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Sarah Newcomb: 'I Love Rules of Thumb'

The director of behavioral science at Morningstar discusses the value of smart shortcuts, why social media makes people feel bad about themselves, and how the pandemic changed how Americans save and spend.

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Our guest on the podcast today is Sarah Newcomb, director of behavioral science at Morningstar. In her role she works to integrate the findings of her research into Morningstar financial management applications and tools. Before joining Morningstar in 2015, Sarah earned her doctorate in behavioral economics from the University of Maine, where her work focused on the psychological barriers to sound personal money management. She's the author of Loaded: Money, Psychology, and How to Get Ahead Without Leaving Your Values Behind. Sarah also holds a bachelor's degree in mathematics from Salem State University, a master's degree in financial economics from the University of Maine, and a master's certification in personal financial planning from Bentley University.


Financial Education

"Smart Shortcuts for the Good-Enough Investor," by Sarah Newcomb,, Sept. 3, 2019.

"Can a Rule of Thumb Be a Shortcut to Financial Well-Being?" by Samantha Lamas,, Jan. 25, 2021.

"Keeping it Simple: Financial Literacy and Rules of Thumb," by Greg Fischer, Alejandro Drexler, and Antoinette Schoar,, July 1, 2010.

"Making the Science Practical: Behavioral Interventions in Practice," by Sarah Newcomb and Benjamin Cummings,, January 2019.

"A Simple Plan for Financial Independence," by Sarah Newcomb,, Oct. 15, 2019.

"The Complicated Art of Making Things Simple," by Sarah Newcomb and Samantha Lamas,, May/June 2017.

"Sarah Newcomb: Understanding a Client's Money Mindset in Order to Maximize Their Well-Being," The Human Side of Money podcast with Brendan Frazier,, March 17, 2021.

"Encouraging Action Through Design and Testing," by Sarah Newcomb,, April 29, 2015.

"Don't Give Up on Financial Literacy Efforts,", Feb. 8, 2020.

"Money Doesn't Buy Happiness, but Power Might," by Sarah Newcomb,, Jan. 13, 2017.

"Coaching Clients to Teach Their Kids About Investing," by Sarah Newcomb,, Jan. 21, 2020.

"How to Start Teaching Your Kids About Money," by Sarah Newcomb and Samantha Lamas,, Aug. 4, 2018.

"What Is Mad Money?" by Keonhee Kim,, April 6, 2021.

"John Lynch: Rethinking Financial Education," The Long View Podcast,, Dec. 11, 2019.

"Overcoming Clients' Behavioral Biases Using Nudges, Smart Heuristics, and Behavioral Coaching," by Michael Kitces,, March 24, 2021.

"Separating 'Needs' From 'Wants' Could Be Harming Your Financial Planning," by Bill Keen,, June 2, 2021.

Financial Wellness and Tools

"5 Financial Signs to Check Your Financial Independence," by Sarah Newcomb,, Jan. 16, 2020.

"What Makes People Happy?" by Carla Fried,, April 15, 2021.

"Neighbors of Lottery Winners Are More Likely to Go Bankrupt," by Leslie Albrecht,, Oct. 21, 2018.

"An Innovative Way to Face Retirement," by Emily Brandon,, Jan. 14, 2103.

"Is Instagram Making You Poor?" by Sarah Newcomb,, Oct. 18, 2018.

"How Stories Drive Financial Behavior--and What to Do About It," by Sarah Newcomb,, Sept. 14, 2020.


"Year in Review: Pandemic Edition," by Sarah Newcomb,, Dec. 3, 2020.

"Sick of Uncertainty? Read This," by Sarah Newcomb,, Nov. 3, 2020.

"It's the End of the World as We Know It," by Sarah Newcomb,, Oct. 8, 2020.

Behavioral Finance


Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak chief ratings officer for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance and retirement planning at Morningstar.

Ptak: Our guest on the podcast today is Sarah Newcomb, director of behavioral science at Morningstar. In her role she works to integrate the findings of her research into Morningstar financial management applications and tools. Before joining Morningstar in 2015, Sarah earned her doctorate in Behavioral Economics from the University of Maine, where her work focused on the psychological barriers to sound personal money management. She's the author of Loaded: Money, Psychology, and How to Get Ahead Without Leaving Your Values Behind. Sarah also holds a bachelor's degree in Mathematics from Salem State University, a master's degree in Financial Economics from the University of Maine, and a master's certification in Personal Financial Planning from Bentley University.

Sarah, welcome to The Long View.

Sarah Newcomb: Thank you. It's great to be here.

Ptak: So maybe we'll start off with financial literacy, which I know is a key area of interest for you. You've noted that rules of thumb really work in financial education. What are some examples? And why are they so useful in your opinion?

Newcomb: I love rules of thumb. I think for the most part, we need to work with the way our brains work rather than against them. And we tend to take the complex and distill it down to the very simple, and so rules of thumb work with the way that our brains like to work.

