Mind Your Decisions
Money advice for smart people: thoughts on strategy, risk, and saving
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3 important lessons from the financial crisis
It’s hard to know what to think these days. I find myself overwhelmed sorting through all the data and predictions. It’s time for reflection, so here are three of my lessons during this downturn: 1. Saving for emergencies: time to revive age old wisdom Ancient societies understood the need to save for emergencies. Those that could save stored up food and supplies for unexpected hard times. The economy has changed, but the logic is relatively the same. Nowadays we don’t save food... |
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Understanding the winner’s curse
Read more Game Theory (new article every Tuesday) Sometimes winning comes at too high a cost. In such cases, it is the winners that are the real losers. The phenomenon is known as the “winner’s curse” and it affects a wide variety of situations, from baseball free agency signings to stock market IPOs. Whether you are an executive in a big auction or a participant on eBay, it’s important to understand the winner’s curse. Here are a few thoughts on how and why the winner’s... |
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Calculating the rate of return on investments: ROI versus IRR
Whether you are investing in the stock market or a business project, you need to understand rates of return. Stock gurus talk about things like ROI and IRR, but what do they mean? I’ll go through the logic of each method and explain why IRR is my preferred choice. Rate of return (ROR, or more commonly called ROI) ROI is the simplest return measure and also the most often quoted. ROI is defined as the percentage increase or decrease of an investment over a period of time. This method gives... |
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Negotiate better by withholding supply
Read more Game Theory (new article every Tuesday) My underpaid friend used every trick during salary negotiations to no avail. This year she got the raise she deserved. The trick that finally worked was getting sick. My friend joked the company would only realize her value after she left. By chance, it happened much sooner. My friend became very ill for one week and her projects suffered. Upon her return, she quickly fixed the problems. It was this incident that impressed managers at review time. The... |
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Figuring out how much your time is worth—does it make sense?
Question: What’s the best way to value your time? I am trying to make a decision about whether to hire help for my house. My answer: There are many ways to figure out how much your time is worth. You can get a quick estimate of your hourly rate by taking your salary and dividing by 2,000 (typical yearly hours for a full-time job). Or if you want to be more precise, you can go use MSN’s calculator, or one of a dozen other methods. But before you get going you have to ask yourself: does... |
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Game theory and the math of infinity
Read more Game Theory (new article every Tuesday) Many of us have a sense for physical units like 750 mL, 12 ounces, or a six-pack. But what does it mean to have an infinite size? The math is fascinating. Perhaps the most remarkable result is that infinity is not a single size. One can talk intelligently about different sizes or types of infinity. This was first and famously demonstrated by Georg Cantor in the late 1800s, in work that laid groundwork for the field of set theory. Set theory is... |
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Why do people make stupid money decisions?
image source: Andreia via flickr Reader question: Presh, random question for you: why do people make stupid money decisions? Any thoughts would be appreciated. My answer: This is an interesting question. The other day I saw someone pay more for food because he ordered ala carte instead of getting the combo. I certainly scratched my head after that one. I was tempted to do some research on the topic, but then I thought of something. It’s too easy to point the finger at “stupid people.”... |
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Game theory and racism: the Schelling Segregation Model
Read more Game Theory (new article every Tuesday) [update: welcome readers from The Club for Growth] Fidel Castro says America is “profoundly racist.” What do you think? His statement made me think about segregation. I thought about racially divided neighborhoods in big cities. I thought about the “racial cliques” I observed among peers at Stanford. I thought about how few CEOs are of color. Is Castro right-do these things mean America is deeply racist? The surprising answer... |
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Marriage Jokes and Game Theory
Read more Game Theory (new article every Tuesday) I’m on vacation so my regular article will resume next week. In the meantime, I thought it would be fun to share a few jokes somewhat related to marriage and strategy. Hope you enjoy them, and feel free to add your favorite jokes in the comment section. One way to play matchmaker Father: “I want you to marry a girl of my choice” Son: “I will choose my own bride!” Father: “But the girl is Bill Gates’ daughter.” Son:... |
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Is your car loan more expensive than you think? The difference between APR and the total interest you have to pay
Question from a reader (slightly edited): I have 60-month loan for an $18500 car with a 5.69 percent APR. When I do the calculation using simple interest it comes to $1052.65. On my contract from the dealer it says $2726.20. Why is their number closer to 15 percent? Am I missing something? My answer: This is a great question about interest rates. Their numbers, though correct, are confusing for a simple reason: car dealers want to be confusing. The main thing you are missing is an honest explanation... |
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Can a rational person believe in miracles?
