Guest User

August 13, 2026

80 Years of Financial Knowledge in 53 Minutes | #422 (Bill Bernstein)

Guest User

August 13, 2026

William Bernstein was a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history, including The Four Pillars of Investing and A Splendid Exchange. H was also the 2017 winner of the CFA Institute’s James R. Vertin Award.

In this episode, we welcome back William Bernstein to discuss the final book of his longtime friend Jonathan Clements, Money and Me. Bill reflects on Jonathan’s ideas about spending, happiness, retirement, investing, inheritance, and the psychology of financial decision-making, while sharing personal stories that bring those ideas to life.

We explore why material purchases often lose their appeal quickly, why autonomy can be one of the best things money can buy, and how worrying about money can be a greater problem than spending it. Bill also discusses the four horsemen of financial disaster—inflation, deflation, confiscation, and destruction—why diversification matters, and why investors should be skeptical of assumptions about future returns and market forecasts.

The conversation also examines what it means to “win the game” financially, why retirement should be thought of as a verb rather than a destination, and the three foundations of well-being: connection, competence, and autonomy. Bill shares Jonathan’s approach to teaching children about money, the concept of “Omega” as a way to think about spending versus saving, and why the people around us can have an enormous influence on our expectations and consumption.

Key Points From This Episode:

(4:56) Why success can contain the seeds of its own destruction—and the role of competition, organizational hubris, and luck.

(6:15) Why dynastic wealth is so difficult to preserve across generations.

(8:28) A hierarchy of spending: material purchases, experiences, autonomy, and the relief from worrying about money.

(10:54) Why some people continue worrying about money no matter how much they have.

(11:44) Why we are poor at predicting what purchases and lifestyle changes will actually make us happy.

(13:36) How to pressure-test large purchases by considering their downsides and their effect on your time.

(14:20) Why the happiness generated by spending does not necessarily scale with the price of a purchase.

(15:21) The importance of gratitude and savoring small pleasures.

(16:39) The four horsemen of financial apocalypse: inflation, deflation, confiscation, and destruction.

(18:15) Why inflation is the financial risk Bill focuses on—and how investors can blunt its effects.

(19:26) Why relatively inexpensive international markets can still offer optimism for long-term investors.

(21:02) Jonathan Clements’ “investment sin”: slightly overbalancing when rebalancing.

(22:04) What it means to have “won the game” financially.

(24:36) Why a TIPS ladder or annuity can help defuse retirement spending needs.

(25:19) Why the math of financial planning often fails to account for human psychology.

(27:21) Why diversification matters when bad returns arrive at the same time as bad circumstances.

(28:20) The challenge of variable spending in retirement.

(29:10) Why retirement should be a verb—and why simply stopping work can leave people searching for meaning.

(30:00) The three foundations of happiness: connection, competence, and autonomy.

(32:03) Investment assumptions people should avoid, including confusing great companies with great stocks.

(33:10) Why eloquence can be an alarm bell when evaluating financial forecasts.

(34:18) Jonathan’s three-pronged strategy for getting more out of your money: pause before making important decisions.

(35:01) How to audit your past spending to identify what actually made you happy.

(37:11) Hedonic versus eudaimonic happiness—and why life satisfaction can outlast momentary pleasure.

(39:05) Why enjoying your work can be more valuable than maximizing your salary.

(40:56) A different perspective on FIRE: working less and doing work you enjoy rather than simply retiring early.

(41:37) Why giving money to children while you’re alive can be more useful than leaving it as an inheritance.

(42:29) How parents teach children about money by modeling their own spending behavior.

(44:13) Jonathan’s practical approach to teaching children about spending and saving.

(44:49) The “Omega” concept: avoiding both YOLO spending and dying as the richest person in the graveyard.

(46:26) How social comparisons influence spending and expectations.

(48:54) Why rising markets can encourage investors to take on more risk.

(49:06) How recency and the availability heuristic shape investment beliefs.

(49:46) Bill’s favorite memories of Jonathan and his remarkable outlook while facing a terminal diagnosis.

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer and Cameron Passmore, Chief Executive Officer at PWL Capital.

Cameron Passmore: Welcome to episode 422 and Ben, this is a very special episode where we welcomed a past guest, William Bernstein, Bill Bernstein, many listeners know of his work, but he joined us to talk about a book that another guest wrote just before he recently passed away and that's Jonathan Clements' book called Money and Me and there's a neat story there where early on in the podcast, this is eight years ago, pretty much now Ben, we were coming up with the idea of having guests on and we both knew about Jonathan, so we reached out to him, he was in the New York City area and we asked if he would be willing to join us. I think we talked about this on a recent pod, we lugged our equipment to New York City, well, of course, with the interview with Barry Ritholtz and went to New York City with our equipment and interviewed Barry and Jonathan said, well, if you're going to Barry's office, I'll meet you there. Love to have an interview with you guys.

He met us after we saw Barry, we interviewed Jonathan Clements in the Ritholtz office in Midtown Manhattan and he was very kind, very gracious, so happy to see us and it was a fabulous interview and we were very early on in the podcast.

Ben Felix: That was episode 55 that Jonathan was on.

Cameron Passmore: 55, yes, I guess that makes it seven years ago. Regardless, it was a great interview and it's a real treat to have Bill join us to talk about the memory and the legacy of Jonathan, which is highlighted in this book, Money and Me: How to make your finances work harder for you and your family.

