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Q&A: Author Joe Hallinan on financial goofs

'Why We Make Mistakes' author explains bad credit card choices

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Research shows that when confronted with several credit card offers, most of us choose the wrong one: We'll bite at the attractive teaser rate rather than the best overall terms.

Why?Author Joe Hallinhan on financial goofs

Pulitzer Prize-winning journalist Joe Hallinan finds answers to a wide range of such costly miscalculations in his new book, "Why We Make Mistakes."

It turns out our credit card blunder is due to a lack of "calibration," a term best summed up by Clint Eastwood's Dirty Harry character in the movie "Magnum Force": "A man's got to know his limitations."

Simply put, we don't. And worse, most of us don't know we don't.

Our innate overconfidence leads us to believe against all evidence that we can always obtain the maximum result -- whether it's losing 80 pounds on a weight loss plan or paying off our credit card balance during the introductory period.

The same human flaw leads us to hold fast to a failing stock (or stock adviser), fail to ask for directions, and believe that our first answer on a test is probably the best one (it isn't).

Hallinan shows that while to err is indeed human, learning from our mistakes apparently is not.

That said, those who are routinely confronted with evidence of their success-to-failure rate, such as TV meteorologists, can fine-tune their calibrations and make better picks. It also helps to impose constraints that keep you from giving in to your wayward impulses.

We recently talked with Hallinan from his Chicago home about the reasons behind 10 worst credit card mistakes, and why you might want to consult your preteen on your next credit card move.

CreditCards.com: Studies show that we consistently make the wrong choice when selecting from competing credit card plans. Why is that?

Joe Hallinan: Credit card companies know your inner self better than you do. It's the same principle of human behavior that drives NutriSystem weight loss programs, the airlines' frequent flier miles, even gift cards at retailers. Businesses have caught on to it, but consumers haven't. Businesses have been able to make quite a bit of money on that principle.

CreditCards.com: We overestimate our resolve. Or, perhaps more correctly, we underestimate our slackness.

Hallinan: Sure. I think NutriSystem is a perfect example. NutriSystem will tell you, albeit in very small type, on their advertisements, "Results not typical." But nobody thinks they're typical; nobody thinks they're average. That's for other people. Well, not everybody can be above average. I'm not going to be like most of the people who have followed this program before me and conk out after 10 or 11 weeks and have only lost a fraction of the weight that they wanted to lose.

CreditCards.com: It's not hard to see how destructive that behavioral quirk has become for some.Joe Hallinan

Hallinan: When you look at that broadly, is that really so dissimilar to many of the people who invested with Bernie Madoff? They thought they were special, right? Average returns are for somebody else. I'm not typical; I'm special. They're not so special now.

CreditCards.com: Research suggests that we might in fact do better to ask our local weather forecaster for investment advice than a financial adviser. How so?

Hallinan: Weathermen and bridge players, oddly enough. The best thinking about weathermen is, unlike other occupations, everybody knows the next day whether the weather forecaster was right. You know if it rained or not. If they blow a call, they hear about it right away. The thinking is that weathermen have had such a long history of quantifying their guesses that they could actually compare their predictions against the actual result.

One of the effects of that is, in part, you get humbled because you see that you are, in fact, wrong sometimes, and you're able to then more closely gage exactly how good you are.

CreditCards.com: So you can become better calibrated?

Hallinan: Exactly. In fact, in the book, Wharton professor Paul Schoemaker cites research with Shell Oil. Shell found that its geologists, who were all very bright, talented guys in predicting where oil would be, were wrong a lot of the time. So Shell said, "How can we improve this?" They found that they could improve the calibration of their geologists by designing a program that gave them feedback in the same way that weather forecasters receive it. It's kind of a way of combating that natural overconfidence that resides in all of us.

CreditCards.com: What impact could that have on choosing the right credit card offer?