Read more Game Theory (new article every Tuesday) Rationality and miracles are seemingly in conflict. Rationality is about reason and natural explanations. Miracles are about emotion and supernatural forces. Can the two be reconciled? My friend sent me a fascinating explanation from The Language of God, a book by Francis Collins, a leader of the Human Genome Project. Collins suggests that rational people can believe in miracles, and he provides an interesting example. A small introduction to Bayes... |
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Age old wisdom for dealing with the financial crisis
photo credit: Brian-Progressive Spin Lately I’ve been fielding a lot of questions about the financial crisis. What should I invest in? When will the market recover? What is causing it? I pause before I answer. The truth is no one can answer these things with much certainty. My own opinion is to buy and hold and think a lot about lowering risk. I suspect most people feel this way deep down, but they are wondering if this time will be different. Perhaps it might, but perhaps not. Financial... |
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Game Theory and Voting
Read more Game Theory (new article every Tuesday) Voting is a prized civic duty. But it is also a high stakes competition with clear winners and losers. In this light, voting can be viewed as a contest of strategy. If you want to make your vote count, it is useful to learn the rules of the game. History suggests that some votes don’t “count.” In at least five U.S. presidential elections, the most popular candidate ended up losing (more on this below in point 5). The results depended... |
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Are You Eating Your Retirement Savings?
Some of my acquaintances think it’s impossible to save nowadays. They say there is nothing left after taxes, housing, and basic social expenses. One person even said it’s getting to the point that $50,000 is not enough to live in Chicago. This seemed curious to me, so I started a discussion and ran some numbers. Our conclusion: he could live on that money and save more. The problem was he was eating his retirement savings. Why focus on food? There are many things you can do to boost savings.... |
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Ducks know game theory?
Read more from the Game Theory archive (new article every Tuesday) Game theory sounds like something only intellectuals would use. After all, technical math is required for academic courses. And many introductory problems border on the bizarre, like learning how to solve a game of “hot or not.” Game theory is famously associated with the RAND institute, a think tank of intellectuals solving abnormal problems like nuclear warfare. So it’s surprising that years of research have indicated the... |
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Money tip number 189: stop trying so hard
Let me backtrack a moment for perspective. Most of us fail at money decisions because we don’t try, or we don’t try hard enough. That’s probably why 99 percent of conventional money advice is about getting us to take action, and understandably so. I’d guess there are 188 tips more pressing than this one. But we can’t ignore problems because they are rare, so let’s take a moment to address an overlooked issue. For some of us, the problem is trying too hard; it’s a case of... |
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The Crummey trust and game theory: understanding the grim trigger strategy
My friend never broke curfew during high school. The consequences were too dire. His parents had threatened to cut off his allowance and scale back on helping him pay for college. Years later I would recognize the parents’ strategy as an important game theory concept. They were playing what is known as a grim trigger strategy, a strategy of eternal punishment resulting from a single provocation or “trigger.” We all use or attempt to use grim trigger strategies on occasion. In general, a... |
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Which investment news is worthwhile?
These days it is not much fun to read about the markets. So I think it’s important to keep a good sense of humor. On that note, today I share a light story from one of my previous email newsletters (you can sign up here). Friend: I can’t believe it. The market was down big time. Me: Yes it was. What are you going to do about it? Friend: Probably nothing, but man, my portfolio is hurting. And so I shrug. News should be about improving your decisions. Will you change your investments?... |
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The Game Theory of Stacking Matchups in Your Favor
Every Tuesday is a Game Theory article at Mind Your Decisions Baseball pitchers and competition San Diego pitcher Jake Peavy did not like being called soft. On August 13, 2008, one day before a scheduled start, Peavy was brooding about accusations that he was choosing to face weaker opponents. Radio hosts were critical that Peavy had missed facing elite pitchers like Johan Santana and CC Sabathia due to an abnormal resting schedule. Peavy channeled his anger in his next start and outdueled all-star... |
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News flash: We workers want to feel useful, not just appreciated
My friend received a promotion, a raise, and a big fat bonus, but in the end, he still chose to leave the company. His departure offended some older executives who asked questions like “Doesn’t this kid realize how good he has it?” The truth is that my friend did appreciate his situation and it had nothing to do with generational conflict. The real problem was he didn’t feel useful. Being appreciated and feeling useful are related but vastly different feelings. Being appreciated means... |