One of my favorite examples of studies in the rules-of-thumb area was an experiment that was done with small business owners in, I believe it’s, Central America. And what they did was they split them into two groups, and one group was given a basic accounting course. And the second group was given just a bunch of rules of thumb for accounting. And then the next year, guess which group performed better on their accounting tasks? It was the rules of thumb group. And part of the reason is because rules of thumb are memorable, and they're general and flexible. And we can often take them into more than one circumstance. Where we learn exact equations, those equations only are fitting in very specific circumstances. And so, rules of thumb tend to be more general, more flexible, more memorable, and therefore they're more useful. So, I think that for most financial decisions, yes, there are some where exactitude is important, but most financial decisions can be solved with general rules of thumb as long as you're applying the right rule to the right circumstance.

Benz: What are some examples in personal finance where a rule of thumb might be useful?

Newcomb: I think some really simple ones are things that probably most people will be very familiar with: things like keeping your debt-to-income ratio below 30% so that you can get good interest rates and have your debt be manageable, and not overwhelming. Things like saving at least 10%. Putting general rules around the amounts that you're putting toward the past and the future, I think are really helpful. Things like, I mean, there's a typical "100 minus your age" for equity investment rule of thumb, which I think a lot of financial advisors balk at, but it's at least a starting point. It's at least a place to say, look, this is better than throwing a dart at the board. And lots of times what rules of thumb can do is get us started thinking about a problem and at least get us moving forward.

So, I think rules of thumb can be especially helpful in situations where there's a lot of information that's complex, and maybe not enough time to really digest all the information. Heuristics and rules of thumb are what our brains use to make good enough decisions, when we have constraints on our time, or the amount of information we have available to us or the amount of information we can process. And they're really applicable when you're in a situation where there's too much information or not enough time, or both. So especially when it comes to things like looking at comparing funds and comparing lots of complex attributes of different investment strategies to put into your portfolio.

A lot of times one of the things I love about Morningstar's work is our star ratings, our moat ratings, our globe ratings, our carbon leaf ratings--these are all rules of thumb. They take the very complex financial analysis and fundamental analysis of the company's balance sheet and business practices and distills them down to something that's digestible, memorable and useful. And so I think that those ratings are great rules of thumb to be able to say look in the absence of being able to understand every single bit of information and read all the prospectus on everything, you can say I'd like a fund that has five stars and a wide moat and five globes. And you're going to make a good enough decision in that situation. And we often focus on trying to make absolutely the optimal decision, when really what we need is to be able to make a good enough decision and be happy with that.

Ptak: That's a good segue to the next question we had, which is the financial-services industry and its tendency to try to optimize portfolios and financial decision-making, which is laudable in a way, but do you think it's gotten in the way of some of these rules of thumb taking hold? We're often surprised, for instance, about the amount of criticism that good quality target-date funds come in for among financial-services professionals, for example. So, do you think that the financial-services industry allows perfect to be the enemy of good, with good being some of those rules of thumb that you mentioned?

Newcomb: I really do. And I understand it as well. I'm a math person. I love numbers, I love the problem-solving, the puzzle aspect of trying to come up with an optimized investment strategy. And I know that because this involves math, a lot of us that are numbers-oriented want to be able to find that perfect solution. But there's a psychological reason why this optimization is actually not a great approach. And there's been some really interesting research into these different attitudes toward selection. And one of them is called maximizing, the "maximizing mindset" and the other one is called "satisficing." And what research has shown is that maximizing is all about trying to find the optimal choice, selecting the optimal choice for you. And we can do this in every domain of life from finding the perfect investment vehicle, or the perfect mate, the perfect restaurant, whatever it is, we try to optimize and maximize our well-being, maximize the utility that we're getting from something. Maximizing is looking for the best.

Satisficing is a totally different approach that sets sort of a standard, a bar above which, as long as the option that you're looking at meets or exceeds this particular standard that you set, you will be satisfied with the outcome. And what research has shown repeatedly is that people with a maximizing mindset often make an objectively better decision than the satisficers do. So, they do end up choosing the better option in the end. But when they're measured on satisfaction, on confidence in their choice, and on measures of things like depression, and overall well-being as related to the choice, maximizers are less happy with their choice than satisficers, even though they've objectively made a better choice. And part of the theory here is that what happens with a maximizing mindset is that you get so fixated on finding the perfect thing that you're never satisfied. Whereas if you have a satisficing mindset, the challenge is to set your standard of satisfaction high enough that you truly will be satisfied. And then beyond that, you stop searching for a better alternative.

So, I think to put this in a little bit more concrete terms, let's say you speculate on a company you think is really poised for growth, and you invest in that company. And it returns 400% return in the first year. Are you satisfied with a 400% return, or are you concerned with well, how high can it go? And a maximizing mindset won't be able to sell a winner, because you're fixated on getting the absolute most return you could possibly get. And so, you get fixated on timing the top. Where a satisficing mindset says, look a 400% return is a great return on my money. I'm going to take that and find another bargain somewhere.

