Review:
Pound Foolish, by Helaine Olen
| Publisher: |
Penguin |
| Copyright: |
2012, 2013 |
| Printing: |
2013 |
| ISBN: |
1-59184-679-X |
| Format: |
Trade paperback |
| Pages: |
241 |
For at least the last six years, it's not been surprising news that the
relationship between the average person and the US financial system is
tense at best, and downright exploitative at worst. The collapse of the
housing bubble revealed a morass of predatory lending practices,
spectacularly poor (or spectacularly cynical) investment decisions, and
out-of-control personal debt coupled with erosion of bankruptcy law.
Despite this, there's always a second story in all discussions of the
finances of the US population: the problem isn't with financial structures
and products, but with us. We're too stupid, or naive, or emotional, or
uninformed, or greedy, or unprincipled, or impatient. Finances are
complicated, yes, but that just means we have to be more thoughtful. All
of these complex financial products could have been used properly.
Helaine Olen's
Pound Foolish is a systemtic, biting,
well-researched, and pointed counter to that second story. The short
summary of this book is that it's not us. We're being set up for failure,
and there is a large and lucrative industry profiting off of that failure.
And many (although not all) people in that industry know exactly what
they're doing.
Pound Foolish is one of my favorite forms of non-fiction: long-form
journalism. This is an investigative essay into the personal finance and
investment industry, developed to book length. Readers of Michael Lewis
will feel right at home. Olen doesn't have Lewis's skill with
characterization and biography, but she makes up for it in big-picture
clarity. She takes a wealth of individual facts about who is involved in
personal finance, how they make money, what they recommend, and who
profits, and develops it into a clear and coherent overview.
If you have paid any attention to US financial issues, you'll know some of
this already.
Frontline has done a great job of covering
administrative fees in mutual funds. Lots of people have warned about
annuities. The spectacular collapse of the home mortgage is old news now.
But Olen does a great job of finding the connections between these
elements and adding some less familiar ones, including an insightful and
damning analysis of financial literacy campaigns and the widespread belief
that these problems are caused by lack of consumer understanding. I've
read and watched a lot of related material, including several full-book
treatments of the mortgage crisis, so I think it's telling that I never
got bored in the middle of Olen's treatment.
I find the deep US belief in the power of personal improvement
fascinating. It feels like one of the defining characteristics of US
culture, for both good and for ill. We're very good at writing compelling
narratives of personal improvement, and sometimes act on them. We believe
that everyone can and should improve themselves. But that comes coupled
to a dislike and distrust of expertise, even when it is legitimate and
earned (Hofstadter's
Anti-Intellectualism
in American Life develops this idea at length). And I believe we
significantly overestimate the ability of individuals to act despite
systems that are stacked against us, and significantly overestimate our
responsibility for the inevitable results.
This was the main message I took from
Pound Foolish: we desperately
want to believe in the myth of personal control. We want to believe that
our financial troubles are something we can fix through personal
education, more will power, better decisions, or just the right
investment. And so, we turn to gurus like Suze Orman and buy their mix of
muddled financial advice and "tough love" that completely ignores broader
social factors. We're easy marks for psychologically-trained investment
sellers who mix fear, pressure, and a fantasy of inside knowledge and
personal control. We're fooled by a narrative of empowerment and stand by
while a working retirement system (guaranteed benefit pensions) is
undermined and destroyed in favor of much riskier investment
schemes... riskier for us, at least, but loaded with guaranteed profits
for the people who "advise" us. And we cling to financial literacy
campaigns that are funded by exactly the same credit card companies who
fight tooth and nail against regulations that would require they provide
simple, comprehensible descriptions of loan terms. One wonders if they
support them precisely because they know they don't work.
Olen mentions, in passing, the Stanford marshmallow experiment, which is
often used as a foundation for arguments about personal responsibility for
financial outcomes, but she doesn't do a detailed critique. I wish she
had, since I think it's such a good example of the theme of this book.
The Stanford marshmallow experiment was a psychological experiment from
the late 1960s and early 1970s in delayed gratification. Children were
put in a room in front of some treat (marshmallows, cookies, pretzels) and
told that they could eat it if they wished. But if they didn't eat the
treat before the monitor came back, they would get two of the treat
instead. Long-term follow-up studies found that the children who
refrained from eating the treat and got the reward had better life
outcomes along multiple metrics: SAT scores, educational attainment, and
others.
On the surface, this seems to support everything US culture loves to
believe about the power of self-control, self-improvement, and the
Protestant work ethic. People who can delay gratification and save for a
future reward do better in the world. (The darker interpretation, also
common since the experiment was performed on children, is that the ability
to delay gratification has a genetic component, and some people are just
doomed to make poor decisions due to their inability to exercise
self-control.)
However, I can call the traditional interpretation into question with one
simple question that the experimenters appeared not to ask: under what
circumstances would taking the treat immediately be the rational and best
choice?
One answer, of course, is when one does not trust the adult to produce the
promised reward. If the adult might come back, take the treat away, and
not give any treat, it's to the child's advantage to take the treat
immediately. Even if the adult left the treat but wouldn't actually
double it, it's to the child's advantage to take the treat immediately.
The traditional interpretation assumes the child trusts the adults
performing the experiment a logical assumption for those of us whose
childhood experience was that adults could generally be trusted and that
promised rewards would materialize. If the child instead came from a
chaotic family where adults weren't reliable, or just one where frequent
unexpected money problems meant that promised treats often didn't
materialize, the most logical assumption may be much different. One has
to ask if such a background may have more to do with the measured
long-term life outcomes than the child's unwillingness to trust in a
future reward.
And this is one of the major themes of this book. Problems the personal
finance industry attributes to our personal shortcomings (which they're
happy to take our money to remedy) are often systematic, or at least
largely outside of our control. We may already be making the most logical
choices given our personal situations. We're in worse financial shape
because we're making less money. Our retirements are in danger because
our retirement systems were dismantled and replaced with risky and
expensive alternatives. And where problems are attributed to our poor
choices, one can find entire industries that focus on undermining our
ability to make good choices: scaring us, confusing us, hiding vital
information, and exploiting known weaknesses of human psychology to route
our money to them.
These are not problems that can be solved by watching Suze Orman yell at
us to stop buying things. These are systematic social problems that
demand a sweeping discussion about regulation, automatic savings systems,
and social insurance programs to spread risk and minimize the weaknesses
of human psychology. Exactly the kind of discussion that the personal
finance industry doesn't want us to have.
Those who are well-read in these topics probably won't find a lot new
here. Those who aren't in the US will shake their heads at some of the
ways that the US fails its citizens, although many of Olen's points apply
even to countries with stronger social safety nets. But if you're
interested in solid long-form journalism on this topic, backed by lots of
data on just how badly a focus on personal accountability is working for
us, I recommend
Pound Foolish.
Rating: 8 out of 10