Blog – Page 92

Merry Christmas! The Carnival of Wealth doesn’t take the holiday off. Personal finance blog posts of varying worth. Let’s get started:

Justin at Young & Thrifty cites examples of what we’ve been saying for years: A university education is not a certain ticket to riches, a necessity in an ever more competitive marketplace, a human birthright, or any of that nonsense. For most of you, going to college will be worse than a gigantic waste of time. It’ll be a gigantic waste of time that will set you back dozens of thousands of dollars and will permanently retard your financial progress. Go ask the philosophy major stocking shelves at Guitar Center if you don’t believe us. But before you do that, relying on the reading skills you mastered in elementary school and read Justin’s post. He lists several lucrative positions that require little more than a brief and relatively inexpensive, relevant course of study. Neither Harvard nor Oxford has a Department of Elevator Repair, but mastering that particular trade is an easy way to earn good money while staying out of debt that will crush your spirit and weigh on you like a fat girl attempting to do squat thrusts.

Kroger is one of America’s 25 or so largest companies by revenue. Think of all the synergy they’d have if they started buying up farms in the San Joaquin Valley and cattle ranches throughout the Midwest! In fact, why aren’t they doing this already? Because Kroger’s executives aren’t crazy, at least not at crazy at the Delta suits who decided that if you’re going to buy jet fuel, you might as well eliminate the middleman and buy yourself a refinery. Andrew at 101 Centavos brings us this curious tale of an airline forgetting what business it’s in, and loading up on an asset that ConocoPhillips was happy to get rid of. But yeah, if an oil refiner with a 137-year history can’t turn a profit on an idle refinery, an airline can.

Michael at Financial Ramblings explains the common phenomenon of your mutual fund share prices dropping while the market itself rises. It’s not just possible, it’s likely, depending on dividend distribution. We’d give more details about Michael’s submission but the CoW has a longstanding tradition of never offering an analysis of a post that’s longer than the post itself.

One thing we’ll never understand here at Control Your Cash is some people’s relentless faith in their government. Especially in their government’s financial prowess. Former President George W. Bush made a halfhearted attempt at giving Americans the opportunity for a little more autonomy in their retirement accounts, and got drowned out by a chorus of “DON’T TAKE AWAY MY PRECIOUS SOCIAL SECURITY” for his troubles. Never mind that Social Security has been unsustainable from the day that incestuous statist Franklin Roosevelt developed it, we can’t let mathematics stand in the way of our desires. PKamp3 at DQYDJ.net imagines a world in which human self-determination includes the right to not have federal functionaries proclaim, “Citizen, you’re too stupid to make your own investment decisions. Let us handle them. One less thing for you to worry your pretty little head about.”

The ever-mysterious Dividend Growth Investor discusses the inevitable can-kicking that will result from the “fiscal cliff” “talks”. We used that first set of quotation marks because the term that’s entered the vernacular implies that our nation’s economy isn’t already in a gigantic freefall resulting from a volume of spending that has permanently entrenched the United States as by far the biggest debtor nation in history. As for the second set of quotation marks, our political bettors aren’t discussing anything of consequence, other than how quickly the voices of alleged fiscal conservatism will sell out their principles when confronted by a dashing and charismatic President who, as one voter pointed out to us, sings to his wife at night.

Some crap about yoga.

Free Money Finance saved almost 40% on appliances? Wait, that should be a statement, not a question. Or maybe it should be an exclamation. Yes, an exclamation! He went to Lowe’s, used a gift card with a built-in discount, finagled another discount from a realtor friend of his, bought in bulk, paid with an American Express Blue Cash card, and basically saved hundreds of times what that kook at The Simple Dollar saves every time he brews his own toothpaste or collects tattered baseballs on his intrastate vacations instead of going to a souvenir shop.

Odysseas Papadimitriou at Wallet Blog recently bought some eye drops for his kid, Achilles Spiro Papadimitriou (we believe they might be Greek.) The eye drops cost 3,025% more in the United States, the country where they were developed, than in Greece. How is this possible? Mostly patents, plus insurance companies mandating the use of specific drugs for specific ailments. Those and a 1987 act of Congress that prohibits resale of drugs. You know, because why should there be a market for a valuable commodity? Better to deny people the right of mutually beneficial exchange.

Harry Campbell at Your PF Pro is an aerospace engineer? Wow, didn’t see that coming. Consider him the counterexample to our argument that a college education is almost always going to be a waste of time. Anyhow, Harry sacrificed money for professional convenience (he took a job in expensive San Diego rather than a better-paying one in the interior of California, a day’s drive from the beach.) Harry’s content with his decision. Then again, he can write his own ticket for the rest of his life because he didn’t waste his time studying something pointless in college.