Ben Felix: Jonathan spent his whole professional life as a financial writer. He was at the Wall Street Journal for 20 years, spent six years at Citigroup, where he was the director of financial education for their wealth management arm and then he ran his own blog website called Humble Dollar from 2016 until a few months before he passed away and he wrote about his diagnosis, his terminal diagnosis on the blog and reflected on life and dying and it's pretty powerful stuff.

Cameron Passmore: He was so open about it as well and shared. He was on many interviews that I would listen to up to his death where he was just so frank about it and wanted to have an impact right to his end.

Ben Felix: Yeah, which he did and so he published his book posthumously and Bill Bernstein, who knew Jonathan for years and he tells stories about their relationship. Bill stepped in to do interviews like this on Jonathan's behalf because he was so familiar with his writing and Bill is such a good speaker. Bill, so he was on in episode 108, again, pretty early on in the podcast.

If people don't know who he is and listeners likely do, but for anyone who doesn't, he's a neurologist, but also the co-founder of Efficient Frontier Advisors, which is an investment management firm that approaches investments, I would say, very similar to PWL using low-cost index funds and stuff like that to build portfolios. He's also written a ton of books on finance, financial decision-making, economic history and other topics. He's got some good peer-reviewed papers out there as well.

He's a brilliant, brilliant guy. Some of the best practical writing on how do you take what we know from academic finance and make it useful to individuals making household financial decisions come from Bill's writing. He's one of the pioneers in taking academic literature and making it practically useful in a way that's not too dumbed down, but is still accessible.

Cameron Passmore: It comes from his scientific medical background. That's his foundation, right? I mean, his books were a big part of convincing me to make this shift that I did 30 plus years or so ago.

Ben Felix: Yeah. The scientific background, for sure, but his ability to communicate and make things practically relevant as opposed to abstract is unusual. It's special. Fantastic to have him on, talking about what Jonathan had to say in his final book.

Cameron Passmore: Exactly. Okay. Should we get to the interview?

Ben Felix: Yep. Let's go ahead to our interview with Bill Bernstein on behalf of Jonathan Clements. Bill Bernstein, welcome back to the Rational Reminder Podcast.

William Bernstein: Glad to be here.

Ben Felix: Very excited to be talking to you about Jonathan Clements, who has unfortunately passed away. We're talking to you about a book that he wrote before he passed away, and you've been gracious enough to speak on his behalf about his writing, which is, I think, an incredible thing for you to do in his memory.

To kick it off, Bill, why does success often contain the seeds of its own destruction?

William Bernstein: Well, if you're talking about success at the corporate level, obviously great success, and a very high profitability and profit margin attracts competition. So that's number one.

Number two, organizations that are successful grow to be large and they become unwieldy and sclerotic and difficult to manage. And they develop hubris. They think that they can do no wrong.

And there's another factor which people don't think about enough, I think, which is that a lot of success has to do with luck. A lot of corporations wind up being in the right place at the right time, and then they're never that lucky again. I think that Facebook Meta is a classic example of that.

Zuckerberg got very lucky at Harvard setting up his social media there. He was at the right place at the right time. He took off.

He was able then to monetize that quite successfully in terms of advertising revenue. You know, Meta is still a cash cow, but it's obvious that he's lost his touch. The metaverse, that didn't work out so well.

The odds that he's going to succeed at AI, they're not zero, but they're not high either.

Cameron Passmore: What constraints does our ability to help future generations face?

William Bernstein: I think what you're asking is the ability of individuals to endow their heirs.

I think that's what you're talking about. In other words, how can I establish, or how can our listeners establish a family dynasty? Their kids, their grandkids, educate them, make sure they're successful.

The answer is something that not only Jonathan's written about, I wrote about as well with Rob Arnott and Lillian Wu. It's virtually impossible to do for any number of reasons to establish that dynastic wealth and power. First of all, people breed like rabbits.

You double the population of your heirs every generation, so you're dividing by two once every generation. Then your heirs tend not to be as ambitious and as hungry as you are. They tend not to be as good at managing money as you are.

They have to pay taxes. They climb the hedonic treadmill and their material wants explode. They fight with each other over inheritances.

History is full of cases of supposed dynastic wealth that burned out very quickly. For example, there was a reunion of the Vanderbilt heirs in 1970. There was not one millionaire among them.

There are cases where families have managed to keep their wealth intact. I happen to be personally acquainted with someone who is the heir to a large manufacturing fortune. He, I believe, is the fourth in his line.

He was deemed not able to take over the business. By the way, he has 12 grandchildren. You can see where that's headed.

Ben Felix: Interesting. There's a great book about the Vanderbilt wealth dynasty and how it ended up where it is now, which is a pretty interesting read.

William Bernstein: It burned out very quickly because there was one direct spendthrift heir.

That really did a number on that particular inheritance. The story is the same throughout all inheritances. If you think you're going to be endowing your great-great-grandchildren with wealth and privilege, guess again.

Ben Felix: So interesting to think about the estate planning implications of that reality. Why do people spend as they do?

William Bernstein: The question is, what's the most effective kind of spending? I tend to think of a spending hierarchy the same way that I think of Maslow's pyramid. It's not really a question of hierarchy of needs. It's a question of hierarchy of adaptation.

So what do we adapt to the fastest in terms of our consumption? Well, it's material consumption. Get used to driving a Beamer or flying first class, and the thrill very quickly fades.

We adapt the fastest to material purchases. Next up is something that people talk a lot about these days, which is experiences. We don't adapt quite as quickly to experiences, but we certainly do.

We get used to the nice hotel. We get used to the travel. We get used to spending a lot of time with family.

