Author Topic: Towards a Unifying Theory of Math is Math and Behavioral Economics  (Read 2999 times)

mm1970

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #50 on: January 12, 2018, 09:49:34 AM »
Are they bad decisions or sub-optimal?  When do you cross over?

Was buying too big a house no matter what other great deals were had, if you don't need the space now and just have to pay more for it, or to heat and cool it, even if you can mitigatge that (for boarder42) a bad decision, or sub-optimal?  Do we know that now, or will we have to wait 5-10 years to see how the housing market is doing, to see if he's still living in it, etc?

Cycling Stache

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #51 on: January 12, 2018, 10:07:00 AM »
You ability to do the cookie math (is short-term enjoyment worth long-term unhealthiness) never changed.

The "cookie math" is not math, it is cost-benefit analysis.  There is no math involved, and therefore no unassailably-correct answer yielded by math.

This is a fair distinction, but I think the second point goes too far.

The cost-benefit analysis in my hypothetical can be correctly calculated for the individual.  The individual weighs the short-term joy of eating the cookie versus the long-term impact of that cookie fest.  That's classic economics.  Correctly applying that cost-benefit analysis for the individual should always result in the same outcome, so long as nothing material changes to affect the cost-benefit analysis.

That's where behavioral economics comes in.  Whether the cookie is on your desk doesn't change the cost-benefit analysis you likely did in deciding whether to eat a cookie in the first place.  Whether you're solving a hard math problem likely shouldn't change your cost-benefit analysis, unless you've always thought there is nothing more enjoyable than eating cookies while doing hard math problems.  You eat the cookie because it's available, or in the latter example, because the analytical side of your brain is engaged in work, and so the instant-reaction side takes over (Daniel Kahneman who won a Nobel Prize in Economics for some of this stuff calls it System 1 and System 2).

In that sense, the "math" embedded in the cost-benefit analysis produces one correct answer for the individual in a particular situation, and that "math" shouldn't change so long as the material variables don't change.

For boarder's mortgage payment example, if I told you that you could earn a guaranteed 7% return on your money (no question guaranteed) and only pay 4% interest on the same money, you would rationally take that offer 100% of the time.  It's an easy cost-benefit analysis, or math problem. 

In fact, the return over a 30-year period in the market has always been positive and there's no good reason to believe that the future will be any different (see that chart that has all the terrible things that have happened during the history of the stock market while it's constantly gone up).  Thus, while there is some uncertainty about the market's performance over the next 30 years, you can still theoretically do a math problem of the estimates of various probabilities and conclude that there is a very high likelihood that the market will return a positive number greater than the 4% mortgage.

The problem is that the uncertainty and the difficulty in doing that math problem opens the door for fear of loss.  We assign twice as much value to loss as we do gain.  That's a consistent finding in behavioral economics.  It's not a math error in terms of adding up numbers incorrectly.  Rather it shows up in our irrational overweighting of the likelihood or impact of loss when we consider what might happen, and so we do the cost-benefit calculation incorrectly. 

boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #52 on: January 12, 2018, 10:09:10 AM »
Are they bad decisions or sub-optimal?  When do you cross over?

Was buying too big a house no matter what other great deals were had, if you don't need the space now and just have to pay more for it, or to heat and cool it, even if you can mitigatge that (for boarder42) a bad decision, or sub-optimal?  Do we know that now, or will we have to wait 5-10 years to see how the housing market is doing, to see if he's still living in it, etc?

you're comparing two fundamentally different things - choosing a house or a car or anything that you purchase is not in the same ballpark as the simple difference in paying down a low cost mortgage instead of investing. 

when presented with the option to live like a monk and be retired today almost no one here would choose this option.

when presented with the option of retiring 2-3 years sooner without changing any part of your lifestyle most here on the surface would choose that. 

