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“Past Performance is No Guarantee of Future Results…”

Anyone who has studied a document which illustrates the financial returns of a particular investment is most likely familiar with these words. The regulatory bodies require this disclaimer to be included with any reporting of investment results. While the regulators seek to prevent unscrupulous sales personnel from overpromising results, these words also sum up our next behavioral finance bias. Recency bias has caused many an investor to be disappointed with their selection of a particular security.

We Only Listen to What We Want to Hear…

One common bias that investors must overcome is known as confirmation bias. It comes into play after we have researched and analyzed a potential investment and made a decision regarding its relative merit. If our impression is that the investment is worthy of purchase and do so, confirmation bias will cause us to only seek out additional information about the investment that confirms our initial positive opinion. Likewise, we will ignore or downplay any new information that contradicts our initial impression. Confirmation bias also works against us when our first research conclusion is negative. If we initially decide not to make a purchase, we will continue to seek out only information that reinforces the original negative assessment. 

Reference Points Present Challenges

Behavioral finance researchers have noted that many of our financial decisions are based on “reference points”. Numerous experiments have been conducted which validate the concept that we make decisions based on a previously identified number. For instance, we may have difficulty deciding if $100 is a fair price for an item #1 if we are initially given no other information. However, if we are shown a similar item and told that its price is $200, we become much more likely to state that the $100 item is fairly priced. This belief occurs even though we have received no additional information about item #1. Surprisingly, this is true even when people know the initial item’s $100 price was merely a random amount.

Being Human Can Work Against Us

This quarter we will examine the field of behavioral finance. Classical economists believed that people, driven by their self-interest, would naturally behave in a rational manner. Observers of human behavior challenged this belief in many areas and especially with respect to personal finance. By combining the study of finance with human psychology, the field of behavioral finance was born. Most notably, behavioral economists believe that our inherent biases as human beings inhibit our success as investors.

What Are the Characteristics of Sound Tax Policy?

As our quarter’s focus on taxes comes to a close, we will step back from the details and examine our overall system of taxation. Some Americans believe the only sound tax policy is the policy that minimizes taxes. However, most of these same people would be appalled at the devastation that such tax policy would wreak on our schools, roads, parks and military. So, dismissing this extreme position leads us to accept the fact that taxes must be levied and a more relevant question might be the consideration of the factors that make for a sound tax policy.

What Is The Goal of Tax Planning?

Many people believe that the goal of tax planning is to arrange one’s financial affairs in order to minimize federal income taxes in that particular year. While such activities can be productive, they may create a case of “winning the battle, but losing the war.” Trying to minimize one’s lifetime tax bill is usually a better objective, even though it may raise income taxes in the short term. Consider the early years of retirement as an example.  

Do People Really Vote With Their Feet?

Conservative politicians often claim that migration patterns within the United States are influenced by the taxing policies of the various states. If this claim were true, people would be expected to be leaving higher tax states and they would be losing population. Conversely, lower tax states would be gaining population as the number of people moving in would exceed the number moving out. Is this true?

How Do Your State Tax Rates Compare?

Federal income tax rates attract a great deal of attention. This is to be expected because our federal income taxes are the largest tax bill most of us will pay. However, state taxes are also significant and they come in multiple forms. How much will the average American pay in state levies? Which state extracts the most from its residents?

“Should Corporate Tax Rates Be Restored to 2017 Levels?”

One of the tax increases proposed by the Biden Administration would restore corporate tax rates in the U.S. to 28%. This was the level they were at prior to the Tax Cut and Jobs Act of 2017, which lowered rates to their current 21%. Regardless of one’s beliefs on the merits of the spending proposals, it is clearly worthwhile to be aware of how our corporate rates stack up against the rest of the world. Our corporations must compete with others based outside the United States and many would argue that there should be a “level playing field”.