“Buying a house? Don’t forget about the closing costs.” “What are closing costs?” “Heck, I don’t know. But watch out for them.” Charles at Wallet Hub doesn’t do vague platitudes, he does detailed analysis. And explains exactly what each closing cost is when you buy a house, and how they can impact your purchase price. God, there are lots of them. Still, it beats the hell out of renting.

From John Kiernan at Card Hub, an original take on the aforementioned “fiscal cliff”. He talked to…cliff divers. Actual cliff divers. And a guy named Cliff (a business administration professor). This is better than it sounds, swear to God. Read it.

All in all, not an awful Carnival. Way better than last week’s, anyway. Thanks again for joining us. Merry Christmas. New Anti-Tip of the Day tomorrow, new post Wednesday…you know how it works. See ya.

Or for our blind fans, gutta-percha balls of varying wicker width will work.

Let’s play a game. (Save your energy looking for a trick, or a loophole in the wording. There isn’t any. Just read.)

Behold a bag with 3 balls in it. One is red, each of the others is either black or white.

You get a choice. You’ll receive $100 if you reach into the bag and pull out:

A. A red ball. (These are straight-up gifts, with no risk on your part. It’s not as if you have to pay $100 if you don’t choose a red ball.)

B. A black ball.

Pick one. Write down your answer. We’ll need it in a couple of minutes. (And don’t think anyone’s trying to screw you here. The non-red balls came at random from a giant vat of balls containing 1000 white ones and 1000 black ones.)

Okay, same bag, only now with different (and more generous) rules. You get $100 if you choose a

C. Red or a white ball.
D. Black or a white ball.

Again, pick one.
Now look at your answer from the 1st question. Considering that the answer consisted of only a single letter, you probably didn’t need to write it down and can thus recite it from memory, but many of you are slow, which is why we disabled comments.

If you’re like most people, you selected A and D. Which isn’t wrong nor right, but it is inconsistent.

Regarding the A-B choice in the first example: Most people pick A because it’s a “sure thing”, in a manner of speaking. You have a fixed 1/3 chance of winning if you pick A. If you pick B, you might have a 1/3 chance of winning. Or a 2/3 chance. Or possibly no chance.

In the second example, most people pick D. Again, because it’s a “sure thing”. Choose D, and you’re guaranteed a 2/3 chance of winning. But if you pick C, yes, you might have a certain chance of winning. Or a 2/3 chance. Then again, you might have only a 1/3 chance.

So why is it that if you indeed picked A and D (or B and C, which hardly anyone does), it makes you inconsistent?

If you choose A, you’re assuming that both the non-red balls are white. (Think about it.)
And if you choose D, you’re assuming the opposite – that at least one non-red ball is black.

The psychological revelation here is clear: people hate risk that they deem unnecessary, even when said risk is anything but.

“No, but I KNOW I have a 1/3 chance with A. I don’t KNOW that with B.” Yeah, but it doesn’t matter. Ultimately, it doesn’t matter whether you pick A or B, and it doesn’t matter whether you pick C or D. Each of the former has a 1/3 chance of paying off, each of the latter has a 2/3 chance of paying off. Pull a ball out of the bag (or out of other bags that fill the same conditions) 900 times, and on average it’ll be red 300 times. It’ll be black 300 times. It’ll be red or white 600 times, and it’ll be black or white 600 times. Absolutely and without exception.

Humans are awful at assessing odds, that’s not news. Go to a lottery ticket kiosk or casino floor if you doubt that. But here’s a situation where people know the odds and are still somehow convinced that there’s a way to beat them, by eliminating uncertainty. (Or believing they’re eliminating uncertainty, when in fact they aren’t doing a thing.) And this for a game with nothing but upside.

How does this manifest itself in our daily lives? It happens all the time, and in more subtle ways than you think. The investment that pays 10%, or the one with half a chance of returning nothing and half a chance of returning 20%? There’s a particular kind of person who wants the certain payout and another who’s willing to gamble, but again, that’s not the point here. The point is that if you are going to be that conservative person who wants a guaranteed payout no matter what and will gladly forgo the possibility of greater riches (because you figure your metaphorical bag probably contains 2 white balls), you should still hold that assumption when the payouts increase across the board (instead of assuming that well, if I look at it from this angle, then there’s either 0 or 1 white balls in there and my initial assumption about 2 white balls was wrong.)

Selecting “B” or “C” isn’t embracing the fear of the unknown. It’s coldly assessing the situation and saying, “This is no worse than selecting ‘A’ or ‘D’. I can’t assume the deck is stacked against me in one moment and then think it’s stacked the other way in the next.”

But what if you can’t afford to lose? What if the payouts above were -$100 instead of $100? Again, it shouldn’t matter. There’s nothing you can do minimize your chance of loss, although maybe you can convince yourself otherwise.

In our example, it doesn’t matter what you pick. In real life, it usually does. But either way, there’s no point in holding hunches only to discard them seconds later. And in cases where the inputs and outcomes are random, there’s no point in even holding those hunches in the first place. Expected value is expected value.

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