Then when you tell them you have to change your feelings around debt they get combative and say its different.  no its not different.  you're now applying emotion to what should be a very simple mathmatical decision - now that you've applied emotion to this decision with out really understanding the math i think it makes that person more inclined to sell in a down turn as well.  b/c they've proven once to not pay attention to our understand the math so when the markets are bad they could and are more likely to make that same decision again. 
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brooklynguy

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #53 on: January 12, 2018, 10:42:00 AM »
The cost-benefit analysis in my hypothetical can be correctly calculated for the individual.  The individual weighs the short-term joy of eating the cookie versus the long-term impact of that cookie fest.  That's classic economics.  Correctly applying that cost-benefit analysis for the individual should always result in the same outcome, so long as nothing material changes to affect the cost-benefit analysis.

The quantification of qualitative costs and benefits is not math.  Once you've reduced your inputs to numbers you can use math to compute your output, and if your math is correct then your output will necessarily be correct but only assuming your inputs were correctly quantified in the first place.  Garbage in, garbage out.

Quote
The problem is that the uncertainty and the difficulty in doing that math problem opens the door for fear of loss.  We assign twice as much value to loss as we do gain.  That's a consistent finding in behavioral economics.  It's not a math error in terms of adding up numbers incorrectly.  Rather it shows up in our irrational overweighting of the likelihood or impact of loss when we consider what might happen, and so we do the cost-benefit calculation incorrectly.

This is exactly my point.  Most of the debate in the leveraged-investing-via-mortgage threads revolves around risk assessment and the like, not bad math.  There's plenty of bad math too, but any debate borne out of faulty arithmetic tends to get stopped in its tracks once the math is corrected.  You can't argue with math.  But you can argue with the assessment and weighting of risks.  In my view, most of the anti-leveraged-investing-via-mortage crowd does a poor job of it, but I can't use the inviolate universal truth of mathematics to defend that position (except to the extent that the risk analysis in question is relying on faulty math).

Cycling Stache

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #54 on: January 12, 2018, 10:44:06 AM »
Using it to justify or support deliberately making mathematically bad decisions is dumb.  We should identify our flaws in order to correct them, not celebrate and reinforce them.

I agree that we should not be celebrating bad decisions.

But I also believe that we should be skeptical about your ability to act rationally, notwithstanding your belief that you will do so.  The key is that the fact that you think you will act rationally makes you no different than anyone else.  Maybe you will and maybe not, but statistically you won't, at least in certain situations.

so whats your goal with this thread - to just point it out? or to try to determine who is more susceptible? 

This is a fair question.  My goal is to identify the tension between the belief that we will act rationally and that everything is just a math problem, and the reality that people do not tend to act that way, even though they believe they will.

You, Sol, and probably 90% on this board believe they will make correct, rational decisions with respect to investing and applying "math is math" principles.  Statistically, though, most people believe they will act rationally, and statistically they don't, at least in certain predictable situations.

So the goal in giving advice on this forum and understanding what is likely to happen is to identify the mathematical principles that are clear and incontrovertible and see if we can make it so ingrained that we will consistently act on those principles, even when most people would not.  But it's also to recognize that despite talking a good game, we also have to come up with plans to help people protect themselves from situations in which they will tend to act irrationally even while believing they're going to act rationally.

In other words, it's not always math is math, unless we also articulate that the goal is to do the math correctly, but also identify the ways in which people may do the analysis incorrectly, so that they can protect themselves from that mistake.

You have done that in large part with your trying to help people ingrain the math of investing rather than pre-paying the mortgage, by trying to help people clearly see the optimal outcome so that they can hopefully act on it.  Where you've missed though is in failing to understand the way in which people predictably skew the cost-benefit analysis to account for fear of loss. 

Why does that matter?  Because it's great to give people the textbook solution to follow, but if they're going to panic and screw it up when the markets starts to plummet, then you haven't equipped them to deal with the situation.

