If my parents had bought when I was born they paid $982. But if they bought when my brother was born, it would be almost two-hundred dollars less each month. A huge difference for a young family.
The sweet spot for modern buyers was October 2011 when payments flirted with $1,000.
The Covid-19 drop and surge can be seen toward the right. It wasn’t until August of 2021 that payments crossed the trend line into wild heights.
What difference does it make for someone now? Since the end of 2020, the ‘typical’ payment increased seven-hundred dollars a month.
Interest rates are a headline metric, but are not the most important thing for buyers. The fall 2022 ‘typical’ monthly payment is: $2,580. A $50,000 decline on the purchase price is equivalent to 1% lower interest payments. Not only that, home prices have a .9 correlation with monthly payments whereas interest rates have a -.55 score.
Housing is easy news to consume. The bad is about rising prices and rates. The good is about remodels, flips, and luxury. The truth is somewhere in the middle, here it’s in color.
How “off track” are housing prices? The red line is the 2016- March 2020 trend line relative to the graph of median listing prices. Currently prices are a 33% premium to what the historical growth suggests.
This is from our HSA. It’s good copywriting. ‘5X’ is easy to understand. ‘You may be missing out’ is great too.
The chart excels as well. It’s easy to understand and those Enhanced Rates do look bigger. They look bigger because of level one numeracy.
We level one think all the time. It’s knee jerk and first blush. We see something and some combination of evolution and experience fit what we see with what we know. Big red ‘Sale’ signs are examples. We first compare the sale price with the previous price rather than the item’s intrinsic value. This makes sense as our first reaction is immediate, requires no additional effort, and is something we are used to doing because it mostly works just fine.
The posts here, about average, focus on this idea too. Average is easy to compute and conveys certainty about an uncertain (often heterogeneous) world. Average is level one numeracy but we can do better.
A fast fix comes from Sir David Spiegelhalter. Don’t look at relative comparisons, look at absolutes. Rather than the relative rate, look at the dollar difference.
That’s what I did.
If someone saves the $2,000 in an ‘enhanced’ HSA account they have sixteen more dollars after twenty years. A lot of years for not a lot of money. For accounts of ten-thousand dollars, the difference is almost eight hundred dollars ($11,543 vs $10,745). Fine, a Series I Savings Bond accrued that same dollar value in six months.
The don’t look at relative comparisons, look at absolutes is a good starting place – but there are further levels.
First is to think about the costs. The enhanced HSA rates are an annuity, likely with some new terms. There’s the switching costs too. That’s a potential headache and unwanted contract in exchange for not much money. We will pass.
Actual health rather than health savings is different.
For people 25-34, their chance of dying from Covid-19 is about the same as pulling the ace of spades from a shuffled deck – twice in a row.
For people 55-64, their chance of dying from Covid-19 is about the same as flipping heads eight times in a row.
For people 75-84, their chance of dying from Covid-19 is about the same as pulling any heart from a random deck of cards – three times in a row.
Those are low absolute risks but seriously consequential.
The world is complicated and messy. Not only that, but it changes too. Numbers are helpful, but we have to ask the right questions to start.
The Covid-19 odds are rough estimates. There are about forty million people in any ten year age group. The number of deaths in the 25-34 group is 11,451. I divided the deaths by size of the group to get the percent chance of death. Odds are multiplicative, three heads in a row are 12.5%, 0.5*0.5*05. Two ace of spaces are one in fifty-two times one in fifty two, or about 0.04%.
It was October 2000 or thereabouts and Jacob Lund Fisker wanted to know if someone could live a sustainable and rich life.
“I did a little back of the envelope math. We physicist restrict ourselves to post it notes typically. I took the global GDP, divided it by the global population, and took our ecological footprint number and divided by it as well. If everyone did what I was setting out to do, the maximum each person could spend was six thousand dollars per person per year.” – Jacob Lund Fisker, Through Conversations, November 2021
There’s a few things going on with FIRE. One is attention grabbing, everyone has a means to share their story and the atypical gets attention. Another is the financial conditions, it’s easier (though not easy) than ever to make a large amount of money, in a short amount of time, and invest in a mostly up market. The last and staying part of FIRE is the intentionality. It is impossible to FIRE without prioritizing one’s life.
Fisker’s philosophy is my favorite because he’s a system thinker. Early Retirement Extreme is a book that starts with systems and ends with personal finance. Saving half of one’s income is the act but you can’t do just one thing.
We’ve looked at spreadsheets for emergency funds, 401Ks, and how many touchdowns a quarterback will throw. Spreadsheets offer precision with numbers but don’t address our systems. Basic math is fine if the system is great but it doesn’t matter how great the math if the system is shit.
