On May 16, 2007, economist Thomas Sargent accomplished something remarkable in the history of graduation speeches. He gave an address that, rather than flattering the graduates as is so typical, gave them sound advice. And it was so brief, the entire speech could be printed on a single sheet of paper.1Sargent's commencement speech was delivered to graduates of the University of California at Berkeley, where Sargent himself was an alumnus. Recognized for its simplicity, the speech quickly became a favorite among economists and policy experts.Sargent begins by saying, "I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words."He adds that "economics is organized common sense." And then goes on to list twelve valuable lessons it can teach us about human behavior. Read the complete speech here.What you notice right away about Sargent's dozen observations is that most of them don't mention money at all. They talk about incentives, trade-offs, and unintended consequences.For example, he addresses our tendency to think that we know what's best for others. "Other people have more information about their abilities, their efforts, and their preferences than you do." And "In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for the better or worse."He identifies the fundamental reason for government overspending. "Most people want other people to pay for public goods and government transfers (especially transfers to themselves)."And he explains who will end up holding the bag. "When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation."And finally, he explains why it's nearly impossible to predict what global capital markets will do next. "Because market prices aggregate traders' information, it is difficult to forecast stock prices and interest rates and exchange rates."Sargent, who would win the Nobel Prize in Economics four years after giving this address, reminds us that economics is simply the study of human nature—the choices people make when weighing their incentives and available options. In the same way, our personal financial behavior is simply a part of our life.2Knowing this is how we behave, it's important to have strong incentives to reach our goals. We need specific milestones we can look forward to that can help motivate us to stay disciplined and consistently do the prudent thing over the long-term.If you find you're lacking the motivation to save for your retirement or investment goals, talk to your trusted advisor about setting the kind of concrete goals you can look forward to achieving.
Sources:1.http://go.pardot.com/e/91522/lic-personal-UC-graduation-pdf/94bd8m/2162159892/h/NwG-dEsygvkLRci9g1W64c9dWTL2QlsYFw_fhmVSjRg2. http://go.pardot.com/e/91522/wiki-Thomas-J--Sargent/94bd8t/2162159892/h/NwG-dEsygvkLRci9g1W64c9dWTL2QlsYFw_fhmVSjRgDisclosure:The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.