The Investment Policy Statement above is a perfect example of a well-done solution to this problem.  You write out ahead of time exactly what your investment allocation is and when you're going to rebalance.  Why?  Because you can read it and follow it when you wouldn't otherwise do it.  Not because you're bad at math, but because you're likely to make predictable errors, in good times and bad.  Let's say you've got 60% domestic, 30% international, and 10% cash.  International has a great year and outperforms and it comes time to rebalance.  What's the tendency?  The tendency is to think that international is going great and domestic isn't doing as well, so let me stick with the international rather that rebalance.  It's not a math error in the sense of messing up numbers.  It's just a normal reaction to one section doing better than another, and not rebalancing violates the formula that you worked out ahead of time that you believed to be optimal.  You need the rule to help you overcome your tendencies.  Or maybe the market is crashing.  It's tempting to go to cash for a little while to see how things shake out.  That's a strong behavioral tendency.  The IPS is basically forcing you to be the computer that ignores those human reactions, by following the pre-planned schedule.

When we get to asset allocation, it's more complicated, but I think we need to bring some consistency to the analysis.  If a 25-year old says they don't trust the stock market because it dropped in 2008-2009, the first answer has got to be to show them the math.  Here's how the market has performed all time, here's how it performs compared to cash, etc.  Even if that person is risk averse and uncomfortable, the first goal has got to be able to get them to understand the optimal numbers so they can try to internalize it, rather than just say it sounds like you're risk averse, fewer stocks for you. 

But the second step also needs to happen, which is not just you're 25, so 100% stocks for you, good luck, nothing further to discuss.  If someone is going to be truly uncomfortable with the market such that they're then not going to invest or are likely to panic when the market drops, then the appropriate answer is maybe 50% stocks, 50% bonds to start.  Explain what they're giving up in potential returns based on a historical analysis, but if that's what they need to get comfortable, fine.  Not, you're being an idiot, learn to do math.

It's always easy to talk a good game.  But everyone thinks they're rational and exceptional, even though statistically, they're not.  We should acknowledge that in giving advice.   

boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #55 on: January 12, 2018, 11:07:53 AM »
i think your case of 50/50 AA is just giving in to behavioral economics and using it as an excuse to make a very poor decision.  And if that person cannot feel comfortable enough to go higher than that on their own an advisor making 1% would be better for them.

So i think i've come to my own conclusion here others may differ but, if you cant or are unwilling to learn the math or even after you do, you still have a very poor risk tolerance that may lead you to changing your AA in a downturn you should then hire a financial advisor who takes 1% of your money b/c that is money well spent.

So i guess your goal here was to convince us Financial Advisors are needed for people. 
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mm1970

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #56 on: January 12, 2018, 11:18:48 AM »
Are they bad decisions or sub-optimal?  When do you cross over?

Was buying too big a house no matter what other great deals were had, if you don't need the space now and just have to pay more for it, or to heat and cool it, even if you can mitigatge that (for boarder42) a bad decision, or sub-optimal?  Do we know that now, or will we have to wait 5-10 years to see how the housing market is doing, to see if he's still living in it, etc?

you're comparing two fundamentally different things - choosing a house or a car or anything that you purchase is not in the same ballpark as the simple difference in paying down a low cost mortgage instead of investing. 

when presented with the option to live like a monk and be retired today almost no one here would choose this option.

when presented with the option of retiring 2-3 years sooner without changing any part of your lifestyle most here on the surface would choose that. 

Then when you tell them you have to change your feelings around debt they get combative and say its different.  no its not different.  you're now applying emotion to what should be a very simple mathmatical decision - now that you've applied emotion to this decision with out really understanding the math i think it makes that person more inclined to sell in a down turn as well.  b/c they've proven once to not pay attention to our understand the math so when the markets are bad they could and are more likely to make that same decision again.
My argument is that they are exactly the same.

Both are based on emotions, and what is perceived as safe, or comfortable.

It's not simply retiring 2-3 years early because most people don't know what is coming in the future.

The mortgage is a SURE bet over the space of a short time.
The market is a SURE bet over a long period of time, but unknown over a short period of time.

sol

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #57 on: January 12, 2018, 11:24:42 AM »
You, Sol, and probably 90% on this board believe they will make correct, rational decisions with respect to investing and applying "math is math" principles. 