Benz: I know that you're super-interested in the topic of financial education and helping people learn about investing in personal finance. I wanted to ask what you think about the stock market game that a lot of schools use to teach students about investing? Do you think that's productive? Or should they be doing something else to help kids get information and help them get engaged?

Newcomb: I have a lot of mixed feelings here. I know the people that run the stock market game, and I think that they are--it's a laudable effort, and I think there are some pros and some cons to it. The pros are that it definitely gets kids interested, and it makes the stock market feel accessible and fun to them. That's great. The cons are that when you think about it, the way the stock market game works is it's generally a one-yearlong competition and whoever gets the highest return wins. And so, what you're teaching them to do is to chase short-term returns. Because the team that wins is most likely--the best strategy for short-term returns is speculation, not long-term investment. You want to speculate and buy penny stocks and hope that you get a 5,000% return in that year. And you don't learn the benefits of long-term fundamental analysis when you are focused on chasing one-year returns.

It's difficult, though, to come up with a really strong alternative that's engaging enough, because with a 30-year timeline, the long-term investment takes a long time to see the payout. And it tends to be very boring in comparison. And I think the challenge for teaching kids or teaching anyone really about the stock market is to contract that 30-year timeline into something short-term so that you can get that adrenaline rush of the payoff without having to wait 30 years for it. But I think that the stock market game and getting kids involved in any kind of investment competition, where the metric of success is returns, and the time frame is short-term, you're setting them up to speculate, not to invest.

Ptak: So maybe to build on your answer there. How do you think do-it-yourself investors can balance their urge to dabble in individual stocks with the need to invest in a way that gets them to their goals? And how can advisors help their clients scratch that itch to pick stocks, while doing what's best for them? Is it reasonable, you think, to maintain sort of that separate "mad money" account?

Newcomb: I think it's a great question. Because the thing is that speculation is fun and legal and can be really lucrative. And it's one thing that really gets people involved in the stock market, is the idea that their money can grow quickly. So, I'm definitely pro speculation, I think speculation is great, so long as you play. The thing is that speculation and investment are two different games. And there's a different set of rules for each game. So, you need to know which game you're playing, and you need to do it responsibly. So long-term investment is slow and steady and fairly boring. And it's not going to give you that adrenaline rush. And many of us who like to see returns and who are impatient and want to see our money grow quickly, are more drawn to picking individual stocks, trying to find that way to get an edge on the market.

And I think having a separate mad money account, that's a reasonable percentage of your portfolio where you can afford to lose that money completely, and you're not going to be kicked off your trajectory toward long-term solvency then I think it's great. And if you make a lot of money speculating, then you've got more money to speculate with. But if you lose it, you're not losing sleep over it. And I think that having that percentage, having your fun money, I call it my gambling fund, it's a separate investment account that I've got set up for picking individual stocks. And it's great because I can scratch that itch. And I can get involved in investing in the things that I think are really exciting. But I'm never worried that I'm putting my financial future at risk by doing that. And if you're speculating with too large a portion of your assets, then you're going to be far more sensitive to the volatility of the stock market, because you're not as well diversified. I do think that it's great to let people play, but let them play with a responsible amount of money so that they're not sabotaging their long-term outcomes for short-term adrenaline.

Benz: Going back to the topic of financial education, we had Professor John Lynch on the podcast a while back, and he asserted that a lot of financial education doesn't stick and contribute to better outcomes because it decays over time, like a lot of education that we receive along the way. Does that jibe with your observation and what do we do with that? How do we change up what we're doing with financial education to address potential decay?

Newcomb: What I think Professor Lynch was referring to are the studies that show the memory decay of concepts after participating in certain financial literacy courses. And I've seen that research, too. And the thing about a lot of mathematical knowledge is like this; a lot of knowledge is sort of "use it or lose it." You can learn a topic, but if you're not actually putting it into practice, we don't remember facts unless they're repeated and repeated and repeated. And so, if you're not using it, then you're going to lose that knowledge. And the sort of use-it-or-lose-it nature of these topics make it very, very difficult to create really effective financial literacy programs.

I don't agree that financial literacy doesn't work, and I don't think that John was trying to say that it doesn't work as a blanket statement. But I do think that we have to pay attention to the teaching approaches and making sure that the ways that we are trying to communicate this information, let's use the knowledge that we have about what does work, and what we're seeing is sticking. And I think we've seen a lot of evidence that just-in-time financial education is really a lot more people are receptive to learning when there is something in their life, there is a financial decision that they're trying to make. For example, if you learn about a lot of different types of mortgages and interest-rate structures in high school, you may or may not remember that when you go to buy a house, depending on how interesting and engaged you were when you took the course. But when you're about to finance the largest, probably the largest purchase you've ever made, you're a lot more open to learning about the ins and outs of different mortgage products.

And so just-in-time financial education takes advantage of the emotional and psychological engagement of the moment and provides just the information that's needed at the right time to be able to then be put into practice right then. So that you do use it, and you're less likely to lose it, because you have put it into practice.