Hallinan: You wouldn't go for the pie-in-the-sky one. You would go, "OK, I may not want to admit to myself that I'm actually going to behave this way, but if I'm well calibrated, I'll be more honest with myself and say, 'Yeah, I'm really not going to be able to pay that balance off in six months during that teaser rate so I'm going to ignore that teaser rate and go for the better long-term rate.'" But a lot of people don't like to be honest with themselves about that; they're miscalibrated, and as a result, make bad financial decisions.

CreditCards.com: The idea of constraints gives some hope that even the hopelessly deluded among us can rein in their risk when it comes to credit cards.

Hallinan: It's a great tool, and one I was unaware of. Let's say you have a general model in your head that goes something like this: "Look, I'm prone to be overconfident, and I won't always know when I'm being overconfident, so I'm going to make errors that I'm not really aware that I'm going to make. How can I protect myself against that?" Well, one of the ways you can is by using things that have constraints, that basically are bumpers that keep you from yourself, that keep you between the ditches when your natural predilections would have you go into the ditch.

CreditCards.com: But we tend to reject constraints, which can be as simple as a budget or a credit limit.

Hallinan: And it's at odds with our view of ourselves as being above average. "I don't need training wheels; I can ride the big-boy bike. Look at me, how smart and mature and advanced and sophisticated I am." But you see constraints used all the time by very smart people.

For instance, doctors now, and surgeons in particular, are seeing the wisdom of checklists, of actually writing things down before they operate.

Rather than make those silly, stupid mistakes, why don't you just write it down? And the checklist actually acts as a constraint because you have to go down the checklist and put a check. There was actually a study just a few days ago in the New England Journal of Medicine where they looked at using checklists at hospitals around the world. They found that if the doctors would use a checklist, they cut the surgical death rate by nearly half. Amazing! One little thing like that cuts the death rate in half!

CreditCards.com: You mention many instances where the best minds on a subject are often called on a mistake by a 13-year-old. How is that possible?

Hallinan: That gets into the way in which we process information. As we grow up and become "experts" in whatever we do, or think we're experts, we tend to process information differently than when we were kids because we tend to work more on an abstract or symbolic basis.

For example, when a kid reads a book, you see him labor over every word, right? "See ... Spot ... run." But you and I can read very rapidly and we don't really look at every word; we use context. We know when we read, "The thirsty man licked his..." we know that last word is going to be lips. So you just zip right over it. But the kid doesn't zip right over it; he looks at every granular detail. They're processing information on a word-by-word or note-by-note basis, whereas you and I are careening by all of that stuff.

So you can see where these compound. You're already overconfident, you're speeding by things and dealing with them on a symbolic or abstract basis, and then, to put another plate in the air and try to spin it, you multitask. Is it any wonder that you would commit a variety of errors while doing all those things? If you had to design a system where you commit errors, that would be it.

CreditCards.com: Which seems to speak directly to how we got into our current financial mess in the first place.

Hallinan: There's a corollary, isn't there? Warren Buffett has rather famously said that he doesn't invest in things he doesn't understand, which is why he avoided much of the dot-com and high-tech meltdown. Very few people would acknowledge that. And today, things have become so complex and complicated that even smart people can't understand them. They may pretend they do, but you can't; they're so opaque that you just can't.

CreditCards.com: Which brings us back again to our overconfidence and our illusion of control.

Hallinan: (laughs) After all, I have a good adviser and nothing bad has happened to me yet!

CreditCards.com: Maybe the true meaning of "caveat emptor," or "let the buyer beware," was to caution us to be aware of our own blind spots and unconscious inclinations.

Hallinan: Clint Eastwood, right? "A man's got to know his limitations." We don't like to ever admit that we have any, of course. The beauty of a guy like Buffett is, he knows his limitations. He knows what he understands, and most important, he knows what he doesn't understand. That's one definition of genius in my book.

See related: Q&A with credit card and debt expert Amelia Warren Tyagi, Credit Card Help: How to pick the right card for you, Credit Card Help: 10 worst credit card mistakes

Published: April 28, 2009


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