Pound Foolish

by Helaine Olen

Cover image

Publisher: Penguin
Copyright: 2012, 2013
Printing: 2013
ISBN: 1-59184-679-X
Format: Trade paperback
Pages: 241

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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

Reviewed: 2015-08-29

Last modified and spun 2016-10-24