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Get Smart

There are Pokemon accessories, Furby creatures, and Harry Potter volumes to be had. Airplane tickets and cross-country road trips to be financed. Frosted ornaments, earthen wreaths, and holiday greeting cards to be collected.

A fiscal cyclone touched down at strip malls and suburban gallerias this weekend as rabid shoppers welcomed yet another holiday season predicted to generate billions of dollars in traditional and electronic retail sales. The 1999 holiday buying frenzy, which escalates Friday night with Hanukkah, will only begin to wane after Christmas, Kwanzaa, and New Year’s Eve. Until then, money — the spiritual insignificance of, the relative shortage of, the comparative buying power of — will dominate the discussions and preoccupations of local newscasters, scrimping Santas, and giddy merchants everywhere.

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With that economic inevitability in mind, Fast Company sought financial advice from a man who passes the buck — or at least lessons, theories, and tactics related to the buck — for a living. He’s taught financial strategies to business school students at Harvard and Northwestern. He’s penned more than 100 articles and eight books, including the 1999 release, “Smart Money Decisions: Why You Do What You Do With Your Money (and How to Change for the Better)” (John Wiley & Sons, Inc.). But, more importantly, he pinches his pennies — hard.

Max Bazerman hates to waste money. And he hates to see smart people act stupidly with their pocketbooks. In the following Web feature, Bazerman — Gerber Distinguished Professor of Dispute Resolution in Organizations at the Kellogg School at Northwestern and Marvin Bauer Fellow at the Harvard Business School — offers a few tips, strategies, and warnings for online shoppers using services such as priceline.com, eBay, and E*TRADE. First, study Bazerman’s list of Top Ten Money Mistakes taken from “Smart Money Decisions,” and then learn his guidelines for smart Web shopping below.

Beleaguered Bidders

Why do airlines play the priceline.com game? It’s one more extreme version of the Saturday night stay rule. Airlines have long discriminated their airfares based on whether you stay a Saturday night. That policy allows them to sell seats to leisure travelers who won’t pay very much while at the same time charging business travelers — who aren’t spending their own money anyhow — shockingly large amounts of money for basically the same trip.

Priceline.com is taking this market niche separation one more step by saying, “We want to get people traveling who are amazingly price-conscious. These are probably people who wouldn’t go on the trip if priceline didn’t exist. And they’re willing to run the risk of significant inconvenience to get there.” Now, instead of sitting next to a person who paid $300 by staying over Saturday night, they’re going to be sitting next to someone who paid $128 because they bid on priceline.com. The airlines are finding one more way to price discriminate based on the flexibility of the traveler.

As a customer, you should assume that you’re going to get the worst of the possibilities that priceline specifies in the rules. If you’re still potentially willing to go on the trip, call up United Airlines and find out how much they would charge you normally. Then ask yourself, “How much would United have to pay me to follow these unusual requirements of stopping in Chicago on my way from Boston to Florida?” Discount the price appropriately and go ahead and bid. For some people, that’s going to mean that priceline.com would have to pay you to fly and, obviously, they’re not going to get a seat. But for other folks, it’s quite worthwhile and they might even think of it as fun.

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In addition, if you ask yourself how much your time is worth, you’re less likely to get sucked in to checking various Web sites or pricing schemes on an obsessive-compulsive basis. Ask yourself how much money an airline would have to pay you to do white collar work for an extra two hours. Also, some flyers are quite happy in an airplane doing light reading out of their briefcase, while others are nervous and find flying an upsetting experience. That comfort level logically affects how much you’re willing to pay to have a ticket that may require multiple take-offs and landings.

Auction Block Outs

Potentially, online auctions are a good way to get bargains if you’re well informed. However, the potential to be suckered is even higher than in live auctions because you can bid on items that you don’t even get to inspect. If you go to a rug auction, you at least need to know how to evaluate whether this is a Persian rug, as they auctioneers are claiming. When you buy on eBay, however, there is more complexity involved in judging a rug without even being able to see it. And what are the rules? Do I send money first? What are my means of recourse? It takes a significant amount of time to keep track of all those things.

Thankfully, on eBay, you can also look up the reputability of various sellers. That might allow you to buy something more expensive with a certain degree of confidence. Certain antiques can be described to an expert in ways that would make them comfortable. Generally, if I like how an item looks, and it would only create minor unhappiness if it turned out to be at the lower end of what I was expecting, I can live with eBay. But I don’t recommend that non-professionals use eBay to shop for major objects.

Stocks and Boasters

Although popular, day trading has been wildly unsuccessful from the perspective of investors. It is a truly fascinating event to see a new group of companies that trade for its customers at seemingly low rates, yet have done shockingly well. They found an interesting new market niche and then brought down the cost of trading.

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The big news is really these techno wackos who have quit their day jobs and have expectations of out-performing the market. The data overwhelmingly says that day traders as a group, are dramatically under-performing the market. Not slightly under-performing the market, but dramatically under-performing the market.

The media has made day trading activities seem glamorous. The notion is, Why work hard when you can simply sit at your computer a few hours a day and make lots of money? Meanwhile, the data suggests that the vast majority of day traders are losing money. People hear these second-hand stories of successful day traders and it doesn’t matter that one in 20 may be succeeding, because the other 19 aren’t talking about it. Selective reporting and the media are portraying a positive image. The other interesting piece here is that the concept of electronic trading isn’t bad. The notion that you can execute a trade for $8 to $20, instead of $50 or $70, is one that I like. But the problem isn’t the electronically based trades, it’s the frequency of trades that are being performed by day traders who are paying $8, $8, $8, $8, $8, $8. Cumulatively, they’re spending a lot of money on transaction costs.

Let’s consider your typical 26-year-old, bright technical guy who quits his day job to be a day trader. He’s buying a stock at a particular moment in time. Who do you think knows more? The day trader or the significant New York-based Wall Street firm that uses supercomputers to make wise investment decisions? You’re a bright, 26-year-old professional who just quit your well-paying job to make it on your own. Why in the world do you think you can out-perform Goldman-Sachs? That’s essentially what you’re betting when you’re making multiple transactions.

A wise investment strategy means figuring out your asset allocation between stocks and bonds. Investing in a very low-cost manner could either mean buying index funds or buying specific stocks and holding onto them for many, many years. Any kind of investment approach, whether it’s actively managed mutual funds or day trading, is bound in the aggregate to under-perform the market because of the transaction fees involved. So this isn’t even speculative on whether most day traders are making a mistake. We can analytically say that they have to be making a mistake.

Instead of paying thousands of dollars a year for financial advice, I recommend that you buy a good investment book. For example, Jane Bryant Quinn writes very sensible investment advice. Buy one of her books, think through your asset allocations, and then buy and hold in a fairly low-cost manner. There’s absolutely no reason for a typical, successful professional to be paying one to two percent of their wealth each year for investment advice.