond if inflation runs low. Therefore, the decision to favor TIPS over an equivalent nominal Bond hinges in part on the current breakeven inflation rate. If it’s low enough, favoring TIPS can be an easy decision. Getting unlimited protection against unexpectedly high inflation is worth accepting the relatively small opportunity cost if inflation comes below the breakeven rate. There is, however, a cautionary note about buying TIPS bonds in the secondary market, especially older issues. Consider a 30-year TIPS bond issued 20 years ago and a 10-year TIPS issued within last 6 months. Both might appear to be valid choices if they mature within a few months of each other and offer similar yields. But beneath the surface, one may be more favorable than the other. The older TIPS will likely have a much higher inflation-adjusted principal because it accumulated 20 years of inflation adjustments. But the protection against unexpected deflation applies only to the bond’s original face value, which is typically $1,000. In a prolonged deflationary period, the older bond has much more room for its inflation-adjusted principal to decline before reaching the $1,000 floor. The newer issue, whose adjusted principal is much closer to the $1,000 face value, has less exposure to this risk. Therefore, all else being equal, I’d favor a TIPS with a low inflation-adjusted factor when buying in the secondary market. All things considered, my vote goes to TIPS for long-term “safe” investments, provided the break-even inflation is reasonably low. For secondary market purchases, however, a high inflation-adjustment factor would give me pause. Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib’s earlier articles.

Traditional or Roth

ArticleRichard Connor | Aug 29, 2026

The Intentional Spendthrift

Mark Crothers | Aug 21, 2026

- Boomerst3

Bad Maths, Good Fire.

Mark Crothers | Aug 28, 2026

- David Mulligan

Inflation Hedge

ArticleAdam M. Grossman | Aug 29, 2026

Americans and their credit cards

R Quinn | Aug 24, 2026

- Mark Crothers

How Did You Find Paid Work After Retiring from Your Primary Career?

Jeffrey Chan | Jul 31, 2026

"Good for you."

- Patrick Brennan

The Wrong-Sided Man

Dennis Friedman | May 8, 2025

"I too walk early in the morning and now I carry a small can of pepper spray. It might be a vicious dog, wrong-way man as you describe, or a wayward hobo looking for an easy roll."

- art winslow

This would be a great posting on a web site with the name “HaughtyDollar.”

R Quinn | Aug 28, 2026

"t"

- Mick

You Heel!

Michael Flack | Aug 24, 2026

- John Verlautz

Manifesto

Aug 30, 2026

NO. 24: OUR ONLY earthly immortality will be the memories of others. We should make sure those memories are good—by spending our wealth on special times with friends and family.

humans

Aug 31, 2026

NO. 26: WE TEND to be overconfident—which isn’t a bad thing. Self-confident individuals tend to be happier, have a wider circle of friends and enjoy greater career success. Problem is, if we’re too confident in our financial abilities, there’s a risk we’ll rack up hefty investment costs and make big undiversified bets, both of which could come back to haunt us.

think

Aug 31, 2026

PASCAL’S WAGER. Belief in God is rational, argued Blaise Pascal. If you believe and God doesn’t exist, the price is modest: a less immoral life. But if you don’t believe and God does exist, the price is far higher: an eternity in hell. The lesson? When managing money, we should focus less on the odds of something happening and more on the consequences.

Truths

Aug 30, 2026

NO. 86: CARRYING a mortgage into retirement can cost a heap of taxes. To cover the monthly payment, you might sell winning investments in your taxable account or tap retirement accounts, thus boosting your taxable income. That, in turn, could trigger higher Medicare premiums and taxes on your Social Security benefit. Result: You suffer a double tax hit.

Money Guide

Manifesto

Aug 30, 2026

NO. 24: OUR ONLY earthly immortality will be the memories of others. We should make sure those memories are good—by spending our wealth on special times with friends and family.