You misunderstand.  I'm not suggesting that any one specific person will make the right decision, I'm suggesting that there IS a right decision and if you do anything else then you are wrong.  Being wrong isn't the end of the world.  Sometimes it makes us feel better.

So if you want to be a momentum trading market timer, that is your right.  You're going to end up with less money than if you had been an indexer, but if it makes you happy to have less money that's fine.  If you want to rock 80% bonds, you are going to miss out on vast economic prosperity but if you sleep better at night you go ahead and rock out.

The key here is that this is a financial forum.  We are dealing with dollars, not feelings.  Go party on a psych forum if you want to talk about your emotional vulnerabilities.  Here, there are exact numerical answers to maximizing wealth.  Every choice that reduces your wealth, for reasons psychological or irrational or charitable or accidental, is mathematically wrong when evaluated in terms of wealth maximization.  That doesn't mean it isn't the right choice for you, it just means you will be poorer as a result.

BookLoverL

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #58 on: January 12, 2018, 11:25:15 AM »
FWIW, I don't have a horse in the mortgage vs investing game at the moment, because I don't have a house. Also, I don't really want to spend the extra time working each year that would be needed to make mortgage payments AS WELL as saving/investing, unless one of my self-employed endeavours takes off enough that it's basically no extra time. In this scenario, I wait until I have 100% of the cost of the house saved in my stache on top of what I consider a reasonable number of years' expenses (maybe 5? IDK), and then buy a house with no mortgage at all ever. This means that everything I earn on top of my actual expenses is going towards my net worth anyway.

My goal in joining the thread was to help the different sides in this argument understand each other better - when I read the mortgage payment threads, I often feel like people are talking past each other. Generally, if someone's not responding to your initial arguments, and it doesn't seem to be an issue of reading comprehension (in that case, maybe rephrase in simpler language?), the most effective option isn't simply to repeat the same argument again a few posts later, but to try to figure out where they disagree, and to bring new, fresh points into the argument that might help bridge that divide. If they weren't convinced the first couple of times they heard a particular point of view, they're not likely to be unless more information is provided that causes them to see the issue differently.
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boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #59 on: January 12, 2018, 11:30:50 AM »
FWIW, I don't have a horse in the mortgage vs investing game at the moment, because I don't have a house. Also, I don't really want to spend the extra time working each year that would be needed to make mortgage payments AS WELL as saving/investing, unless one of my self-employed endeavours takes off enough that it's basically no extra time. In this scenario, I wait until I have 100% of the cost of the house saved in my stache on top of what I consider a reasonable number of years' expenses (maybe 5? IDK), and then buy a house with no mortgage at all ever. This means that everything I earn on top of my actual expenses is going towards my net worth anyway.

My goal in joining the thread was to help the different sides in this argument understand each other better - when I read the mortgage payment threads, I often feel like people are talking past each other. Generally, if someone's not responding to your initial arguments, and it doesn't seem to be an issue of reading comprehension (in that case, maybe rephrase in simpler language?), the most effective option isn't simply to repeat the same argument again a few posts later, but to try to figure out where they disagree, and to bring new, fresh points into the argument that might help bridge that divide. If they weren't convinced the first couple of times they heard a particular point of view, they're not likely to be unless more information is provided that causes them to see the issue differently.

your first statement is confusing - do you have no cost for your lodging - owning a house or renting is another math problem that can be done to determine which is optimal for your personal situation.  so your evaluation for what you'd need to own a house is likely flawed - since we have a mathematically optimal way to determine if its better for one to own or rent.  if you have no cost for lodging then you can ignore this comment .
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boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #60 on: January 12, 2018, 11:39:33 AM »
and to @sol 's point above - we should always present the best options for people to follow and celebrate the good things people do to make it a better place.  like how i dont celebrate my mcmansion on here or my commute to work - i dont think we should be celebrating mortgage paydowns in the US
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BookLoverL

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #61 on: January 12, 2018, 11:59:31 AM »
FWIW, I don't have a horse in the mortgage vs investing game at the moment, because I don't have a house. Also, I don't really want to spend the extra time working each year that would be needed to make mortgage payments AS WELL as saving/investing, unless one of my self-employed endeavours takes off enough that it's basically no extra time. In this scenario, I wait until I have 100% of the cost of the house saved in my stache on top of what I consider a reasonable number of years' expenses (maybe 5? IDK), and then buy a house with no mortgage at all ever. This means that everything I earn on top of my actual expenses is going towards my net worth anyway.

