Why Cartoon Laws Apply

Remember Saturday mornings, cartoon, pajamas and a bowl of cereal. We entered into a world of animation that had rules in play we knew only existed there. Boomers may have forgotten those laws and have grown up thinking that was then, this is now. But perhaps...

It all seems so otherworldly these days. As if everything that seems familiar isn’t and the laws the govern rational – and often irrational behavior no longer apply. Markets are up then down and then post the worst third quarter in recent memory – and we’re not sure what that means. Does it indicate something wicked this way comes or perhaps the end of the episode? So I turned to some laws that explain the world of finance, retirement and just getting-by in a world gone wacky.

Cartoon Law I.

“Any body suspended in space will remain in space until made aware of its situation.” We basically have two things to focus on: our future and what will happen next. We are continually being told to invest, max-out that 401(k), do everything you can now, pain equals pleasure which has replaced risk equals reward. That is until we chance to look down. And you know what happens next.

Cartoon Law II.

“Any body in motion will tend to remain in motion until solid matter intervenes suddenly.” Our retirement goals have experienced this law firsthand.  Hitting the cartoon telephone pole at full speed is, as this Law II suggests, the only way to stop forward motion with any success. There is the comic slide down the pole immediately following the impact which can only mean two things: we will sit as the cartoon stars whirl around our collective heads, trying to regain our reason for moving forward. Once our heads are cleared, Law II is waiting with the next pole a little further down the road.

Cartoon Law III.

“Any body passing through solid matter will leave a perforation conforming to its perimeter.” If you follow the markets, any markets, no matter how much information you think you have, now matter how timely it seems to be, the person in front of you will create their own cookie-cutter hole, exit, leaving you to get ahead of the problem that no one, including you is sure is a problem.  So instead of leaving by the door, they exit through a wall, evidently not a solid enough surface to allow Cartoon Law II to come into play.  We are at the mercy of speculators it seems who apparently have little regard for laws of supply and demand but understand two things: your predictable behavior and the ability of cartoon physics to protect them.

Cartoon Law IV.

“The time required for an object to fall twenty stories is greater than or equal to the time it takes for whoever knocked it off the ledge to spiral down twenty flights to attempt to capture it unbroken.” This is my favorite axiom of all.  Who among us has not seen the Federal Reserve try and do this?  We are watching this occur as we speak as Fed chairman Ben Bernanke races down the stairs with his latest effort in Operation Twist. Only Cartoon Law IV is a waste of time.  The priceless nature of the economy, the object hurtling through global space in this instance, falls victim to the inevitable comic result: it might be too big to fail but the attempt to catch it will prove unsuccessful as well.

Cartoon Law V.

“All principles of gravity are negated by fear.” I offer last quarter’s frenetic trading as proof that investors can spin their feet so quickly that they do not touch the ground while any news good or bad propels most of them straight up a flag pole. These days many average investors are left scratching their heads as they realize that just the sound of the unknown can change the direction of the market dramatically.

Cartoon Law VI.

“As speed increases, objects can be in several places at once.” You know this one as the cloud of dust and debris brawl, to be witnessed as the candidates begin their battle for the White House.  With the economy hanging in the balance or at least by their telling of the tale, the next year should provide numerous occasions of spinning and throttling as no candidate so far can pinpoint where the nation is right now and offer a plan of where we should be.

Cartoon Law VII.

“Certain bodies can pass through solid walls painted to resemble tunnel entrances; others cannot.” This inconsistency has played itself out to great effect in housing.  The folks who stand at the helm of the economy have painted an imaginary tunnel and allowed millions of Americans to pass through but when those that needed help the most attempted to follow, the surface was once again solid. This trick surface has left many wondering why something cohesive can’t be done. Housing may never recover if recovery is gauged by where it was. Yet so many people are wondering why the supposedly smart financial people who aided and abetted in this financial crime won’t simply understand that they have an option – and it isn’t achieved by raising ATM or debit card fees.

Cartoon Law VIII.