Ptak: As we've been talking about, it's hard not to be compelled by the just-in-time concept, but the question is how realistic it is to insert financial education into point-of-purchase decisions? 401(k) plans are maybe a best-case scenario where the employee generally wants, or I should say the employer generally wants what's best for the employee, but there's no such good actor in many other financial decision-making situations. So, can you think of practical ways that more just-in-time education can happen if it is feasible in some of those scenarios?

Newcomb: That's a really good point. And I think embedded in your question is the reality that we have this interesting situation where the financial services and advice industry is regulated under the caveat emptor framework, which is buyer beware. And so, the onus is on the customer to understand the products that they're buying. And how this sort of dovetails with just-in-time financial education is that people may not understand the math, or the pros and cons, or the different attributes, that are involved in the product-selection process when they're about to, say buy either a security or sign a loan product. In fact, a lot of people don't even think about these things as financial products. It's only in the finance industry that we use that term "financial product." Most people, most of the customers, aren't thinking about products like they're on a shelf and they can compare them by attribute.

What happens is that when people are ripe for learning about a particular financial decision, they will go and seek out information because the onus is on them to understand the products that they buy and the decisions that they make. And who's right there, really eager to give them all the information that they could want, so long as it's bent in their own version of things, is the sellers of those products. And so sometimes we end up with a situation where you have people who are very vulnerable to marketing and to misinformation, being the target of explanations, or basically marketing pitches that seem like they're financial education. So, there'll be workshops that try to teach you about retirement that really are trying to sell you a product. And because they do have some education embedded in them, they can be useful to some extent. But the customer is sort of an easy target for manipulation, because they don't know what they don't know.

And I do think that there are some ways we can get around this, I think that there are already some great solutions out there, some fintech firms that are trying to use things like alerts to monitoring transactions, monitoring things like your credit score. Credit Karma for instance, if they see a change in your credit score, they'll alert you to it. That's a great time to educate people about how to improve their credit score, or what kind of loan products they might qualify for, etc. So, in that case you're using the alert about a change in the person's either balance sheet or credit information to trigger that just-in-time moment for education. But even Credit Karma is trying to sell you credit cards or loan opportunities. You have to question whether the incentives are truly aligned.

I think that we could really, there's an opportunity here for better alignment between the people who have access to really holistic financial data about people, namely banks, who have all their transaction and balance information, and nonprofit financial literacy organizations. If we had some better alignment there, then maybe some of the people who are out there trying to teach sound financial literacy could have more of that, could find those moments through the banks being able to send an alert to someone if there is some behavioral or transactional data that alerts them to a critical moment that might be happening in a person's financial life. Could then surface the appropriate information and financial literacy information that they could use at that moment.

Again, even the banks tend to be commercial. So, we have an issue where there's often a misalignment between the interests of the seller and the interests of the buyer. And there's a huge asymmetry of information. And yet the onus of responsibility is on the buyer, who doesn't know what they don't know. I do think it's a big problem. I also think every problem is an opportunity. And there are ways that I think fintech can come in and be smart about what information they present to who and how. But I do think it's going to take a concerted effort on the part of commercial for-profit institutions that have that data, partnering with people who are trying to get the knowledge into the hands of the people that need it.

Benz: We want to switch over to discuss financial wellness and all that that encompasses. You've been working on a project that aims to help people quickly size up key metrics of their financial health. How are you aiming to get beyond the usual metrics like net worth statements when it comes to gauging financial wellness?

Newcomb: This project has been really a labor of love over the last year for me. I've been trying to figure out a good way to do personal financial statement analysis, much in the way that we look at financial statements of companies and look at things like their price/earnings ratio. I've been asking the question, "What are some key ratios and statistics that we can glean from our personal balance sheets in order to find out how healthy our own financial management is?" And I have some training in personal financial planning and went back to some of that information, the kinds of things that financial planners are trained in.

And generally what we do is we create a balance sheet and a cash flow statement and try to create something like a net worth goal over time, but I think there's so much more that we can look at to help us understand not just where we stand right now, but the trajectory of our wealth, the potential longevity of our wealth, measures of short- and long-term solvency. Some of the things that help us understand not just where we are, but how resilient we may be to shocks and losses. And putting these things into really simple metrics that are easy to calculate and easy to understand. So that we can set short- and long-term goals and track these things quickly over time.

And so, this has been a big project for me. And I've been thinking about it a lot, and most common is this net worth metric, but net worth is pretty meaningless on its own, I mean, what's $1 million? Well, if you spend $40,000 a year, then $1 million is a 25-to-1 ratio, which represents under pretty simple assumptions of inflation and growth expectations. A 25-to-1 ratio pretty much represents, you can retire, you're going to be financially independent, you're not going to outlive your money. But if you spend $200,000 a year, then that's only a 5-to-1 wealth-to-spend ratio, and that's only going to last you six or seven years under the same assumptions.