My goal in joining the thread was to help the different sides in this argument understand each other better - when I read the mortgage payment threads, I often feel like people are talking past each other. Generally, if someone's not responding to your initial arguments, and it doesn't seem to be an issue of reading comprehension (in that case, maybe rephrase in simpler language?), the most effective option isn't simply to repeat the same argument again a few posts later, but to try to figure out where they disagree, and to bring new, fresh points into the argument that might help bridge that divide. If they weren't convinced the first couple of times they heard a particular point of view, they're not likely to be unless more information is provided that causes them to see the issue differently.

your first statement is confusing - do you have no cost for your lodging - owning a house or renting is another math problem that can be done to determine which is optimal for your personal situation.  so your evaluation for what you'd need to own a house is likely flawed - since we have a mathematically optimal way to determine if its better for one to own or rent.  if you have no cost for lodging then you can ignore this comment .

I'm in my mid-twenties, and live with my parents in exchange for board and doing general helpful things around the house, as I'm fortunate to get on with them and they live in the area I would like to live in long term. The board includes all food and bills and is about equivalent to what I'd spend on just food if by myself, so it's cheaper than either renting or mortgage. I recognise that not everybody has this option. If I couldn't do this, I would probably look for people to cohabit with and save money that way.
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boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #62 on: January 12, 2018, 12:21:09 PM »
FWIW, I don't have a horse in the mortgage vs investing game at the moment, because I don't have a house. Also, I don't really want to spend the extra time working each year that would be needed to make mortgage payments AS WELL as saving/investing, unless one of my self-employed endeavours takes off enough that it's basically no extra time. In this scenario, I wait until I have 100% of the cost of the house saved in my stache on top of what I consider a reasonable number of years' expenses (maybe 5? IDK), and then buy a house with no mortgage at all ever. This means that everything I earn on top of my actual expenses is going towards my net worth anyway.

My goal in joining the thread was to help the different sides in this argument understand each other better - when I read the mortgage payment threads, I often feel like people are talking past each other. Generally, if someone's not responding to your initial arguments, and it doesn't seem to be an issue of reading comprehension (in that case, maybe rephrase in simpler language?), the most effective option isn't simply to repeat the same argument again a few posts later, but to try to figure out where they disagree, and to bring new, fresh points into the argument that might help bridge that divide. If they weren't convinced the first couple of times they heard a particular point of view, they're not likely to be unless more information is provided that causes them to see the issue differently.

your first statement is confusing - do you have no cost for your lodging - owning a house or renting is another math problem that can be done to determine which is optimal for your personal situation.  so your evaluation for what you'd need to own a house is likely flawed - since we have a mathematically optimal way to determine if its better for one to own or rent.  if you have no cost for lodging then you can ignore this comment .

I'm in my mid-twenties, and live with my parents in exchange for board and doing general helpful things around the house, as I'm fortunate to get on with them and they live in the area I would like to live in long term. The board includes all food and bills and is about equivalent to what I'd spend on just food if by myself, so it's cheaper than either renting or mortgage. I recognise that not everybody has this option. If I couldn't do this, I would probably look for people to cohabit with and save money that way.

thats completely acceptable but you should keep your funds invested if you choose to buy and draw down from them to pay the mortgage would be the optimal way to do it.  - the issue is youre GB and your rates arent fixed so this would carry a higher level of risk with adjustable rates than the US fixed for 30.  i dont know that i would do it but i dont have to make that decision b/c i'm not in that situation and likely will never be. your rates are sub 2% for most fixed for 5 years though and i'd likely roll the dice there.
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brooklynguy

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #63 on: January 12, 2018, 12:32:09 PM »
Also, I don't really want to spend the extra time working each year that would be needed to make mortgage payments AS WELL as saving/investing, unless one of my self-employed endeavours takes off enough that it's basically no extra time.