“Cartoon cats have more than the traditional nine lives.” They become like water snapping back to whatever they were prior to their mishap, even assuming the shape of the container if they happen to find themselves in one.   Seems that we alone know this to be true and no matter how many times the economy can be “decimated, spliced, splayed, accordion-pleated, spindled, or disassembled, it cannot be destroyed.” It becomes the equivalent of a cartoon mulligan. Someone please tell those in Washington. They think that what the economy needs is simple: more self-regulation and perhaps a little agency consolidation, a trillion dollar cut in spending here and an entitlement cutback there. We’ve seen it before and it gives us hope. We know that after the economy regains its shape, these set-backs (weak dollar, global slowdowns, market volatility and commodity speculation) will prove there are lessons we haven’t really learned and why should we have. We are pretty confident as a group that we will have another life to do it over again. At  least we hope that this cartoon law is real.

Cartoon Law IX.

“Necessity plus Will provokes spontaneous generation.” This opens the door to the “controversial pocket theory” which  “suggests objects can be drawn from unseen recesses of a character’s costume, or from a storehouse immediately off-screen” or can be borrowed directly from what you will owe at some point in the future.  And then, as if by magic, this future they tell us will just show up as if it “merely defers the question of how any absolutely apt object is instantaneously available”. Of course, you do need to believe in magic and if magic is the suspension of disbelief, saving will help – a lot.

Cartoon Law X

“For every vengeance there is an equal and opposite re-vengeance.” This is the one law of animated cartoon motion that also applies to the physical world at large. The bottom line is that we are not to blame. Each time I talk to an expert on my radio show we are told is our behavior that is the reason we are in the mess we are in. Every nuance we have is examined and studied and plans for re-vengeance are hatched. It has become us versus them. Instead of financial products getting simpler and more easy to understand, they ultimately become more nuanced, more layered with possibilities and as they get less expensive, they don’t become less expensive. It seems that all we want is to fall on the right side of cartoon law.

These laws were borrowed liberally from “Elementary Education” by Mark O’Donnell (Knopf (1985) in the hope that when you encounter these situations, you may fall on the right side of cartoon law.

Paul Petillo is the Managing Editor or Target2025.com/BlueCollarDollar.com

Adjusting the Dream of Retirement

Since the advent of blogs, the ability to complain has gone beyond grumbling to your co-worker and on to the world stage.  Much of the complaining has been egged on by writers looking to fire up your anger and make you face the consequences of a period of time when wealth seemed like it was attainable for everyone. The sad truth is that this simply was not possible for everyone and for the vast majority of us, the reality was a harsh and somewhat rude awakening.

Outraged, we looked to the government to save us from ourselves and when they admitted that this was not possible for everyone, we did what was expected: expressed our outrage. In a recent post on the AFL-CIO blog by former news reporter Mike Hall, the suggestion that Washington should wake-up and come to terms with a $6.6 trillion retirement deficit lays the responsibility on the wrong party. yes, that is a lot of money. Yes, it has impacted everyone (with the exception of the highest wage earners).  And yes, it does make me just as angry as you might be.

But I blame myself and in many instances, you should blame you.  Mr. Hall suggested that this multi-trillion dollar deficit will prevent us from the "hope to maintain your current standard of living when you retire".  To do that, you would need to have enough income in retirement to match what you currently earn.  With few exceptions, your retirement income is designed - and if properly funded - to replace only 70-80% of what you currently earn.  With few exceptions, the vast majority of us do not plan our retirement based on these assumptions.

Let's consider those assumptions.  Retirement still is and always has been a combination of elements working in tandem. The first is your own ability to live within your means.  This allows you to build some sort of savings/investment plan to meet your needs when you no longer want to work.  And for the majority of the current workforce, some reliance on Social Security.


It is amazing how many people who are close to retirement believe that Social Security will somehow survive without some adjustments. Minor tweaks to Social Security will happen.  But it will have the greatest effect on those who are still decades away from drawing on the program. It does remain solvent and will do so in the near future - long range though, several things have to happen.

The size of the group contributing needs to increase. If the government does anything it should be to focus on the current wave of cash hoarding by the country's largest corporations. This means more employed workers contributing which means more revenue.