And so, being able to contextualize net worth into this ratio of wealth to spending is a really simple way to set a goal and say, look, I'm looking for a 15-to-1 ratio by the time I'm 60. Some people have already blown past that 20-to-1 ratio. And if you look at it that way, you might be able to say, well, if I have a 25-to-1 ratio, my wealth will last me 35 years on my current spending, just putting it into context. So that's one thing that I think is really helpful. Another one is looking at the trajectory of your balance sheet. And this is also fairly easy to calculate. What you do is you add up all the interest that you're paying on your debt--not the amount that you're paying down on your debt, just the interest that you're paying, just the money you're paying to own that debt in the first place. And you subtract that from the amount you expect your assets to grow over the next year.

Let's say you've got $100,000, growing at about 7% in a retirement account, so then you're looking at about $7,000 in interest on that account, in a year's time. But if you're paying $10,000 in interest on your debt, then you've actually got a $3,000 drag on your balance sheet because of the way that you've set up your accounts. And this concept of a base growth rate is another really simple statistic that you can calculate to find out before you add to your asset accounts. And before you pay down your debt, if you're just looking at the amount that your assets are earning in the accounts that they're currently in, invested as they are currently invested, and just the amount that you're spending on interest. Then, if you have a negative base growth rate, that's an immediate red flag that your debt needs attention. And so, before you go and invest more, you should probably either refinance some debt, or move some assets to pay down that debt, or somehow get that base growth rate to positive before you even start to add more to your assets and pay down your debt.

It's a way of finding out, is your balance sheet in balance? If you do nothing, is it going to grow, or shrink? And I think it's a really great way to look at that underlying health of your balance sheet. And it's two very simple numbers to calculate. And you subtract one from the other and you've got this very illuminating statistic. So those are the kinds of things that I've been scouring the Earth for, to try to find the things that we can use to illuminate our personal finance, so that we can see where we're at, see where we're going, and set some goals and track. If we track these simple metrics over time, we'll make better decisions than we would just by looking at our net worth.

Ptak: One challenge for everyone in the financial planning and investment space is getting people to prioritize the future. Are you compelled by research that shows getting people to empathize with their future selves works, for example, by showing them images of what they might look like later in life? Are there any tools that you could recommend in this vein?

Newcomb: Yes, so I have done a lot of research in this area and been inspired by some great academic researchers in this area, Hal Hershfield, Gabriel Edington, and some others. What I've seen in my own research is an extremely strong connection between how far into the future people tend to think and plan, and how much they have saved or acquired in assets. And when you think about it, it's kind of a no-brainer. If you want to be investing for the long term, you need to be able to think long-term. But we're not all naturally long-term thinkers. Some people are blessed with that as a trait, and they are naturally thinking 10, 20 years ahead, and those people are going to tend to be better planners and better savers than people like me who naturally think just a very short period of time ahead. And if you're only thinking a month into the future, what happens is that your discount rate--this has been connected in many studies, that people who are short-term thinkers have a higher discount rate--we have higher levels of present bias, which means that we are less likely to actually feel that we discount the cost. If we get the benefit today, then we overvalue the benefit in our mind's eye compared to the cost down the line, which we shrink in our mental estimation.

And when you do that mental cost-benefit analysis, the benefit of a small amount of money today feels a lot more than the benefit of a large amount of money in the future. Because the future is so far off in our mind's eye, that it's like a landscape painting, we shrink everything down. And we see it as small in comparison to this up-close benefit that we're getting right now. And that effect, we all have that effect in our brains to some extent. But people who are short-term thinkers, it's more pronounced, we have a higher discount rate. And for people who are naturally short-term thinkers, training our mind to think further ahead, training our brains to think further ahead and to see into the long view, can be an extremely valuable habit of mind to cultivate.

Now, naturally, long-term thinkers don't need to do this, because they're probably already doing it. But this is especially useful for people who are short-term thinkers. And most of the research that's been done in this space has been done on college students who are young, and the research shows that your mental time horizon does elongate naturally with age. We tend to think further ahead as we get older. But the problem is that by the time we're naturally thinking about retirement age, sometimes for those of us that weren't thinking far ahead in the future, it takes us too long. We're already in our late 30s or 40s by the time we're concerned about retirement, and at that point, it may be too late to catch up. And training your mind to think further ahead as soon as possible is an extremely efficient use of resources, because it doesn't cost anything. It's very simple and it's very effective. But, how to do it?

There have been some tools that were developed to do this. Hal Hershfield teamed up with Merrill Lynch a few years back, and they created, it was Merrill Edge, they created this thing called “Face Retirement,” where you would take a photo on your webcam, and it would age-progress it. And it was cute, and it showed you some stats about retirement and I don't know if it's still up or not. I don't know how effective it was. The graphics were definitely in the uncanny valley where it was a little bit creepy to look at this future version of yourself staring back at you. But it can be very effective, because what it's doing is, it's shrinking that psychological distance in your mind's eye and it's making the future seem more real, more detailed, and therefore, our brains translate it as more likely. And so those of us who are not naturally inclined to think in the long term, interventions like age-progressing your face can help sort of jump-drive that or jump-start your imagination to seeing the long term.