Alchemy is about taking existing or marginal resources and deploying them for non-linear effect. Sometimes small changes go boom.
One way to see this is in the expression 20,000×1 != 1×20,000. Rory Sutherland introduced this idea through travel. A new rail line, Sutherland said, that saves many people a few minutes is worth less than a change that saves a few people many minutes.
Another example Rory gave was airline lounges. A sole traveler visiting a lounge many times a year gets a small benefit whereas that traveler with their family twice a year gets a huge benefit. In each case the same number of scones are consumed, but the effect to the consumer is different.
A real life example is the Credit Karma Save program.
“One of the things we noticed was that there’s strong deposit behavior around paydays and we wondered if there was a way to do nudging around paydays. So we created a savings boost program where just by depositing a dollar that month you’re eligible to win twenty thousand dollars that month.” – Kyle Thibaut, The Science of Change, October 2021
That’s not all. Credit Karma also offers Instant Karma, a cash reimbursement program for their debit card users. Every transaction is a chance to win that amount back.
I’d wager that the Credit Karma accounting for “customer reward” or “interest paid” or such, is similar in scope to the competition – but having a few large chunks rather than many small ones is a golden idea.
It’s always nice to validate an idea with an “out of sample test”. Does this work elsewhere? Marc Andreessen riffed on the idea that there are only bonds and call options.
March 28, 2022 update. Previously this idea was in the Landslide post which covered: sun and skin damage, landslide prevention, and Marc Andreessen on the culture of work.
In the early 2010s I listened to Dave Ramsey nearly every day. The Nashville based personal finance (personal accountability) radio host is still on the air, holding court. There’s a few things that make Ramsey popular.
First, he’s great on the radio. The content fits the medium, and Ramsey’s basic explanations, stories, and approaches combined with the delivery works.
Second, he gives good advice rather than perfect advice. There’s a difference between precision and accuracy, usually between the world of a model and the real world. It’s why Ramsey suggests beginning with the debt snowball:
“Start by listing all of your debts except for your mortgage. Put them in order by balance from smallest to largest—regardless of interest rate. Pay minimum payments on everything but the little one. Attack that one with a vengeance. Once it’s gone, take that payment and put it toward the second-smallest debt, making minimum payments on the rest.” – Dave Ramsey (link)
A great behavioral angle. We like feelings of progress and by focusing on the smallest balance we get that, especially given the financial conditions we may be in.
A third thing Ramsey does well is filling an answer gap. One time a woman called into his show and asked a question. He answered. She protested that her friends and family wouldn’t understand. He suggested telling them her financial advisor advised it. I don’t have a financial advisor she said. “I’m your financial advisor!!”, Ramsey retorted.
In another instance he told someone it didn’t matter how much their income was, the purchase wasn’t “in the budget”. Could they afford it? Yep. But framing it against the contrived ‘budget’ change the conversation. (I’ve used this one, it works.)
Both “I’m your financial advisor” and “it’s not in the budget” fill in an answer gap. Having ready answers can change our fast thinking. It works for drinking too much, a diet, or any kind of behavior we’re trying to stick with.
The ready answers can be pretty arbitrary too. If you offered “meatless Monday” would anyone actually comment? I’d wager not. So it’s not the validity of an explanation but merely the existence of one.
Some people don’t like Ramsey’s advice but I’m reminded of the Tyler Cowen expression: opposed to what? If not this then what?
To humans, conditions matter. This, is a creativity canvas.
For instance, payment medium matters. People tend to spend differently because the feedback, the salience of paying with a twenty dollar bill is much higher than with a credit card.
“Certain payment systems leave a weaker trace in your memory. When I’m facing a purchase I ask, ‘How much have I spent in the recent past on things like this?’ If the answer is a lot then I’m less likely to make a new purchase, and if I’m paying by credit card I don’t remember those past purchases.” – Dilip Soman, The Decision Corner, October 2021
So, Soman created an app where people could spend and see feedback on their recent purchases. They spent less! Success!! But in 2010 South Korea created a text-message-for-purchases-alert-system and they found the opposite. “On an average,” Soman said, “people who opted in to receive the notifications spent more instead of less.”
The mechanism seems to be that text message information registers in a different way. “When we interviewed people they would say things like, ‘Oh if I ever needed a record I know my phone has it.’ Instead of being more vigilant they outsources that to the phone.”
The replication crisis in behavioral sciences makes me more hopeful about the tool’s potential. Human beings are goofy. Being one place and not another doesn’t matter how hungry I am, but you wouldn’t know by our actions.
Bottom line: the easiest behavioral tool is dialing friction up or down. Thanks for reading and supporting.
I’ve been driving my wife’s car a lot lately. Her car is nice. It’s smooth, it’s got more room, and it has bells and whistles. It’s always had these things but I’d never noticed.