You will always be able to take the early draw on SS.  While most experts agree that this is not a good idea, they are referring to the workers who can continue to work beyond the targeted retirement age. Plan your retirement based on this early withdrawal number. True, it is worst-case scenario but the true essence of plan is based on this concept; not shooting beyond what it possible.

You can also help your cause by contributing to an IRA or if your employer allows you, to their 401(k) plan.  Five percent a paycheck does not alter your take-home pay. While the $6.6T number quoted in Mr. Hall's piece seems daunting, it creates sensationalism and lacks solutions. Most of us need to keep in mind that a great deal of the wealth recently amassed and lost was due to a bull market that lasted between 1982 and 2000, much of which was due to the elimination of pension plans and the forced march to defined contribution plans. We can't go back.  But we can move on.

As for pension plans - still the great economic stabilizer - they are under pressure to reduce their impact on the employer.  If such a thing comes to pass, what it won't take away is what you already earned, just the projection of what you could have earned.  While austerity is a difficult pill to swallow, there are ways to increase your retirement opportunities.

Adjust the dream you may have harbored and do not want to let go. Get your house in order by imagining living on 30% less income than you do now. Underspend and over save/invest. Get healthy and stay that way - medical costs will have the greatest impact on your retirement income and doing this could save you thousands of dollars in medical bills that otherwise could have been spent on living expenses.

There is no quick or easy answer and like most problems facing the American worker these days, it relies on realistic assumptions, workable plans and a measure of hope that we will survive the current economic situation. I'm not sure the government can rescue us all - which means that some of us will need to learn how to swim.

I have some additional thoughts on the subject here.

Why Investors Do What They Do: Anchoring

So far, we have discussed loss aversion and narrow framing, trouble spots in any investors view of what they are trying to do. They may be investing in their retirement plan or simply making an economic (better yet, one with financial implications) decisions, but we often, as studies have shown, begin from some point of what we know. This is referred to as anchoring.

Unfortunately, anchoring is a bias. It is often included among other similar cognitive biases such as memory bias (which effects how we recall a situation after the fact) and confirmation bias (depends largely of what you already know and uses this information to skew your perception of what really is). Each alters what we see with something we already know and this drives businesses, who want to anticipate what you will do and more importantly, what you will buy and confounds psychologists, who have twisted the lab questions done on test subjects in every conceivable way only to find out that we have numerous cognitive influences mucking up the works.

But anchoring is particularly dangerous when it comes to investor reaction. An anchor is basically an expectation. We are not the kind of shoppers who go into a store, find a good and before we flip the price tag, try and determine what we will pay for it. But it is a good experiment that you can conduct on yourself. Time after time, you will find your expectations of the cost of the good, be it a television or a dress will be altered by what you perceive.

You will try and narrow down your choices to one that seems to be what you think something is worth. But that narrowing of thought, trying to get closer to the price tag (and feeling very smug if your bias towards the cost is exactly what the cost is) will not work across a broad spectrum of goods. In lab tests, subjects merely get "a good" and know little about what it is. But as soon as the item is revealed, adjustments are automatically made.

We generally have no real anchor when we begin investing except for the money we begin the process with. This becomes the anchor if you have nothing in the account. But in a upwardly moving market, an investor can quickly get swept up in a constantly readjusting balance. Once money is made, a new anchor is created in your view of that portfolio.

Investing however is never quite that simple. While we all enjoy growth, we tend to lose focus on the fickleness of the markets and the underlying worth of whatever it is we are buying. If a stock or a mutual fund has had a great run of it, even topping the top ten lists, investors will not see this as the top but the new value on which to anchor their expectations.

Consider what cognitive abilities (or biases) you may have used or borrowed from someone else. You watch the business news channels hoping for a tidbit of relevant information about which security you would like to buy. You peruse the web looking for confirmation of what you would like to believe is true. But what you are really doing is looking for an anchor using someone else's anchor to support your decision.

If analysts make forecasts or predictions based on past performance and then offer the disclaimer that future results are not guaranteed. They have used past results to anchor their bias as to whether things look rosy or the future is bleak for the stock.