But you don't really need tools. All you need is to think a little bit further ahead than you normally do. If you're normally planning about a year out, then maybe think about five years out. And what you want to do is really infuse your picture of your life in that time period with as many concrete details as possible. Because what happens when we think about the future, the further something is out in our mind's eye, in time, the more we will see it, we paint with a broad brush. So when we think about things that are close up, we see the details, we think about the concrete things, the things we have to do, the how of what we're doing, when we think about something that's far off, because we know that there's uncertainty involved, we paint with a really broad brush. And we see things sort of abstract. A lot of people think about retirement and they think, oh, yeah, I just want to relax in retirement.

Well, what's far more useful is to go way beyond saying I want to relax in retirement and to get really specific. Think about a day in your life. Where do you want to be living? Is it in a house, a condo, is it in the country, is it in the city? What are you going to be doing with your time? How will you fill a typical day? And really think through it. Financial advisors have been taught to do this with clients since the beginning of the profession. What science is doing now is sort of filling in the, Why does this work? And the reason why it works, the reason why infusing your picture of the future you and your future life with concrete details helps you to be more long-term oriented, is because it helps shrink the psychological distance between the known today and this far-off future that feels very abstract and unknown. And the better you can see it, the more likely you are to plan for it, because the more emotionally engaged you'll be with it, and the more your brain sees it as a reality. So short-term thinkers have got to learn how to think about the long term in great detail. Long-term thinkers are probably already doing it, so just keep it up.

Benz: You wrote a piece entitled, "Is Instagram Making You Poor?" for Psychology Today, a few years ago. So how do social media and comparing ourselves to others work against our ability to save for the future and even think about the future?

Newcomb: Social comparisons is a big topic. We all know that keeping up with the Joneses is a huge resource suck on many people. But it can be difficult not to do it because we're social creatures. Social comparison theory states basically that we all need to know sort of where we stand. We want to know, how are we doing at this life thing? And when we don't have an objective measure by which to judge ourselves or our progress, what we do is we look around us for a similar other to compare ourselves with. And this is such a natural inclination that we don't even notice ourselves doing it. And when we compare ourselves to others, I wanted to know how social comparisons were affecting people's bottom line. And so, I did a number of surveys, asking people about who they compare themselves with, how often, whether they're comparing themselves with people they think are higher on the socioeconomic ladder or lower. And then I asked a series of questions about their financial well-being. So specifically, I was asking them about their emotional experiences with money, how often they felt joy, peace, satisfaction, and pride, versus how often they were feeling anger, stress, helplessness, and anxiety with respect to their money.

What I found in analyzing the results of this was that first of all, most people are comparing themselves financially--no big surprise there. And in every income group, most people are comparing themselves with those that they believe are better off. Not everyone, but more than half of the people in every income group are looking up the socioeconomic ladder when they compare themselves. And then I looked at the correlation between that upward comparison versus downward comparison and the emotional experience with money. And it was no big surprise to me to find that the people who were comparing themselves with those they thought were doing better, were experiencing more stress, lower satisfaction, and not only that--they were spending more and saving less, because they were trying to reach that higher level or live the lifestyle that they were looking at and admiring.

We end up with a situation where this need to compare ourselves may actually be driving us to lower financial health, because the people that we tend to compare ourselves with are doing better, and so the natural comparison makes us feel bad. And in order to deal with that psychological pain, some people spend in order to try to achieve the lifestyle that they're admiring of the person higher up the ladder. There was, however, in this research, a very interesting finding, which was that who people compare themselves with made a big difference in one particular category. There was this one little group of people that said, they compare themselves not to their friends or families or neighbors or celebrities, or even themselves at a previous time in life. All of those people who were making those comparisons, which was the vast majority followed this pattern, where if they looked up, they felt bad; if they looked down, they felt great. And most of them were looking up and therefore feeling bad.

This one little group compared themselves with a financial role model--specifically a financial role model. And they, regardless of whether they were looking up or down the socioeconomic ladder at that role model, they were feeling consistently more financial satisfaction, regardless of their income level and regardless of which way they were looking up the ladder, up or down the ladder.

And it really, I think, illustrates the difference between what I would call evaluative comparison, which asks the question, “Do I measure up right now?” And aspirational comparison, which asks the question, “Can I follow in their footsteps and be where they are in the future?” Which you may have noticed is a future-oriented question. And so, it also ties into that long-term view. But when we look up the socioeconomic ladder and compare ourselves with people that we think are doing better, we may think we're being aspirational in doing so. But if the question you're asking yourself is, “Do I measure up?” And you're looking up the ladder, of course, the answer is no. You don't measure up because you're choosing a target that's doing better than you are, at least you think they are--you can't see their debt.