The third thing, the third step up from that, which we adapt to much more slowly, is autonomy. This is a podcast. I think I can use the term, give you money, and that is one of the best purchases you can make is autonomy.

There's still another level even above that, which is something that Jonathan wrote about in one of the columns or one of the chapters in the book, and it's something that we don't think about. We think about the utility of purchases, but what we don't think about is the negative utility of money. What do I mean by that?

Worrying about money. When you ask people, and particularly retirees, what they worry about, number one is their health, but then the next five or six items all boil down to not having enough money to pay for rent, groceries, paying for medical expenses, for the travel they want to do, all that sort of thing. The biggest disutility of money is worrying about money.

The nice thing about having a lot of money, and probably the best thing about having a lot of money in my mind, is simply not having to worry about it. I think this goes against the concept of dying with zero. If you die with zero, you're going to run out of money.

The trick is you don't know when you're going to die. If you look, for example, at what's one of the major causes of major depression, it's worry about money. I don't know anyone who ever committed because they were sad that they didn't go to Paris.

Ben Felix: I'm curious in your thoughts on something that I've observed, which is that people who save a lot because they worry about money never stop worrying about money, no matter how much they have.

William Bernstein: There are people who are like that. That's true. I think that there may be a larger number of people who eventually, at a certain age, realize they have enough money and they stop worrying. I think one of the ultimate disutilities of money is winding up in your ninth or tenth decade without enough money. To me, that's a disutility that overshadows all others.

People worry about money, they never stop doing it, but that's not half as bad as an impoverished old age.

Cameron Passmore: What are the main psychological traps that lead us to make spending decisions that we might later regret?

William Bernstein: Jonathan wrote quite a lot about that. We tend to think we know what's going to make us happy. And the classic thing, I think Danny Kahneman wrote about this. I think Jonathan picked up on this, which is the classic example is everybody thinks that moving to Hawaii is going to make them happy.

And what they forget is that in Hawaii, you still have to drive through traffic to buy groceries. You still have to hassle with service reps. You still are going to squabble with your family.

And you wind up spending 90% of your time in Hawaii doing exactly the same things you're going to be doing in Duluth. We're not very good at predicting what is going to make us happy. That's the major thing.

And we don't understand that it's not material possessions and our material circumstances and surrounding that makes us happy. What makes us happy are the basic determinants of well-being, which are number one, your health. And then, you know, the three foundations of self-determination theory, which is connection, competence, and autonomy.

If you're not connected to other people, you're not socially interacting. If you're not autonomous, you're not making your own decisions. You're not in command in your own life.

And you are not doing things besides golf that expand your competency and your skills. You're not going to be happy. And the trick is that people don't focus enough on those other three things.

They obviously focus on their health, or at least they try to, not always successfully. But the things that truly provide us with well-being are not the material circumstances we think that are the important things about our purchase with money.

Ben Felix: Given that disconnect about what actually benefits people from a spending perspective and what they think, what do you think people can do to sort of pressure test large purchases against what is actually going to be optimal for their future self?

William Bernstein: That's a really good question. And I think you have to ask yourself, what are the downsides of this purchase? And that's another thing that Jonathan wrote about.

So we all think that having a bigger house is going to make us happy. Well, bigger houses have bigger problems. I've learned in my impending senescence, the more real estate I own, the less happy I am because the more problems I have.

Or buying the BMW, we don't realize that we're probably paying for the mechanic's preschool fees and we'll be doing so ad infinitum, or I guess Range Rovers are famous for that. So we don't think about the downsides of our purchases.

Cameron Passmore: How much does the happiness we get from a purchase actually scale with its price?

William Bernstein: Not very well. And this is something that Jonathan wrote about. One of the things that's memorable, I'm not sure he wrote about it in this book, but he spoke about it, which is that one of the great pleasures of his life was having croissants with his wife in the morning with coffee once or twice a week.

That $5 per croissant buys a lot of happiness. Going out to dinner for $100 doesn't buy 20 times as much happiness. There's a scale, you know, one of the few things where there isn't really a hedonic treadmill in terms of material purchases are consumer electronics.

They've gotten to be very inexpensive. You're constantly climbing the hedonic treadmill for less and less money with electronic purchases because electronics get better and cheaper all the time. And so it's the one place where you don't run out of hedonic headroom.

Ben Felix: I like that. The croissant example is so good. I would generalize that as savoring small pleasures, which I think people don't do enough of.

William Bernstein: Another thing Jonathan wrote about it, and it's also been written about by well-being researchers is the importance of being thankful, stepping back and being thankful for all of the things you have. Look at how the rest of the world lives and look at how lucky you are. Every time I feel like griping about something, you default back to that and it makes you feel better almost immediately.

Ben Felix: I like your house example, looking at the downsides of a purchase. I think the house and the BMW, one of the tests that I like is asking how a purchase will affect how you spend your time. Because the house, I agree with you. I have a house. One of the biggest costs of the house is the time I spend worrying about the house.

William Bernstein: We live in a very nice place, but half the time I think about how nice it would be just to rent an apartment and being able to call the super when the refrigerator dies.

Ben Felix: Yep. My microwave just broke. It's terrible. It's like a Bosch, like a built-in microwave too. It's not like I can just go get a new one. I'm going to bring the Bosch people in to come fix it. Anyway.

William Bernstein: We have one that's an absolute piece of junk. It's 25 years old. I hate looking at it, but it's never going to die.

Ben Felix: Maybe I need one of those. What are the four horsemen of the economic apocalypse?

