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Friday, April 28, 2017

Irrational Choices

Posted by Tim Stobbs on September 28, 2011

In personal finance circles there is a bit of natural bias to making decisions based on rational thought and careful analysis (you have noticed a LOT of spreadsheets and charts, right?).  Granted a lot of people also temper those decisions with some emotional input.  Yet we tend to ignore the fact we also make complete irrational choices almost purely on emotion.

To explain this further may introduce the newest member of my family, a little dog called Bing, she came to live with our family because of a completely irrational decision by my wife a few weeks ago.  I’m not blaming my wife for this choice, but merely telling the tale of how this all went down.

First a little history on the situation, Bing had previously been owned by my parents.  Yet after a few years of my own father being retired they realized they had a major issue with their dog.  Their lifestyle was no longer compatible with owning a dog.  They travelled much more and also spent longer periods of time away from home during the day which they thought was unfair to the dog since she was used to having someone around for most of the day.  So after a couple of years trying to make it work, they decided to put the dog up for adoption, but prior to doing that they approach their kids to determine if any of us had any interest.

My wife and I aren’t dog people.  Typically we don’t like most of them as we find a lot of them horribly trained or they bark too much.  Yet we had often commented in the past they we make an exception for Bing.  As this particular dog (not its breed) suits us just fine as she only barks when someone comes to the door and is extremely good with kids (which is critical when your wife runs a daycare).  So we had some interest and discussed the decision for a bit.

On the logical side a dog isn’t the best choice for us as we tend to travel a fair bit ourselves and with the daycare the dog might be an issue for some parents.  Yet in this particular case the reality was my wife was going to be spending the majority of the time with the dog and I wasn’t.  So I turned the decision over to my wife and said I could live with or without the dog.

Since we now have the dog for a few weeks, you know what she choose, but what was really interesting to me was when I asked her: why?  The answer “It just feels right.”  So this choice was done purely on emotion and completely irrational.  Yet is that wrong?

I personally think was all make irrational choices a lot more than we give ourselves credit for.  For example, how did you determine what you wanted for supper last night?  Did you look at your previous eating habits and determine the choice based on a cost and nutritional analysis?  I don’t think so, you likely went with “I feel like eating X” and then did so.  So irrational choices happen more often than we like to think about and frankly that is completely fine in many cases.

Where irrational decisions do get you into trouble is investing, buying a house or a car.  What’s the difference?  The impact of the decision and the cost.  High impact and/or high cost decisions shouldn’t be irrational, but low impact or low costs can be.  In regards to our dog, I would say the impact was low and the costs will towards a moderate amount because they will  be ongoing for a number of years.

So what was your last irrational choice? Or what do you do in the case of moderate impacts or costs and irrational decisions?

Cleaning up my mess, all at once

Posted by Dave on September 27, 2011

I have been procrastinating on getting some things done around the house that have sat since I moved in two and a half years ago.  This past Saturday, I finally got around to doing these various projects.   There were three things that I hadn’t done – finish laying a 6’ x 4’ area of laminate flooring; finish painting a hard-to reach area on a stairway; and finally trim about a 1/2 inch from the bottom of a door.  In total, these projects, which sat for so long,  took a total of three and a half hours to complete and around $30 in total cost (I bought an extendable pole for $15 to paint the high wall as well as a $15 saw for the door).

I’m not sure why these things took so long to get around to, my house looks much better now, I have an appreciative wife, and it feels good to get this stuff done.

From a personal finance perspective, there have been times in the past that I have delayed in doing something that would take very little time to achieve, and would provide significant economic gains or peace of mind.  One item that comes to mind was life insurance.  Ideally, I should have had some form of insurance for my family just to deal with funeral costs and settlement of my accounts.  It wasn’t until I had to have insurance to buy a house that I bought insurance from my brother-in-law.

One item that I have put off and need to take care of is a Will.  I think I have put this off because if my wife survives me, everything will be left to her anyways and if we’re both dead we really don’t care who gets our stuff.  I think we would have been a little more pro-active in this task if we had children or dependents, but that is not the case.  However, similar to my home-improvement projects, getting a Will would take at most an hour-long visit with a lawyer, and a relatively low amount of money (or around $75 to buy a legal will kit online that comes with a living will and power of attorney form).

I think that most people have a small list of things that fall into the cheap-and-easy-to-complete-but-just-haven’t-got-around-to-it category.  I am envious of people who can focus on a singular task to completion, and not let anything get in their way, that is not me at all – I have a fairly short attention span and am constantly jumping around between tasks, which leads to a significant list of tasks that are 75% complete, or never get started, such as creating a Will.

Do you have any tasks that you have been avoiding?  If not, how do you do stay on task?(I would like to know!)

Real Life Gaming

Posted by Robert on September 26, 2011

This is a guest post by Robert, who lives in Calgary and works as a financial adviser retired at 34. He is married, has three kids.  Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.

I only played video games occasionally as a teenager, which may be why I still enjoy the simplest games now. For example, my kids recently discovered Plants vs. Zombies, so I played a few rounds to figure out what it was about. Guilty confession: I played for well over an hour. That reminded me how much I enjoyed playing real-time strategy games in university, specifically Warcraft and Starcraft.

What is so fun about these games? Fundamentally, they’re very simple. They have two functions that a player needs to choose between. One function is spending money. In each of these games, spending money means building defences (or offences) against invaders. If you don’t spend money, you get over-run. The second function is increasing capacity. In Plants vs. Zombies, it means generating more sunshine to be able to plant more plants. In Warcraft, it was mining more gold and chopping more wood, to be able to build buildings and warriors. The strategy comes from balancing spending, to avoid being defeated, with increasing capacity, to have enough strength to win.

I also enjoyed programming, a hobby I haven’t devoted time to for years. So I wrote a simple trading game, much like Drug Wars, for the Palm OS. When Palm Pilots were popular, I offered to a colleague, who was at least 10 years older than me, that I would give him a copy of my game. I wanted to impress him with what I was able to create. I explained that you start with a large debt and you try to pay it all back in a certain number of turns. I was surprised that he wasn’t the least bit interested. “That sounds much too much like my real life,” he said.

If games are fun when they’re like real life, could real life be fun if it’s seen as a game? Instead of playing games to build capacity and spend, I viewed life a little like a game. Each month, I got a paycheque. Each month, I had to spend at least a minimum on supporting my family. Each month, I could choose to indulge on extras (like snacks, gadgets or vacations), or I could invest (in stocks, mostly). Investing in stocks has the potential to build capital and income. But, like a game, the outcome is partly random. Unlike a game, however, I have only one life; I’m not even tempted to underspend. Also, although it’s possible to start over, I want to avoid at all costs having my investment account go to zero.

How do I know when I’ve won? With a game, it’s obvious; either all the zombies are defeated or the Orc village is razed and the game ends. But real life keeps on going. There’s always more points to score, and there’s always someone who’s far ahead. The major difference is that only I can decide when I’m finished playing and I’m satisfied with my score. A side benefit is that (almost) no one is impressed by a high score in Plants vs. Zombies, but people are impressed by a large bank account. (I admit, money isn’t the only way to keep score.)

Is life a fun game for you? Are you getting closer to winning?