But those that choose a financial role model, don't ask that question, “Do I measure up now?” They're looking at someone who, who has made decisions that they want to emulate, and they're asking, “What can I do to be more like them? How can I follow in their footsteps?” Then you can say no, “I don't measure up now, but that's OK, because I can do what they've done.” And that's the difference between aspirational, true aspirational comparison, which can be very healthy and adaptive and motivating, and evaluative comparison, which is maladaptive and unhealthy and demotivating.

Ptak: Let's shift and talk about the pandemic. Some consumers were able to use the pandemic period as an opportunity to repair their household balance sheets. American savings rates soared, especially in the early part of the pandemic. The question is, how can those consumers hold on to those healthy habits, even as the economy has opened back up, and there are more spending opportunities? What do you think?

Newcomb: I was so happy to see that finally Americans were saving, but it took a crisis. And I think there's a couple things we have to try to remember, in order to hold on to this new habit of saving. First of all, remember how scary it is to realize you don't have solvency--the state of people's emergency funds in this country are atrocious. We all have probably been exposed to one stat or another that you know that the majority, or at least 40% of Americans, couldn't come up with $400 at a moment's notice without borrowing it from someone or going into debt or putting it on credit. That is a very alarming statistic, because what that means is that we walked into this pandemic largely insolvent. Many, many, many households don't even have short-term solvency and you can't even think about long-term solvency without short-term solvency.

When people are afraid, they save, and then when they're not afraid anymore, they spend. And I'm all for consumer confidence, I think that's great. I'm not anti-spending. But I do think that we have to first of all remember how scary it is to not have solvency, remember how scary it was, if you were one of those people that decided you absolutely needed to start saving, and you wished you had been doing it all along. Try to remember that feeling, because you don't want to be there again, and you don't have to be there again. Then on the other hand, really holding on to that feeling of how good it feels, to have a bit of solvency, to have some slack, to have some security. I generally don't talk about emergency fund in those terms--I think of it in terms of months of safety. How long could you go on your liquid assets, if you lost your income today, just with the money that you could get your hands on in a week or less with no penalties? How long could you maintain your current lifestyle before you'd have to make changes? That's your safety net. It tells you how much freedom you have to be able to handle a shock, or to rebuild after a shock, or to make a major transition.

And I think that what the pandemic really exposed for many people was a basic need for solvency. And I hope that we will really emotionally remember how it feels to be insolvent, and then start to really appreciate how good it feels to be solvent. Because those of us who are not saving enough--which you know, listeners to this podcast probably are great savers--but maybe you know someone who's not a very good saver. Generally, it's because saving doesn't feel as good as spending. We do things that feel good to us, we do cost-benefit analysis all the time. And if what you choose is to spend, then that's because spending won out in your mental cost-benefit analysis. The emotional, the nonfinancial benefits outweighed the financial costs. And your overall utility of spending in your mind's eye was greater.

So, in order to keep this habit of saving, we have to love saving, we have to like the feeling of having money more than the feeling of spending money. I think really leaning into that--many people don't, they feel like it makes them greedy, or somehow we have all these negative connotations around money and greed in our society. And the idea of really sort of savoring that feeling of having money can feel very strange and even bad to some people, especially those who haven't had money. And I think just really leaning into the feeling of security and stability and peace of mind that having money brings, to help you to counter the temptation to go and get the short-term payoff of that new thing that you want. I'm all for spending so long as you maintain that solvency that allows you to sleep at night, and to think long-term and to bounce back when there's another shock, because there will be one.

Benz: What inning would you say we're in, in terms of behavioral science and psychology permeating the investing and finance areas?

Newcomb: I think I would say maybe the fourth or fifth inning. We've gone through periods of establishing the models of behavioral economics as both psychologically and empirically valid. We've gotten the message out that these models of decision-making work and are often more accurate than our rational choice models. And the field has gained notoriety, the academic journals have expanded, and there's more respect for the field both in academia and in the private sector. I think that there's a widespread knowledge now of behavioral science as a field of some of the major models and concepts of behavioral science. So, we've sort of permeated the landscape of finance, but I think that we still have a long way to go in terms of maturing as a field and specifically coming up with proven solutions.

Behavioral science has a lot to say about how we deviate from rational decisions, has a lot to say about how we make maybe imperfect decisions, or how we can get in our own way financially. But we have very few proven methods for solving these things. These are difficult problems to solve, because the work required in order to create proven solutions, it involves field tests in the wild of actual financial interventions and psychological interventions. And a lot of people are--it's very hard to get access to the kind of data that is necessary to perform these studies, because a lot of people don't want their financial information to be exposed to researchers, people are loath to be experimented on, they don't want to be part of the trial, they want only the proven solution. And so a lot of the companies that have the data that the researchers need in order to create these randomized control trials that will allow us to create proven solutions, there's a lot of barriers to getting that data into the hands of researchers, to getting the types of interventions that might help to be tried and validated.