William Bernstein: This was a booklet that I wrote called Deep Risk. Financial economists love to play this little parlor game. What is risk?

Well, is it volatility? Well, shouldn't be volatility. We all know why that doesn't make sense.

Should it be consumption and consumption failure? That makes a little more sense. But I like to step back and ask myself, what are the things that are going to derail your financial future?

It's not October 19th, 1987, which dating myself here rather badly, that's a day that the Dow fell by almost 25%, which anybody who lived through it will remember. Or for that matter, even the lost decade from 2000 to 2009, what can ruin your financial future in the financial markets are really bad things in financial history. So the big one is inflation.

There's deflation. There's confiscation by the government. And finally, there's destruction.

Being in a war zone, all of those things can destroy your financial future. And the last two, you can't do a lot about. If you're in a war zone or the whole world turns into a war zone, your portfolio is the least of your problems.

Confiscation can be dealt with, but it's very hard and it's very expensive. And the cost is enormous. Do you really want to move to Malta and leave all of your friends and your family behind?

It's very expensive. Not only that, but when you move your assets abroad, you're painting a target on your back for the IRS. A lot of good reasons not to do that.

Deflation, rare, vanishingly rare in the era of fiat money. The big one's inflation. And the nice thing about inflation is that, no, you can't completely immunize yourself against it, but you can do a pretty good job.

You can keep your bonds short. You can buy treasury inflation protected securities. You can own value stocks.

You can own commodities producers. I'm not fond of commodities futures for a lot of different reasons, but own the shares of commodities producers. And occasionally you are very pleasantly surprised as you were in 2022 when everything under the sun got creamed, except for oil stocks, which gained something like 60% on the domestic market.

None of those things are perfect, but you do all of those things and you are doing a tolerably good job of blunting the damage. Of the four horsemen, inflation is the one I focus on and I do those four things.

Cameron Passmore: Interesting. How do you justify optimism for a globally diversified portfolio with a long-term horizon?

William Bernstein: I take solace in the fact that even though foreign stocks, international stocks haven't done well the past 10 or 15 years, they're still relatively reasonably priced. If you think about it, what you're saying when you're pricing the U.S. market at 30 times trailing earnings, and foreign markets, they used to be at 15 times trailing earnings. Now they're up to about 20. What you're saying is that the U.S. companies are going to grow their earnings much, much, much faster for a much longer period of time than foreign stocks will. And one of the things you learn from both financial history as well as econometrics is that people tend to grossly overestimate growth rates.

When you look at the discount rates that get applied to growth stocks, they turn out in retrospect to have been way too high. What we're starting to see play out is that happening with the hyperscalers. They used to be cash cows.

They are cash cows no more. They are consumers of cash and they're plowing enormous amounts of CapEx into infrastructure that may have the lifespan of a head of pickled cabbage. I'm talking about chips that are going to obsolete themselves very rapidly.

We're starting to see that play out already, I think.

Ben Felix: Does pickled cabbage last longer than regular cabbage?

William Bernstein: I would think so, yes.

Ben Felix: I would have gone with just regular cabbage. I don't know.

William Bernstein: I have to admit I'm out of my depth here in terms of culinary survivability.

Ben Felix: What can investors learn from Jonathan Clements' investment sin?

William Bernstein: He's basically channeling, even though he doesn't mention him, Cliff Asness' concept of sinning a little, which is that, no, you don't time the market, but if you're going to rebalance, and most people rebalance, why not overbalance a little bit? If your spreadsheet tells you to buy X amount of asset Y at Z percent, why not up Z percent?

If your allocation, let's say, to foreign stocks is 30% of your equity and they've done poorly, why not up it to 35%, which means you're buying a truckload more of it. That's not something you get for free. Rebalancing occasionally bites you.

Occasionally, the return, the rebalancing bonus, which is a term that I hesitate to use, that bonus is occasionally negative. If you're doubling down on that rebalancing by sinning a little, which is what he's talking about, then you can get burned even more. Having said that, I do that myself and have been reasonably pleased with the results over the years.

Cameron Passmore: What does it mean to have won the game financially?

William Bernstein: It can mean one of several things. In the loosest and most forgiving sense, it means that you've paid for your groceries and your mortgage, your very basic needs for the duration of your retirement.

Let's just say, for the sake of argument, that your living expenses are $70,000, your basic living expenses are $70,000 a year, and you're getting 30 from social insurance, Social Security in the US. You've got $40,000 to meet your basic living expenses, including your taxes. You should have about 25 times that.

That's a million dollars. You've won the game in that sense. That's the loosest sense of winning the game.

I think that you can also define winning the game as paying not only for your needs, which is what I was just talking about, but as well as your wants. Visiting the grandkids, the first class seats that you might want to buy, taking that Viking river cruise in Europe, that you can also include. And so maybe you need another $40,000 a year to do that.

So now you need to have really won the game $2 million. Most people aren't able to do that. When you win the game, you defuse those expenses, whether they're your basic expenses, but also on top of that, let's say your wants with a risk-free asset.

Well, what's a risk-free asset? The risk-free asset for consumption over 30 years is a 30-year TIPS ladder. And as soon as you bring that up, people throw up their hands and they say, well, I can't afford that, which is true.

Most people cannot afford to pay for their retirement without getting higher returns than a TIPS ladder. So they have to take a risk. And with that risk comes the possibility that you might not do well.

And let's analogize the person who's won whatever game they're going to talk about with a risk-free asset. And they say, well, but I can make a better return than a 2% or 2.5% return on a TIPS ladder. And the answer is you probably can.

