Personal Finance FAQ

Learning From Your Mistakes – Why Credit Card Fees Aren’t the Same as Stocks

Pile o' mail
There’s a lesson hidden in this stack

“An expert is a person who avoids small error as he sweeps on to the grand fallacy.”
–Benjamin Stollberg

When I first got out of college, I rebelled against the system. For four years, I’d been forced to keep my room clean, straight, and spotless, and was subject to unannounced inspections. Failing those inspections could have meant I’d lose the privilege to leave West Point on weekends (freedom to travel was a privilege at West Point), so, despite my inner tendency to be a packrat and a slob, I managed to survive all four years without demerits based on the (lack of) cleanliness in my room.

So, upon obtaining freedom from inspections, my pendulum swung a long way in the other direction. I was still clean, but I was definitely disorderly. One of my worst habits was letting mail pile up. For weeks. I had other things to do in my spare time, like watching television and sleeping, so I couldn’t be bothered with the hassle of mail.

This habit lasted for a couple of months until two things happened: 1) my Mom made fun of me for having a pile of unopened mail – this would provide her with ammunition for ridicule for years, and 2) I got late fees on credit card bills because I was late in paying them.

Scorn from your mother is one thing. Shelling out additional money to Visa is another matter entirely.

Learning From Our Financial Mistakes

Two papers outline how people learn from their financial mistakes. Sumit Agrawal et al from Harvard describe how negative feedback from credit card fees, like the ones which spurred me back into a responsible adult life of opening up my mail on a somewhat regular basis, teach people not to make the same mistakes. In their study, fees fell by about 75% in the first four years that people held their credit cards.

Meanwhile, Steffen Meyer et al from Goethe University in Frankfurt studied investor behavior to determine if investors performed better as they got more experience. In this study, the benefit of investor experience was mixed. Investors learned to reduce the frequency of trading, but they still did not appropriately diversify, and they were prone to suffer from the disposition effect – selling winning stocks too quickly and holding on too long to losing stocks.

What Can We Easily Learn?

When looking at the two papers in conjunction, a pattern emerges. It’s the same one that Malcolm Gladwell discussed in his book Blink. Among other trends that Gladwell discusses, he posits a rule which states that in order to become an expert in something, you need to spend about 10,000 hours working on it. Soccer players don’t get good overnight. They practice. Overnight sensations are usually revealed to have put years of effort into something before they were good enough to be “suddenly” discovered. The story repeats itself over and over again.

Why do we learn from credit card fees and from overtrading, then? The answer is that the lessons are simple. They are not difficult to learn. Pay late: get fee. Trade a bunch: pay high commissions. Even Monkey Brain can understand those lessons. So, Monkey Brain goes cowering off in the corner of your mind, waiting for another opportunity to strike.

The Meyer paper, though, shows that, despite experience, the average investor still doesn’t perform much better than the inexperienced investor. It’s because the rest of investing is not simple. Trying to pick stocks which are going to go up is not a simple, sit down for 10 minutes a day type of activity. It takes a lot of data and a lot of analytics to be able to separate the winners from the losers, and even then, there are myriad other factors which the analysts cannot control that may affect the stock’s price. Remember, between 2001 and 2011, 57% of actively managed funds underperformed their indices. If the pros fail more than half the time, why would the armchair quarterback investor do any better?

Not only do we have trouble learning difficult tasks – no surprise there – but we also forget the simple rules over time if we’re not reminded of the penalties of failure. The Agrawal study showed that there was about a 10% decline in learning each month, meaning that even if someone paid fees previously, they were likely to pay fees again in the future as the memory of the pain of paying the fee became more and more distant.

Don’t Let Monkey Brain Make Your Mistakes for You

What can we do to make sure that we don’t suffer the same fate as the people studied in the two articles I cited?

  • Automate everything you can. When we have to make decisions over and over again, we suffer from ego depletion. Once we have suffered from ego depletion, we start not to care about things and we make mistakes. This includes mistakes like letting mail pile up and not paying our credit card bills on time. It can also mean automatically investing in diversified index funds across different asset allocations.
  • Don’t try to be an expert in everything. As Gladwell covers in depth in his book, it takes a LOT of time to become an expert in something. You simply don’t have enough time in your life to become an expert at everything. Focus, instead, on the things which matter, and try to simplify everything else in life.
  • Set reminders. Is the credit card bill due on the 15th of each month? Set a calendar reminder on the 8th to make sure that the bill got paid. Put systems in place which do the thinking for you so that you don’t risk letting Monkey Brain make decisions.

Nowadays, I don’t let mail pile up for too long. I don’t check it every day, but it doesn’t sit there for days. My wife wishes that I wouldn’t let other things pile up as well. Maybe she and Monkey Brain should have a talk.


Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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