Some of that work is being done. But it would go a lot faster if there was more of an appetite for trying new things. It's just difficult. It's difficult, in the intervention space, in the solution space. We've got a lot of things that maybe work in the lab with volunteers and college students, but that doesn't necessarily mean that it works in real life with all the other types of noise around us in decision-making. I think that we still have a long way to go to mature, and to be able to provide real solutions beyond just explaining the problem to people.

Benz: Behavioral finance researchers like Daniel Kahneman and Richard Thaler have become celebrities in the financial industry over the past couple of decades. Are there any researchers whose work you feel is underappreciated relative to its importance?

Newcomb: I do. Yes, I think I have got to shout out to Gerd Gigerenzer. He is a contemporary of Thaler and Kahneman and Cass Sunstein. And his work, he's got a great book that is about, it's about smart shortcuts is what I call them. And I did a series a couple years back on Morningstar about simple shortcuts that make us smart. What Gigerenzer, the point that he's trying to make and the bit that he's bringing, the angle that he's bringing to the academic and public discourse on the topic of behavioral finance, is that heuristics are actually in many cases, adaptive strategies for making good-enough decisions under the constraints of time and information that we have to deal with. And heuristics are our beautiful brain's wonderful way of being able to make really good decisions when we don't have enough time to process all the information, or we don't have enough information to really assess the problem. We can still make a good-enough decision with some smart heuristics.

The issue is that when we misuse heuristics--and heuristics are rules of thumb, they're the simplifications that our minds create in order to make fast decisions under uncertainty and time constraints. And so, heuristics can be very adaptive, they can be very beneficial, but they can be maladaptive in two specific cases. First of all, when taken to an extreme, they can, anything taken to an extreme can be maladaptive, but heuristics either used in the wrong situation, or taken to an extreme can lead to biases, and biases are really the things that are the enemy of good choices, not heuristics themselves. So Gigerenzer I think deserves a lot more notoriety and should be getting a lot more play in the media because he's really, I think, illuminating how we can work with heuristics to make really great choices. Instead of trying to turn ourselves into robots by figuring out all the ways that we're irrational and then trying to be more rational. I think it's much easier to work with our brains rather than against them.

Ptak: There's been a lot of interest in the investments and financial-services industry, in customization, for example, services that allow investors to customize a portfolio based on their preferences, which can include ESG preferences or their tax circumstances. Can you discuss what you see as the pros and cons of that kind of customization from your standpoint? It seems an investor might be more likely to stick with a customized portfolio, but are investors in a good position to understand the trade-offs of some of the choices they're making, for instance, by removing all the energy exposure from their portfolio?

Newcomb: I'm generally pro customization, I think it's great to be able to align the portfolio with the person. But again, I want to go back to this idea of the maximizing versus satisficing mindset. Where if you're so focused on getting the perfect portfolio for you, you might end up really in a situation where you're paralyzed and can't pick one. I think that customization to an extent is great but understanding the limits that if we go too far down the bespoke portfolio rabbit hole, you can end up with trying to overfit the portfolio to the person.

And, our preferences are not necessarily stable. What we want is, is for our portfolios to match the things that we care about deeply, the things that, the goals that we want to achieve. And yes, someone may be more likely to stick with a highly customized portfolio. But I think what really it comes down to is that we're a lot more likely to stick with an investment strategy that we understand. Because then when moments of uncertainty and volatility happen, we can look at the investment strategy that we've chosen. And if we understand it, if a client can explain the overall strategy of their investment portfolio, in their own words, not your words, but their own words, then they truly understand it. And when they understand it, their confidence in it is going to increase and when their confidence in it is higher, then they're more likely to stick with it.

It's not so much that they want it to match them perfectly. It's that they need to understand it and believe in the strategy so that when things get rough, and they will, they can hold tight to that strategy. If someone doesn't fully understand the strategy, then when they start losing money, they're going to doubt the validity of that strategy. And I think that transparency, financial education, teaching people why you're investing, why their strategy is right for them--that's where the magic really happens. So much of the financial advice industry seems to be relying on trying to blind clients with all this knowledge and techno speak. And we obfuscate where we should be simplifying. What really is valuable to people when it comes to a financial plan or an investment strategy is the confidence that they know that they've made good decisions.

And so that comes from understanding, not from just trusting someone to be smarter than them. That doesn't help them stay in when things get hard. What helps is if they themselves really understand. So, I think that it's interesting, because I feel like I'm in an industry that loves to use big words and complex equations, and I'm here saying we need to think about feelings, and we need to simplify everything. But I think it's really true. We make so much out of the math and we forget that, our lives do not revolve around our investments. It's the other way around. And, if people can trust that they've made sound--that their investment portfolio was made on sound principles that they understand, then they're going to be able to stay with it when it gets tough.

Ptak: Well, Sarah, this has been a very enjoyable and illuminating discussion. Thanks for sharing your time and insights with us. We really appreciate it.

Newcomb: I really appreciate you having me.

Benz: Thanks so much, Sarah.

Newcomb: Thank you.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Syouth1, which is S-Y-O-U-T-H and the number 1.

Benz: And @Christine_Benz.

Ptak: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)

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