It's also true that five out of six times you play Russian roulette, you win. And when you depart from a risk-free asset and you invest in risky assets to pay for your expenses, you are playing Russian roulette with your future. Five chances out of six, you'll do fine.

But do you really want to take that risk? I can easily conceive of a world in which you might not get a 2.5% real return over the next 30 years.

Ben Felix: So do you think people who have won the game to a level of their satisfaction should be creating that TIPS ladder liability matching portfolio?

William Bernstein: A TIPS ladder, I'm not overly opposed to annuities as well. The trouble with annuities is they're nominal. So you have to be very careful.

If you are going to defuse your expenses with a nominal annuity, you better be banking a fair chunk of your first several years of monthly payments to account for inflation in later years. I've relatively little problem with annuities as well, but you should be defusing your expenses with one of those two things. And if you can't do it because those aren't having enough returns, then realize, yeah, you're going to have to take risk with your portfolio, but realize that risk occasionally shows up.

Cameron Passmore: What explains the gap between what the math permits and what even a rational investor actually does?

William Bernstein: It's all the stuff that Kahneman and Tversky wrote about, which is the endowment effect, the fact that you should be selling, if you have a taxable account, you should be selling your losers and harvesting tax losses. You can't predict what will make you happy. And we don't pay enough attention to the things that do make us happy.

We should be keeping our portfolios very simple. Do I do that? My portfolio is not as simple as it should be.

Has a few more moving parts than is probably necessary. We don't do the things that the math tells us to do because we are human beings. I get a little frustrated,

I have to admit, by people who are very enthusiastic about sophisticated retirement calculators, as if everybody's a Vulcan and will be able to vary their consumption with their portfolio value, which is what these software packages tell you to do. They don't take into account the prospect theory, which is that people don't like seeing their income reduced when their portfolio falls in value, which is what a lot of these calculators tell you to do. I think that a lot people make the engineer's mistake, which is they think that finance is all about the math and they don't take into account millions and millions of years of evolutionary psychology.

Everybody thinks they're going to buy at the bottom. The rational thing to do is to optimize your stock allocation. And these days, everybody is on that bandwagon.

Let me tell you, I was around in 1982. I was also around in 2002 and 2009. I don't remember a lot of people back then bragging about how they were a hundred percent in stocks, which is what the math tells you to do.

Cameron Passmore: Yep.

Ben Felix: We see that with geographic allocations too. A lot of Canadian investors at the moment are pretty enthusiastic about US stocks.

But during that lost decade, Canadian stocks actually did quite well and US stocks did even worse in Canadian dollars than they did in US dollars. And there weren't a whole lot of Canadians back then talking about wanting to even invest outside of Canada at that time.

William Bernstein: I love the lost decade because these days, everybody trashes value investing and foreign investing and small stocks.

Take a look at the returns on those asset classes from 2000 to 2009. It will knock your socks off. One of my favorite concepts is Antti Ilmanen's definition of risk, which is they're not just bad returns, it's bad returns in bad times. That's really why you diversify.

Ben Felix: Your point on variable spending is really good too. We've had a bunch of guests on to talk about the lifecycle model and how your spending should be variable through time.

In practice, people are a little bit okay with that. One of the examples we've given is that they might go on a less fancy cruise that year, but people's spending is generally very inelastic. We've tried to show clients, hey, we've got this new, like you said, this new calculator that lets us model variable spending, and it means you can spend more throughout your lifetime.

They're like, well, no, I don't want my spending to vary.

William Bernstein: All you have to do is pick whether you're not going to visit the grandkids or you're going to put the dog down. All you have to do is pick between those two things. It's easy.

Ben Felix: The cruise example is good. You can go on a less nice cruise. I think people are comfortable with that level of variation. I think it is pretty inelastic.

William Bernstein: I don't want to get too catty here or name too many names, but the lifecycle model is very, very elegant.

The analogy to that model and the man who invented it would be, let's imagine that you've got a textbook of bridge construction, and it's the most famous textbook on bridge construction that's ever been written, written by the most famous bridge engineer. Then you find out that 20 years later that the bridge that man designed collapsed. You might be a little reticent about using that person's model.

Ben Felix: Good theory, maybe not so good in practice.

William Bernstein: Exactly.

Ben Felix: When Clements says, "retire is a verb," what does he mean?

William Bernstein: I like to put it slightly differently, but I think this is what he's talking about, which is that when it comes to retirement, golf is a four-letter word. If you think that you're going to go to the beach and play golf, you're going to be very, very disappointed because you've spent your whole life hopefully developing a professional craft that gave meaning to your life and having vocational activities that gave meaning to your life as well. The idea that you're going to suddenly stop doing that and be happy is ludicrous.

People get very bored on the beach. I can't tell you how many doctors I knew who thought they were going to be happy in retirement who went back at least to working part-time just to give their lives some meaning.

Cameron Passmore: What three factors are crucial to happiness, retired or not retired?

William Bernstein: I've used the term self-determination theory, which I'll expand upon a little bit. It's formulated by two psychologists, Deci and Ryan. Basically, it just talks about the three things that give meaning to your life.

It's connection with other people, social connection. That's number one. And then next is competency.

It's doing something and feeling good about it. Let me give you a silly example from my own personal experience. One of the things that I enjoy doing is just playing with obsolete, clapped-out computers and getting them running again on Linux.