Spotlight: Family

Building Memories by Edmund Marsh

Edmund Marsh | Jun 15, 2025

When my wife asked for a hint for the Father’s Day present I was hankering to get, I was stumped for a day or so. I don’t need a new tie or wallet, or the new garden tool that I sometimes suggest. My eventual answer didn’t surprise her, but she was amused. I’ve asked my daughter to answer two questions: What’s the origin of Father’s Day in our country, and does she think it’s worth observing?

Am I the boring aunt?

Laurianne Falcone | Dec 21, 2024

As I sit here on what the media is calling “Super Saturday” (?!?), I can’t help but wonder, am I the boring aunt? My husband and I are childfree by choice but we are blessed with five awesome nieces and nephews, consisting of 21 month old twins through 7 years old. I love the Christmas season but as a society, we’ve lost something with all the commercialism and commoditization of this great holiday. Thus, we give the kids money for birthdays and holidays.

A Summer of Shared Memories

Mark Crothers | Aug 26, 2025

I noticed a bit of a trend over the summer at my holiday home. Suzie and I were a part of it, as our 10 year old grandson stayed with us for a large portion of the school holiday period. It was wonderful to see so many grandparents helping out in this way.
Our holiday community is gated and has a large play park with extensive grassy areas and a few soccer nets for the kids.

Savoring the Moments

Edmund Marsh | Sep 25, 2024

BASIC ECONOMICS teaches us that scarce commodities are more precious. This holds true for metals, rocks, food—and time. Which brings me to today’s topic: Time spent with my daughter and only child has reached the rare and precious stage.
In summer 2023, scarcity was far from my mind. My daughter and I traveled to visit Grandmama—my mother—five hours’ drive south of our home. The visit itself was short and mundane, with just the usual catching up with my mother and tending to her business.

Family Dynamics, Part 3: What Do Adult Children Owe Their Aging Parents?

DrLefty | Jul 29, 2025

If you thought my posts on family estrangement and supporting adult children were doozies, wait until you dig into this one.
My musings on all three of these topics are specifically related to how complicated the interaction between family dynamics (especially if it’s a “difficult” family) and our finances can be. This one focuses on how caring for parents as they age can raise challenging questions.
Like many of you, I’m at the stage of life where I view these questions both as a daughter and as a parent.

Love, Money, and a 44-Year Compromise

Mark Crothers | Aug 23, 2025

Suzie and I have been together for 44 years and married for 36 of them. It goes without saying that a relationship of that length is achieved by many means, but I think a fundamental characteristic is the ability to compromise and be mindful of each other’s wishes.
A strong partnership where both people work can also supercharge wealth generation through the decades, especially if you both think in lockstep on humble lifestyle choices and the importance of saving for the future.

Training the Mind

Jim Wasserman | Dec 19, 2021

WITH THE SURGE of urbanization in the 19th century, many folks became concerned by the seeming rise in bad behavior. This behavior could be illegal—such as theft—or legal but undesirable, like alcohol abuse. Nascent social sciences, including sociology and psychology, developed two alternative theories. “Moral Deficit” theorists said people engaged in bad behavior because they were internally “weak.” You might have seen a movie scene where a hysterical person is slapped with the admonition to “get a hold of yourself.” Or you might be familiar with the approaches of The Salvation Army and YMCA, both of which use Christian principles to teach people how to strengthen their mind, body and spirit. On the other side was “Moral Purity,” or the belief that temptation could bring down even the strongest person. These theorists advocated attacking supply rather than demand, most famously by initiating Prohibition. Over a century later, our debates seem all too familiar. For the “war on drugs”—or any other “war on…”—what’s the best approach? Do we address demand through education or, instead, should we attack supply by going after its purveyors? Or do we just conclude that the behavior is innate and not worth resisting? Like many social concepts, these same principles can be applied to microeconomics and even personal finance. Why do we overspend? Are we weak, with an uncontrollable desire for admiration that impels us to buy all the trappings of success? Or are we simply inundated with too many nudges to spend, and can’t resist the siren call of consumerism? Even more confusing, what’s the solution? Perhaps a better approach is that of another early reformer, Jane Addams. As part of the settlement house movement, Addams avoided focusing just on the isolated bad behavior. She advocated looking at the whole person, even the whole society, to see…

