In this episode of Money Lessons, Andy supplies the vocabulary behind three weeks of teaching on habits, defaults, and friction.

Herbert Simon — who was never an economist — challenged his era's assumption that buyers decide with complete information, and won a Nobel Prize for finding those limits inside companies before anyone thought to look for them in customers.

Richard Thaler named the arrangement of options in front of you choice architecture, and a decade after publishing Nudge with Cass Sunstein, he coined sludge for friction pointed at the person who has to get through it.

In this episode of Money Lessons, Andy walks through the three categories of risk that dominate the experience of owning stock: firm-specific risk, market risk, and behavioral risk. He explains why a stock's daily movement is mostly driven by company news, but why the broad market overwhelms those differences when it moves sharply—answering the listener's natural "which is it?" question. 

Using the 2008 financial crisis and the March 2020 pandemic crash as examples, Andy shows how fast and slow declines both punish panic-selling, just on different timelines. He closes with the observation that most of the gap between what individual investors earn and what the market returns isn't about picking the wrong stocks—it's about behavior.

As humans, we tend to not put enough thought into the worth or value we assign to the products and services we purchase. We’ll make better decisions on what we purchase with our hard earned $$ if we take a bit more time to consider how we place value on the things we buy. The interesting thing about finance and financial literacy is that it is equal parts objective evaluation of our financial position and our behavioral perspectives about our personal economy. How we feel about money, investing, and consumption is as important as the numerical and analytical side of working with our finances.

As we continue our journey to build financial literacy skills, you may be wondering where all the formulas and numbers are? Well, this is a big misconception of financial literacy—that it is more about numbers than it is about behaviors. How we feel about money & investing and how we behave with the resources we have via the decisions we make are as, or more, important than our ability to work with numbers. Hence, this is where we’re going to place most of our initial emphasis.