I had one that is notoriously difficult to convert to Linux, but it's very lightweight. It's very easy to travel with. It took me two or three days of working on it to finally get Linux installed on it.

It was very frustrating in the moment, but God, I derived an enormous amount of satisfaction. So having a sequence of tasks that you do that you accomplish, learning a piano piece, working with carpentry, those are the sorts of things that make people happy. And then finally, there's autonomy.

And that tends to be a negative thing for most people. A lot of people wind up at age 50 just despising the cubicle they work in and the head-down coding they have to do and the abuse of their bosses. The ability to say goodbye to that is also extremely important as well as being your own boss.

I've been my own boss for the past 40 years and I could not conceive of working under anybody else, especially at my age. I just couldn't conceive of doing it. Even 20 years ago, I couldn't conceive of doing it.

Once you've gotten used to working for yourself, you never go back.

Ben Felix: I like the Linux, the Linux comment. I do that too. Maybe not reviving dead computers, but whenever I have a computer in my household that has become too slow to run Windows or just whatever, it's not working anymore. It gets wiped and it gets Linux on it. I got a bunch of random Linux computers sitting around the house.

William Bernstein: My granddaughter makes fun of me. I have a whole shelf full of them.

Ben Felix: What are some assumptions that investors should not make?

William Bernstein: You're talking about a chapter in the book and Jonathan had a list, an enormously long list of them. And of them, I picked out what I thought were the most important things. Number one, obviously is great company rate stock.

I think we all know that, which is the reason why most amateurs will buy a stock. They think that X company, XYZ is a great company. It's going to be a great stock.

And we all know from the academic literature that that is simply not true. The other thing on his list that really resonated with me is not to listen to talking heads in the media. And I would refine that even further.

Most people tend to listen to the media. They listen to this podcast. And certainly you guys are smart enough not to listen to market gurus.

As we all know that the reason why the word guru is so popular is because charlatan is too hard to spell. But there's a refinement of that, which took me decades to realize, which is that eloquence correlates inversely with forecasting ability. The more eloquent people are, the worse they actually are at forecasting.

And so until relatively recently, I would listen to somebody and I would say, gosh, they're really smart. That makes sense. I should pay attention to this.

And now it rings an alarm bell. Why does it ring an alarm bell for me? Well, first of all, let's take the positive example.

The people who I respect the most, whose opinions I respect the most, tend to be awful public speakers. Think about the most famous names in financial economics and listen to them speak. They're not good speakers.

And yet I respect their analytical ability and their opinions above all else. On the other hand, contrary wise, the worst charlatans, the worst crooks tend to have silver tongues. Why is that?

Well, the reason why there's this inverse correlation is because if you are rhetorically skilled, it enables you to cover up your analytical sloppiness and to intimidate other people. And there is nothing that amplifies that than an English accent, particularly if you're an American. So when I find myself being very impressed with somebody, particularly if they have an English accent, immediately all the alarm bells go off.

Cameron Passmore: What is the three-pronged strategy to get more out of your money?

William Bernstein: That was one of his columns. The biggest point there is waiting before you hit the send button, both literally and metaphorically.

Don't make important decisions rashly. That's how trading mistakes get made, is you didn't reflect enough. You didn't look at it twice. You didn't measure twice and cut once.

Ben Felix: Yeah, it probably applies to investment decisions and consumption too. I love the house example you gave earlier, where it's like you think you want a bigger house, but you don't think about how it's going to affect how you spend your time.

You imagine this big, nice house with marble floors or whatever, but you don't imagine all the time you're going to spend dealing with it and worrying about it. Good time to reflect on those things before pulling the trigger. What decisions can people make today that will improve their happiness?

William Bernstein: We've covered the ground on that, which is that you want to look ahead to your future life and ask, what are the things that make me the happiest? What material possessions have I purchased that made me happy? To basically do an audit, what are the things that made you happy?

The odds are that buying a new car didn't make you happy six months later. The odds are that eating a $300 meal out didn't make you happy. If you're going to spend big money eating out, then take out your whole family.

Take out your kids, your grandkids, your friends. If you're going to spend big money on food, don't spend big money on a fancy restaurant. Spend it on a mediocre restaurant or a good restaurant that you've invited the 20 most important people in your life to.

Ben Felix: I'm glad you followed up with that. I have definitely spent $300 taking my whole family out to a not fancy restaurant, but some of our best memories of those dinners. Maybe that's the best example, the most extreme example, a very fancy restaurant by yourself versus a modest restaurant with your whole family.

William Bernstein: One of the hedonic things about eating out, especially these days, is that a lot of places that have superb food tend to be very crowded and very loud, and you can't enjoy your company in that environment. I find that I would much rather have a meal out with two or four other people where there's mediocre food and it's relatively quiet than eat at a noisy place that has fabulous food.

Ben Felix: That is so true. The last very fancy restaurant that I went to was so incredibly loud. I could barely have a conversation.

William Bernstein: Wait until you get to be my age.

Ben Felix: And the portions are tiny. Like, I don't know.

Cameron Passmore: I knew that was coming.

Ben Felix: I like to eat. I'm a large human, larger than the average person. I need a lot of calories. If I go to a fancy restaurant, I'm going out for dinner afterwards to feed myself.

William Bernstein: That's one of my hot button items too, is I'm really offended when I spend $50 for a plate of food you can barely see.

Ben Felix: Bill, what are the two kinds of happiness?

William Bernstein: The Greeks recognized two kinds of happiness. There was hedonic happiness, which is the nice slice of pizza, the great piece of music, the rave at the concert, the jumping up and down joy. And then there's eudaimonic happiness, which is life satisfaction.