Anchoring is tougher on a retirement account largely due to the set and go approach that most investors use in these types of accounts. Unless severe market downturns capture our attention in the news, we tend to leave these accounts to their own devices, channeling a portion of our earnings into them each week.

But when we do look at those quarterly statements, and many of us have for the first time in a while, we have an idea of where we should be. And it will be much higher than is probably reported. That's because we aren't so good at making predictions or estimates.

Look at it this way. Suppose you invested a thousand dollars in an IRA account and added $100 a week to that account. Over the course of 25 years you would have put $114,429 (adjusted for inflation at 3% on the real value of $131,000 actually contributed) in the account. If the money grew over that period at a modest 5%, which for that stretch of time is below average even with last year calculated into the mix, you would have added almost $135,000 in earnings (also adjusted for inflation).

Now suppose your portfolio balance of $249,402 dropped 30% or $74,802. Wouldn't you still be in the black? With an inflation adjusted contribution of $114k, haven't you protected your money and even grew it by $40k. Because you constantly shift your anchor or readjust your estimates higher, your expectations follow.

This is due in large part to a small target. Your balance may have grown substantially since you began investing but what occurred caused you to miss the target. I am not a shooter but I know that when a person does aim and fire, they are often narrowly focused on the target when in fact we should be making broad sight adjustments.

Next up: Mental Accounting

Why Investors Do What They Do: Narrow Framing

In our previous discussion about loss aversion, we looked at what was the beginning of Kahneman's prospect theory. Coupled with loss aversion, narrow framing represents a look at how investors perceive their chances at wealth but only when they see it as the sole component. This is a discussion about risk. More importantly, a discussion about regret.

When you (or as you are often referred to when being discussed by economic types, an agent) moves into the stock market, be it through individual ownership or through mutual funds, you are changing your wealth allocation. Obviously, the easiest measure of wealth is more tangible elements such as what you get paid (human capital) which also includes what you may have saved (not invested) and the worth of your real assets, such as your home. Once you commit a certain portion of either of those two assets to the investment of your choice, you begin to open the door to regret.

This regret is the result of accessibility and the misuse of the different decision rule. Accessibility is what it is: information that is readily available almost instantaneously through any number of mediums and the ability to enter into the market without restrictions. The different decision rule is described in Walter L. Wallace's book "Principles of Scientific Sociology": [the agent]"chooses whichever means optimizes the end in question". This thinking is looking for what could be crudely referred to as the most bang for the buck. Freud called this the pleasure principle.

Narrow framing demands a high equity return both now and in the future. Does this take into account market shifts, both up and down? Not really nor is a realistic approach in the long-term. But loss aversion and narrow framing are not separate thinking.

One of the most famous examples was described by Paul Samuelson, a noted economist, Nobel Prize winner and the person who bridged theoretical and applied economics. When he offered to flip a coin, the prize being $200 if the flip went his colleagues way of loss $100 if the flip went Samuelson's direction, the colleague declined on both accounts. This is loss aversion. When the perception that the loss is greater than the possibility of winning, the investor tends to freeze.

The different decision rule is often described as a way to optimize the end so as not compromise or to incur the minimum amount of cost. Luigi Guiso of the Einaudi Institute for Economics and Finance Via Due Macelli in Rome tested narrow framing using the lottery question, much like Samuelson's coin flip. What he discovered was that if you allow the subject of the test to have time to think about their personal economic and financial situation before you asked them whether they would like to win twice as much as they might lose, they were more apt to attempt to try the game of chance. He wrote: "attitudes towards regret and reliance on intuition rather than reasoning are likely to drive the tendency to frame choices narrowly."

In their book "The Routines of Decision Making" By Tilmann Betsch and Susanne Haberstroh, the authors suggest that the more routine a decision is - such as investing for retirement - the more likely a person was to resist forecasting. In other words, even if the recent economic downturn had been forecasted, and in some instances it was, the person who might be most at risk of losing value in their 401(k) because of out-sized risk or an overabundant share of their portfolio in their company's stock, might have ignored what was obviously a warning. The markets had routinely ascended along with the value of the portfolio and they had seen this as a reoccurring event that probably would not end in the foreseeable future.