Lucky WOOFs

Jim Wasserman | Feb 6, 2022

MY FATHER-IN-LAW was an avid tennis player and an astute coach. The first time he observed me play, he commented on how I—a soccer player growing up—had good speed and quick reactions. I had a terrible swing, however. As he put it, “You can get to any ball. You have no idea what to do when you get there.” He was correct. To this day, what looks like a great shot is often actually a mishit off my racquet frame. It still counts, so I coined a phrase for such shots: WOOFs, short for winners off of frame. Truth be told, many of my successes have been WOOFs. I’ll be in the right place and just lucky enough to connect with an opportunity. I happened to watch a Kansas City Chiefs game one Sunday, and then successfully interviewed the next day with a law firm that represented the team—something I didn’t know beforehand. Years later, I was asked by a prestigious school to teach a class—on the spot—about the Cuban Missile Crisis. I happened to see that the students were reading Frankenstein in English class. I used my own ancient remembrance of the novel to discuss the theme of disastrously losing control of technology. That lesson led to 20 years of teaching at the school. I’ve had investment tips fall into my lap. Serendipitous encounters have often led to writing topics. Most valuable of all, I stumbled upon a certain woman’s profile in the early days of online dating. She was so cheap—and remains so—that she only kept the profile up a short time during the dating site’s free, introductory period. Some awkward courting later, I WOOFed my way into a great life partner. A common adage is that luck happens when preparation meets opportunity. I wonder how much of…

Shame on Us

Jim Wasserman | Sep 20, 2019

OVER 600 YEARS AGO, Geoffrey Chaucer gave the world The Canterbury Tales, a caustic look at a cross-section of English society. While all the stories are still worth reading, one tale is especially relevant to today’s consumer. For those who don’t remember The Canterbury Tales, it’s a story about a group of pilgrims traveling from London to Canterbury. They pass the time on the road by having a contest to see who can tell the best tale. One of the travelers is a “pardoner” by profession. He describes how he goes from town to town, delivering a pat speech against greed. He then finishes by brandishing supposed holy “relics” of bones and clothing, including a mitten. These relics can purportedly absolve sins, solve problems and cure ailments. The Pardoner invites all to pay a fee to interact with the relics and be publicly relieved of their troubles. But he also issues a dire public warning: Those whose sins are too great cannot be absolved by these relics, so they should remain in their seats and not even attempt to pay. The Pardoner then gleefully watches as most come forward, even those who doubt his authenticity, lest they be suspected by their peers of secret horrible sins. Most people today don’t seek absolution, least of all by paying to put on a holy mitten. Still, Chaucer’s tale encapsulates a contemporary sales technique. The Pardoner is knowingly tapping into our nonrational, but very common, fear of public shame, or what we'll call FOPS. Paying for doubtful absolution is not based on rational factors, like cost or quality, but on concern that not utilizing the product will invoke social ostracism. It’s somewhat similar to the bandwagon effect or FOMO (fear of missing out) nudge, where people spend because they’re afraid of missing a good deal. But…