The point that Jonathan made over and over again, which is blindingly valid, is that hedonic happiness adapts very quickly and fades very quickly. The best happiness in the world is eudaimonic happiness. It's looking back on your life, looking at the things that you've done, looking at the time you've spent with other people, looking at the people you've helped, looking at the things you've accomplished, saying, yes, I've led a good life.

That's the second kind of happiness. That's obviously the best kind of happiness.

Ben Felix: That's interesting. I think eudaimonic for sure, at a moment in time when you're looking back, that's paramount. But I've always talked about having some kind of balance between the two because you can have eudaimonic happiness where you look at your life and you're like, wow, yeah, look at all the things I've accomplished and how great my family is and all this stuff, but you could spend every day being miserable because whatever, you're traveling for work or doing something that you don't like. You can go the other way too.

I like to use the example of you could spend all day in a hot tub drinking beer, which I actually wouldn't enjoy that much, but some people might and you feel really good. You're enjoying it. You get the hedonic happiness, but you look back on your life and you're like, wow, I've done nothing. You got to have something in between those two.

William Bernstein: People say things to you that you keep with you for the rest of your life. We had a client who one day said to us, I wake up every morning and I tell myself that this is a good day to die and I have more than I need.

You can say those two things you've done about as good a job with your wellbeing as possible.

Ben Felix: How do you think people can pursue eudaimonic happiness as they go through each stage of their life?

William Bernstein: It becomes easier the older you get because hopefully you've lived that life.

If you've not gathered together and built upon that eudaimonic happiness, then it's hard to figure out how to do it. When you're 20 years old, you have all these material goals. The mistake that a lot of people make is thinking that if they meet their material goals, they'll achieve eudaimonic happiness.

No, they won't. One of the points that my co-author with the book that we currently have in process, a guy you know by the name of Ed McQuarrie who's done a lot of good historical work, he likes to make the point, he actually does an excellent job of quantifying this with social security calculations and lifecycle investment calculations that you are far better off having a job that has a salary that's 20 or 30 percent less than an optimal salary if you enjoy the work because you will be able to work at that job far longer, enjoy your life more. At the end of the day, you won't burn out at age 55.

You'll be able to work until you're 70 or 75. At the end of the day, you'll wind up in a much better place both psychologically as well as financially because you'll be able to work that extra 15 years which as we all know is the difference between a happy and an unhappy retirement.

Ben Felix: I love that point. I've always felt like that's what people should strive for to find work that they enjoy. There are a lot of people out there who get really upset when I say that because they feel like it's impossible for them to find work that they actually enjoy which leads them to pursue very aggressive retirement goals like the financial independence retire early approach. It's an interesting dynamic there where I think people can find work like that but there are a lot of people out there who don't believe that they can and therefore take these extreme saving approaches.

William Bernstein: The more exposed I get to FIRE and the people who practice it, the more impressed I am. These are not people – a few of them are like this but very few of them want to go to the beach at age 40. Most of the FIRE people who I talk to simply want to earn less, they want to make less money at things they enjoy doing so they can work longer and enjoy their lives.

I think that the FIRE movement is rather misunderstood. The people who disrespect it and who criticize it aren't talking to enough of its practitioners.

Ben Felix: Interesting.

Cameron Passmore: We'll move on from happiness and shift to what's your thinking behind giving money away now rather than bequeathing it?

William Bernstein: Bequeathing it is a lousy idea. It's a terrible way to leave an inheritance because the median life expectancy at my age, my joint life expectancy is somewhere in the low 90s which means that if we bequeath when we pass, we're going to be giving money to our kids at age 60 and 65. That's not when they need the money.

That's not when they can use the money. You give away money as my mother used to say with warm hands. When the kids can use it for that down payment, they can simply have that money there for an emergency so they can lose their job temporarily and not have to live in their car.

That's what the money is really for and you better be giving that money to them in their 30s and 40s assuming they're responsible enough to handle it which is a very big if.

Cameron Passmore: Well, that's my next question. Do you worry about potential unintended consequences?

William Bernstein: Sure, you have to. I get asked all the time, how do you teach your kids not just to invest well but to spend well? The answer is you can't do it didactically.

Your kids learn how to save and invest and to spend by watching you. You can give them all the lectures you want about the importance of saving money and being prudent but if you live in a McMansion and you've been flying them first class since the time they were five years old, you haven't done them any favors. They're not going to listen to you.

You probably ruined their lives financially if you're doing that. You can basically avoid that problem by practicing what you teach by teaching your kids the joy of being able to save money. I think I'm going to jump the gun here and you already told me what your last questions were going to be which is what were the things that you remember most about Jonathan?

One of them was he came to visit me once here in Portland. It just tickled his fancy that he was able to get into town from the airport on the max train for two dollars and his kids grew up watching him practice that. That's how you teach kids about money and his kids are 10 years younger than mine but I remember reading one of his columns and just slapping my head and saying why didn't I think of that which is whenever he took them to a restaurant and the kids asked for a soda he would say okay I'll buy you a soda but I'll tell you what I'll give you a dollar if you just drink the ice water and I think to myself why didn't I figure that one out? That's how you avoid the problem that you're talking about is by practicing what you preach and having your kids watch how you spend money.

Ben Felix: I like that. I'm definitely going to try that one with my kids next time we're out for dinner.