This problem is best manifested in the doctor's office. Your physician gives you news about your health that you are skeptical about or might be life-altering depending on your decision. How do you decide how many second or third opinions you garner to help you decide? Suppose those decisions don't jive with how you are feeling?

Next up: Anchoring

Retirement Planning and Your Personal Finance Skills

Retirement planning is all for naught if you don't bring some basic knowledge to the process. Below is the first of a three part quiz published by the Federal Reserve to help tally your personal finance, economic, and investing skills. There is no reward for right answers. In fact, I have taken the answers below and added explanations to help you understand why.

Part two and three come later this week.

Federal Reserve Quiz

Part One

Personal Financial Literacy Quiz:
(Answers with explanations - from me - at bottom of page)

1. Inflation can cause difficulty in many ways. Which group would have the greatest problem during periods of high inflation that last several years?

a.) Older, working couples saving for retirement.
b.) Older people living on fixed retirement income.
c.) Young couples with no children who both work.
d.) Young working couples with children.

2. Which of the following is true about sales taxes?

a.) The national sales tax percentage rate is 6%.
b.) The federal government will deduct it from your paycheck.
c.) You don't have to pay the tax if your income is very low.
d.) It makes things more expensive for you to buy.

3. Rebecca has saved $12,000 for her college expenses by working part-time. Her plan is to start college next year and she needs all of the money she saved. Which of the following is the safest place for her college money?

a.) Locked in her closet at home.
b.) Stocks.
c.) Corporate bonds.
d.) A bank savings account.

4. Which of the following types of investment would best protect the purchasing power of a family's savings in the event of a sudden increase in inflation?

a.) A 10-year bond issued by a corporation.
b.) A certificate of deposit at a bank.
c.) A twenty-five year corporate bond.
d.) A house financed with a fixed-rate mortgage.

5. Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income?

a.) When you need to buy a car to get a much better paying job.
b.) When you really need a week vacation.
c.) When some clothes you like go on sale.
d.) When the interest on the loan is greater than the interest you get on your savings.

6. Which of the following statements best describes your right to check your credit history for accuracy?

a.) Your credit record can be checked once a year for free.
b.) You cannot see your credit record.
c.) All credit records are the property of the U.S. Government and access is only available to the FBI and Lenders.
d.) You can only check your record for free if you are turned down for credit based on a credit report.

7. Your take home pay from your job is less than the total amount you earn. Which of the following best describes what is taken out of your total pay?

a.) Social security and Medicare contributions.
b.) Federal income tax, property tax, and Medicare and social security contributions.
c.) Federal income tax, social security and Medicare contributions.
d.) Federal income tax, sales tax, and social security contribution.

8. Retirement income paid by a company is called:

a.) 401 (k).
b.) Pension.
c.) Rents and profits.
d.) Social Security.

9. Many people put aside money to take care of unexpected expenses. If Juan and Elva have money put aside for emergencies, in which of the following forms would it be of LEAST benefit to them if they needed it right away?

a.) Invested in a down payment on the house.
b.) Checking account.
c.) Stocks.
d.) Savings account.

10. David just found a job with a take-home pay of $2,000 per month. He must pay $900 for rent and $150 for groceries each month. He also spends $250 per month on transportation. If he budgets $100 each month for clothing, $200 for restaurants and $250 for everything else, how long will it take him to accumulate savings of $600.

a.) 3 months.
b.) 4 months.
c.) 1 month.
d.) 2 months.

ANSWERS: 1) b; 2) d; 3) d; 4) d; 5) a; 6) a; 7) c; 8) b; 9) a; 10) b

Retirement Planning and Risk, Uncertainty, and Profit

Frank Knight, as I mention in the book, was an economist, who seeking out a subject to do his thesis on, choose profit. In today’s terms, this topic would have little significance. We all know what it is and how it is created. In its simplest form, it is the difference of price between the cost of making a good and the price a consumer is willing to pay for it.