Too Clever by Half

Jim Wasserman | Jun 9, 2022

I WAS EDITING a fellow graduate student’s paper. She’s in her mid-20s, less than half my age. She’s bright and communicates well in class discussion, but her paper—frankly—was a mess. Great ideas, but she expressed them in overly pretentious language. One bloviated sentence was more than 60 words. When I asked her why she did this, she said she wanted to “sound smart” by not using the same old words she normally uses. She worried that no one would take her seriously unless she adorned her ideas in the polysyllabic jargon of academia. I told her that, ironically, her convoluted writing was burying the great ideas she had. If I hadn’t been tasked to read her paper, I would have given up by page three. I explained that the best writing is when profound ideas are delivered in simple language. Nothing beats the maxim inscribed at the Temple of Apollo at Delphi and espoused by Socrates: “Know thyself.” Still, I had sympathy for my fellow student. My 20-something self would have done the same thing. We all feel the need to prove our worth to the greater world, even if it’s counterproductive. Seasoned coaches will tell you that trick plays win fans, but mastered fundamentals win championships. The same is true for money. We jump on the latest, hottest trick for making money, hoping to speed ahead of the traditional, boring-to-youth “spend less, save more” strategy. And when we do make financial progress, we want to be acknowledged, so we spend our wealth to show it off, never thinking how this demonstration of our financial smarts actually backfires. We get enough money for some personal freedom, but then we go for the overly large house with the overly large mortgage, and shackle ourselves with debt. We imagine the easy life…

Choice Words

Jim Wasserman | Jun 22, 2020

AS WE MAKE FINANCIAL, political and other decisions, we’re bombarded with messages that supposedly offer helpful information. But as savvy consumers of news and advertising, we need to realize that we aren’t nudged just by the content of these messages. It’s also the packaging that can have a huge influence. Below are 21 ways that information is packaged to make it more enticing. Think of this list as a follow-up to my earlier article, Terms of the Trade, which has garnered almost 80,000 readers over the past year and is now used by many economics teachers. Ad hominem. Where folks attack not the competitions’ products or ideas, but the competitors themselves. “Look at how he dresses.” Anecdotal evidence. Using isolated examples as representative of most or all circumstances. “I know someone who once hopped on one foot at midnight and her warts went away.” If anecdotes are used that don’t accurately represent the overall situation, this is a sampling error. Complementarizing. Positioning a product or idea as “necessary” if you’re also consuming another product. Think about fries with a burger or matching shoes with a dress. “If you buy this base model car, you really won’t get all you can out of it without the deluxe sport package.” “If you believe we ought to do X, then you have to be for Y also.” Confirmation bias. Playing to consumers’ tendency to look for information that matches their already established beliefs. The consumers are then predisposed to accept the claim as true. “Of course, it’s better made. It was made in the U.S.” This is a major factor in today’s fragmented, polarized news consumption. Curation. Selectively picking information that puts something in the best light, while omitting other information that—while accurate—may cast a negative shadow. This is what just about everybody does…

The Dao Is Up

Jim Wasserman | May 25, 2021

WHEN PEOPLE MENTION Eastern philosophy, Westerners often have images of mystic monks in saffron robes, surrounded by clouds of incense and speaking in cryptic riddles like, “What is the sound of one hand clapping?” In fact, Asian philosophy can be very pragmatic in addressing everyday decisions, from family matters to investment choices—and many Westerners welcome the different approach to facing life’s challenges. Daoism (also called Taoism) is one of the world’s oldest philosophies. It’s believed to have emerged more than 2,000 years ago during a period of dissolution, decline and prolonged warfare in China. Amid the chaos, many had a sense they lacked control over their life. Daoism helped address what to do when faced with such anxious times. Here are some of Daoism’s key points: De (Te). There is a natural flow (Dao or Tao) to all things, with everything acting in its own way within that flow—birds gotta fly, trees gotta grow toward light. It’s their innate power (De) of tapping into the greater flow (Dao) to thrive. When we feel out of sync or even going against the flow, it does no good to rail against the way things are or fight against them. It’s better is to see how we can operate within what’s happening. Aware of our own De, we can each take advantage of our unique qualities, natural skills and power to make the best of things. Don’t waste our breath saying the market is irrational. Instead, we should figure out the best way to move within the flow. Wu wei. This is one of the most misunderstood ideas of Daoism because it is often translated as “nonaction,” seeming to imply that we should sit tight and hope all will be well. A better translation is “effortless action.” Imagine a rock in a stream.…

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