William Bernstein: Here's the other trick that he wrote about in the column which was also a beautiful trick which is when it comes to their allowance or when they ask you for the bank of mom and dad for $5 or $10 bill from your wallet for something as soon as they can qualify for it at age 10 or 11 or 12 get them an ATM card and put $50 into it every month and that's their money. When the money runs out it runs out.

Ben Felix: We had a guest a while ago who talked about doing that with cash as opposed to a card because then it's like you got to hold it. Those are good tips. Why do you think people hold on to money that they could safely spend?

William Bernstein: Well, because they're afraid of running out of money and sometimes we sort of batted this around between the two of us. It can be irrational. Again, Ed McQuarrie and I came up with a concept we call Omega.

Omega is the last letter in the Greek alphabet. At an omega of zero you're YOLO. Spend the money today.

Who cares about tomorrow? That's pathologic. But an omega of 1.0 which is other side of it which is the Uncle Scrooge who never spends their money and dies the richest person in the graveyard, that's also pathologic. I tend to want to be closer to an omega of 1.0 than zero because I know too much financial history. I've seen what can happen to societies and what can happen to financial markets and institutions. An omega of somewhere between 0.7 and 0.8 is optimal. Yeah, you can go overboard without a doubt.

Ben Felix: That's an interesting measure. Do you guys quantify it?

William Bernstein: Oh no. Do we formalize it in a model with differential equations and continuous time calculus? No, we don't do that. It's a rhetorical tool.

Ben Felix: I still love the concept. That's very cool. Do you guys agree on where people should be? Would agree that you should be between 0.7 and 0.8?

William Bernstein: Edward is about a 0.4.

Ben Felix: Interesting.

William Bernstein: Yeah, I'm about a 0.8 or a 0.9. We have lots of interesting discussions. Edward's a happy guy. He enjoys his life.

Ben Felix: Do you guys write about that in what you're doing together?

William Bernstein: Yes.

Ben Felix: Yeah, we're going to have to have you back on to talk about that one, you and him together.

Cameron Passmore: How do others influence our spending and even often without us realizing it?

William Bernstein: Well, that's one thing we haven't talked about, which is the eastern paradox, which is as nations become wealthier, they don't become happier. We should be lots happier than we were in the year 1900. We don't have to risk our lives going cross-country.

We're not going to lose half of our kids to infectious disease by the time they're 10 years old. Our quality of our lives is much better. But guess what?

People aren't any happier now in the United States than they were in the year 1950 when our material circumstances were much worse when we first started measuring it. We're probably not any happier than we were in the year 1900 either. Why is that?

Well, it's the essential equation of happiness or the equation of happiness, which is happiness equals reality minus expectations. That was probably an invention, I think, of the Magliozzi brothers on Car Talk, although it was written about before that. What affects our expectations?

Well, our expectations are driven by our current consumption. If you get used to flying first class, you're not going to be happy in cattle class. But also, it's affected by the people around us.

The example I like to give is, for example, the person who's an internist or a practicing physician in a poor rural community is a person who's going to be a lot happier than the person who's practicing internal medicine on the Upper East Side of Manhattan. Because in the poor rural community, that doctor is a respected member of the community, he's making a lot more money than the people around him, and he's not constantly looking over his shoulder trying to keep up with the Joneses. On the other hand, if you are practicing internal medicine in the Upper East Side of Manhattan, you are a half step above being an Uber driver.

You are not treated with respect by your neighbors. Basically, we are affected by the people around us. I'm trying to remember where I came across this.

I read this somewhere, the description of somebody who was very successful in their profession, but they lived in a building in Manhattan where they were constantly on the elevator with billionaire nepo babies, and it just made their life miserable.

Ben Felix: There's lots of interesting research on that too about people living in not so nice neighborhoods, but having a relatively nice house in that neighborhood. We had Robert Frank on this podcast a while ago, and he talks about consumption cascades, how people are always spending up to the next income level that's just above theirs, because that's what they compare themselves to, but it causes people to overspend.

William Bernstein: When you ask people how much income would make you happy, the answer is always one four-letter word, which is more. Just a little more will make me happy.

Ben Felix: Even the wealthiest households, it's fascinating. Why do rising markets lead people to take on more risk, which is maybe a better time to be cautious?

William Bernstein: Everything gets back to Kahneman and Tversky. It's the availability heuristic, or to use a much more down to earth term, it's recency.

I can remember being around during the late 70s. No one thought that inflation was ever going to end. Stocks were for morons.

In the late 70s, by 1979, 1982, only stupid old users invested in stocks. There's that famous piece, The Death of Equities, that wrote about that. I was around then.

Stocks were for idiots. Bonds, bonds, bonds were certificates of confiscation.

Cameron Passmore: Amazing.

Ben Felix: That's fascinating.

Cameron Passmore: Before we let you go, Bill, we have to ask you if you have any other favorite memories of Jonathan.

William Bernstein: Jonathan wasn't a glass half full kind of guy. He was a glass 90% full kind of guy. Everything made him laugh.

Everything made him happy. He writes two books under the gun of a terminal diagnosis. He was just getting all kinds of publicity, the kind of publicity that any author would kill to get.

I remember him laughing and saying he never realized what a great marketing tool a terminal diagnosis was. Someone who can laugh about that is someone who has lived their life well.

Ben Felix: That's a great story. Bill, this has been great. We really appreciate you coming on to talk about Jonathan's book and Jonathan's obviously not here for us to thank, but we appreciate his writing very much.

William Bernstein: It was my pleasure, I can assure you.

Cameron Passmore: Great to see you again, Bill. Thank you.

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