The Entourage theory of financial management

Entourage

Am I the only one that misses Entourage? The former HBO series, which closed shop a few years ago after eight seasons, was my escape from the drudgery and boredom of responsible living. Yes, Entourage was over the top, to put it mildly, but so is pretty much everything else on TV. It was at times just plain dumb (the series finale was a hasty tying of years’ worth of plot loose ends), but the show had a lightheartedness and carefree vibe that’s been missing from television ever since.

At the heart of what made Entourage work, of course, was the character of Vincent Chase, loosely based on Mark Wahlberg’s early career (when he was still Markie Mark and doing stuff like this, which some of us refuse to forget). Vince’s is the happy-go-extremely-lucky story we all love to root for: Poor kid from a blue collar town makes it big, achieves fame and fortune, and lives life in the fast lane while never forgetting his true friends or where he came from.

At this point you may be thinking, What does this have to do with finance? I’m glad you asked. (Let’s pretend you asked.) On many occasions in Vince’s fictional life, when he is warned about the imminent possibility of losing it all — by his accountant, his agent, his manager, whoever — he utters some version of the following statement:

What’s the big deal? If I lose all my money I can always go back to Queens. I was happy before when I had nothing. If I have to go back to that, so what?

This is the part in the blog post where I remind myself that Vincent Chase is not a real person (oh yeah). But a part of Vincent Chase lives inside all of us. That’s because we all, in various ways and to varying degrees, practice what I call the “Vincent Chase theory of financial management”. That is, we are all on occasion tempted to “stretch” our money, saving a little less than we probably should towards getting that bigger house, that nicer car, that more glamorous vacation, etc. After all, when times are good and the money’s flowing, why not? We can always go back to the more modest lifestyle we were perfectly happy with before, if the twists and turns of life force us in that direction.


In a certain way, there’s something deeply commendable in how Vince approaches the world. As the viewer, you’re entirely convinced that he means what he says, that even while enjoying the spoils of superstardom, he’d be entirely content moving back in with mom and hanging out on the corner with his old buddies. You can even argue that there’s something deeply spiritual about thinking this way. Baha’u’llah, after all, teaches:

Rejoice not in the things ye possess; tonight they are yours, tomorrow others will possess them.

In that sense, living life to the fullest and staying in the moment — YOLO, as the kids these days call it — deserves some praise. If we are truly detached from material things, then why should it hurt to have to fall from the ladder?

The problem is that economic research tells us that “falling down” in terms of our lifestyle is really, really painful, and the negative emotional impact of losing what we once had is much bigger than the positive emotional impact of getting it in the first place. This idea is what earned Daniel Kahneman a Nobel prize in economics (and Amos Tversky, had he been alive at the time of the award), under the concept of “prospect theory”. Here’s what a graph* illustrating prospect theory looks like, which basically shows how human beings tend to feel when they gain or lose wealth, consumption, income, etc. Note how much steeper the line is at the bottom; losing what you once had can make a big dent in how you feel, bigger than if you gained the same amount.

prospect theory

This idea is much easier to understand when you think about it in real life: Just picture all those homeowners foreclosed on when the housing bubble burst a few years ago, for instance, and the immeasurable stress, indignity, and depression that their families were forced to deal with.  The boost in happiness we might gain when stretching for a house we can barely afford is nothing compared to the emotional devastation associated with losing one’s home.

One might think that prospect theory probably only holds up in experiments because we are just too materialistic and too attached to what we have. Otherwise, we could all really be the way Vincent Chase claims to be, and just “go back to Queens” and be happy when we fall on hard times. Of course I agree that materialism is an issue in our society (if you didn’t know that already, then you must be new to this blog), but I don’t think that explains what’s going on here. If we were all less materialistic, it does indeed suggest that the slope of the line on the bottom half of the graph would be less steep (that is, it wouldn’t feel as bad to lose our possessions and material lifestyle). But by the same token, so would the slope of the graph in the top part (it wouldn’t feel as good on the way up). The point is, even for virtuous and detached people, it hurts more coming down than it feels good going up.

If you’re reading this and concluding that I’m advocating an austere, bare-bones lifestyle, then this message has somehow gotten jumbled. There is nothing wrong with enjoying life, and that often requires money. My wife and I often talk about how badly we want to buy a house in a nice neighborhood with a decent-sized yard for our kids to run around in. That’s a dream no one should feel guilty about having. And spontaneity in life isn’t anything to be ashamed of, either. But being spontaneous, living in the moment, and enjoying life while you’re young don’t need to entail spending lavishly. In fact, psychologists have proven that it’s life experiences, not possessions, that tend to give us lasting happiness. Luckily, those experiences don’t often carry a hefty pricetag; it’s the possessions that usually drive us into debt and expose us to risk.

Unfortunately, that message — be moderate, feel content with what you have, save your money for a rainy day, derive your happiness from experiences rather than possessions, etc. — isn’t exactly ringing triumphant these days. Instead, it’s Vincent Chase and “Hey, I can always go back to Queens”.

Once again, something has to butt heads with the cacophony of messages encouraging us to recklessly buy, reach, and grab our way to happiness and self-fulfillment, especially when those messages drive some of us to live one paycheck away from financial ruin. The good news is that there’s a whole financial self-help industry out there, some of it corny and gimmicky, but most of it at least sending the right message. And a lot of the financial gurus out there these days, at least the ones here in the US, are coming at this topic from a Christian angle, a trend which I find comforting. We might not tend to think of financial self help as spiritual terrain, but I’d emphatically disagree. Maybe a dose of spirituality is exactly what’s missing from the equation, something to remind us that though it’s fun to pretend, the Vincent Chase story is still just fiction.

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*The image was taken from Kahneman’s Thinking Fast and Slow.

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