But when Knight decided on profit, economists had yet to understand the nature of the corporation fully or its impact on what was about to become one of the most significant changes in economics. (The other was the development of economics as an exact science, one that shared the field with mathematics and physics – in other words, it was about to become abstract.) What Knight found was a system that, prior to the turn of the century, was built on the notion that someone could make money, but only if the capitalist was willing to take the risk.



The system was set up like this: Men used money that they had, hired workers as they needed them and paid rent for the land or buildings they used. They did borrow money to begin these enterprises but that seed cash was the result of sacrificing the financial and often, the managerial side of the business to the banker or trading company. Those two entities became the dominant partner and often one that stifled the very businesses they were funding.

But things were changing. Competition was beginning to exert a force on the business model. His book Risk, Uncertainty, and Profit was published in 1921 and changed the way we looked at randomness and why it was important in making risk work.

Knight suggested that a businessman’s paycheck was not profit but merely a contract interest. He writes that, “Even Adam Smith and his immediate followers recognized that profits normally contain an element which is not interest on capital.” One of the first recognizable references to this change came from a French author J. B. Say. In his fourth edition of Traité he noted that income was once the best way to reward risk-taking but because of shift away from what the capitalist had previously accrued, the reward was now the province of the entrepreneur.



There have been numerous instances where the subject of risk requires a definition. I can’t begin to tell you how often I alone have tried to explain the topic, using a wide variety of analogies to explain that some risk is good because it increases the likelihood of reward. It is almost as if the topic is fluid and cannot be contained by simple words.

I have explained that risk needs to account for inflation, taxes and a whole variety of other distractions including the most problematic element – which I describe in my “Investing for the Utterly Confused” book as the mental maniac inside all of us. But it persists in what it can provide for the investor - and take away and yet, we are all seeking the right level, the perfect balance, and the prize that awaits the person who can.

Mr. Knight also pointed out a flaw in the current thinking about work. Trying to look at how men act rationally, he pointed out that it was “superficially natural to assume that a man will work more – i.e., work harder and more hours per day – for a higher wage than for a lower one.” Calling this assumption incorrect, suggesting instead, that they will in fact divide their time “in such a way as to earn more money, indeed, but to work fewer hours.”



Encouraging risk taking among the youngest members of our society is unfortunately difficult. You can explain the rule of 72 (Divide 72 by the annual interest rate you are receiving on a simple account, and you will be able to pinpoint when that money will double – 72 divided by 6 percent=12 years. Other cool rules at the bottom.).

Risk comes from deduction, which is the use of probabilities to guess how things will turn out for a specific investment or induction, hat is commonly referred to as behavior. You know deductions as forecasts, something all of us make at one time or another based on what we know that could influence what might happen.



Induction is backward looking. How something performed might offer an indication of how it might perform in the future.



Risk can be, more or less quantified, understood or even predicted with a certain degree of accuracy. But behavior is what drives uncertainty both in the marketplace and in your retirement planning portfolio. We second guess ourselves despite knowing the consequences of doing so – lack of savings, inadequate retirement goals, etc. and that creates more uncertainty than is needed.

As I write in the book: “Risk provides the investor with innumerable opportunities. Problem is, we rely on the past to point the way.”

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Suppose you want to calculate the inflation rate and the effect of that rate on that dollar in your pocket. This is important for two reasons, saving too little will create a gap in what your money was actually worth and what is actually is. For instance, suppose the inflation rate was 3%. (This is higher than the current rate.)

Your money will be worth half as much 23 years from now. So that dollar you stuffed under the mattress would only be worth 50 cents. To determine the time for money's buying power to halve, we use the “Rule of 70” dividing 70 by the current inflation rate. See why that rate is so important to the Federal Reserve.

Fees play an important role in our financial decisions and it is important that we know how they impact our savings and investments. Fees usually come with investments such as mutual funds (which have both fees and expenses) and variable universal life insurance policies (loading and expense charges). To calculate the impact of those fees, divide 72 by the fee.

Simply divide the number 72 by the fee to determine when the policies value will be cut in half compared to an investment without fees.

You can use the “Rule of 72” provides a good approximation for annual compounding, and for compounding at typical rates but those approximations become less accurate at higher interest rates – above 10%.