It’s refreshing to notice instances of relative rather than absolute value. Her car is nice relative to mine but not so nice relative to the newest thing for sale. After driving her car I kinda wanted a new car.
To buy two new cars then means that the relative value of the next new car will be largely hidden from me. Sure there will be neighbors and Ubers and advertisements but I make – we make – easy decisions. If it’s not easy to compare then it’s a comparison that won’t occur.
Ironically I noticed this idea with iPhones a couple of years ago. It only mattered that the phone was newer, not that it was newest. All value is perceived value.
There’s an idea, it’s a formula but really it’s an idea, in gambling called the Kelly Criterion. Broadly, it suggests to act in proportion to edge. Bet big when you have a big advantage. Card counters, like those in the book Bringing Down the House followed this idea.
While Kelly is math, like being Bayesian, it works as a general idea too. Most people never follow the formulaic ‘full Kelly’, rather they bet half or ‘quarter Kelly’ because there’s no way to truly know an edge. So, how exactly does it work as just an idea?
“I’ve had a ton of friends who thought Solana is the future, bought in at a couple of dollars, waited eight months and nothing happened and sold everything. Then, all of a sudden, boom Solana took off. The rapid climb is where a majority of the value capture occurred. You have to build a pretty serious conviction around something and have it be small enough dollars. You can’t say: this didn’t work I’m going to move into the next thing. You have to be able to say: I still have conviction here, I’m going to leave this be.” – Kevin Rose, September 2021
Rose practically uses the Kelly language! Rather than edge and bet he says conviction and small-enough-dollars.
This cost to benefit ratio approach is a nice way to frame decisions. While Kelly started in gambling and moved afield, anything about risk and reward, travel budgets for instance, works.
Most systems have lowish cadences: closer to construction than technology, and the reward portion takes time to compound. When that’s the case, it may help to think about how much conviction we have and how long the cycle may take.
This podcast hit my feed September 19, the same day my wife asked me to buy some Doge Coin. ‘Why’ I asked. I’d convinced her to dollar-cost-average into Bitcoin and Ethereum, but it took a fair bit of convincing. ‘I just want some’ she explained. shrug
Sometimes the best way to see a thing is to reframe the situation. We’ve looked at FIRE (financial independence retire early) a couple of times: the FIRE Reddit survey and homeotelic responses. But, what’s the job to be done of FIRE?
When asked what’s worth spending money on, Mr. Money Mustache suggests two further questions:
“So instead of thinking about what’s worth spending money on, I encourage people to break it down more like this: What things really make me happy in life, and which things bring me stress or unhappiness? What is the most effective and least costly way to cut out some of that stress and bring more of the happiness into my typical week?” – Pete Adeney, Outside Magazine, July 2021
What’s the job of money? One way to figure that out is answer the happiness and stress aspects of the question. And this is the job to be done for financial independence retire early – more happy less stress.
This is more tricky than it sounds. FIRE has a number, traditionally 25x expenses. We like numbers like this. Numbers like this offer comfort in their certainty. But numbers don’t answer hard questions, questions about being stressed and being happy.
In an interview with the Financial Times, Adeney is asked to coach two FIRE strivers. Should they quit their teaching careers to make more money (with more stress). Adeney flips the question around. Rather than viewing it as a money question, he frames it as an enjoyment question. Like denominating work trips in time rather than dollars, denominating work in quality rather than quantity (of dollars) shifts the question. The guests like their jobs of the moment, and that Adeney says, is part of what they’re working for anyway.
A friend wants to pay off his mortgage in the next three years. He’s got two young kids. He’s younger than me. Meanwhile, I refinanced into a new thirty year mortgage. If he pays off his home debt it will be quite an accomplishment.
In a way Bobby and I are at the roulette wheel. He’s bet on black. I’ve bet on red. One of us will be right, but we can’t know ahead of time. Most of personal finance is reducing the range of choices to just good options. It feels like we’ve both done that.
The analogy of roulette also works because rather than red or black, the ball could land on green. Despite planning, we both could be wrong.
It’s also important that we have designed our systems. Sometimes we think knowledge leads to action, but around here we know that design rules the day. Bobby has a plan to pay off his mortgage early – that plan is the design. Our family has automatics contributions – that’s our design.
“If someone says financial literacy at a party I basically give them a thirty minute lecture. The idea is that in a perfect world, if someone is taught about FICO and the impact on their life, they would take actions to improve their FICO score. This is just not what researchers have found – and it’s really robust…the punchline is that environment matters.” – Kristen Berman, All the Hacks, October 2021
Roulette, as an investment, is not in the range-of-good-choices. But as an analogy it fits nice. Prepare and pick from prime possibilities but remember the ball might not bounce any of those way.