What does this mean?  If you operate under assumptions that make leveraged-investing-via-mortgage the better strategy, then opting for that strategy will add no time at all to your achievement of financial independence but will increase your net worth (or, alternatively, will shorten your time to achieving financial independence without decreasing your net worth).

(As boarder noted, the fact that you, BookLover, are outside the U.S. (and therefore presumably unable to obtain a U.S.-style 30-year fixed rate mortgage loan) makes it much less likely for those assumptions to be true in your specific case, but the "you" in my previous paragraph is meant to refer to the general "you.")

BookLoverL

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #64 on: January 12, 2018, 12:58:31 PM »
FWIW, I don't have a horse in the mortgage vs investing game at the moment, because I don't have a house. Also, I don't really want to spend the extra time working each year that would be needed to make mortgage payments AS WELL as saving/investing, unless one of my self-employed endeavours takes off enough that it's basically no extra time. In this scenario, I wait until I have 100% of the cost of the house saved in my stache on top of what I consider a reasonable number of years' expenses (maybe 5? IDK), and then buy a house with no mortgage at all ever. This means that everything I earn on top of my actual expenses is going towards my net worth anyway.

My goal in joining the thread was to help the different sides in this argument understand each other better - when I read the mortgage payment threads, I often feel like people are talking past each other. Generally, if someone's not responding to your initial arguments, and it doesn't seem to be an issue of reading comprehension (in that case, maybe rephrase in simpler language?), the most effective option isn't simply to repeat the same argument again a few posts later, but to try to figure out where they disagree, and to bring new, fresh points into the argument that might help bridge that divide. If they weren't convinced the first couple of times they heard a particular point of view, they're not likely to be unless more information is provided that causes them to see the issue differently.

your first statement is confusing - do you have no cost for your lodging - owning a house or renting is another math problem that can be done to determine which is optimal for your personal situation.  so your evaluation for what you'd need to own a house is likely flawed - since we have a mathematically optimal way to determine if its better for one to own or rent.  if you have no cost for lodging then you can ignore this comment .

I'm in my mid-twenties, and live with my parents in exchange for board and doing general helpful things around the house, as I'm fortunate to get on with them and they live in the area I would like to live in long term. The board includes all food and bills and is about equivalent to what I'd spend on just food if by myself, so it's cheaper than either renting or mortgage. I recognise that not everybody has this option. If I couldn't do this, I would probably look for people to cohabit with and save money that way.

thats completely acceptable but you should keep your funds invested if you choose to buy and draw down from them to pay the mortgage would be the optimal way to do it.  - the issue is youre GB and your rates arent fixed so this would carry a higher level of risk with adjustable rates than the US fixed for 30.  i dont know that i would do it but i dont have to make that decision b/c i'm not in that situation and likely will never be. your rates are sub 2% for most fixed for 5 years though and i'd likely roll the dice there.


When I reach a point in my life where I am ready to buy, I shall certainly consider your advice.

Also, I don't really want to spend the extra time working each year that would be needed to make mortgage payments AS WELL as saving/investing, unless one of my self-employed endeavours takes off enough that it's basically no extra time.

What does this mean?  If you operate under assumptions that make leveraged-investing-via-mortgage the better strategy, then opting for that strategy will add no time at all to your achievement of financial independence but will increase your net worth (or, alternatively, will shorten your time to achieving financial independence without decreasing your net worth).

(As boarder noted, the fact that you, BookLover, are outside the U.S. (and therefore presumably unable to obtain a U.S.-style 30-year fixed rate mortgage loan) makes it much less likely for those assumptions to be true in your specific case, but the "you" in my previous paragraph is meant to refer to the general "you.")

I have unfortunately found myself temperamentally unsuited to working full-time in the conventional style recommended for FIRE, as much as I would have liked to be able to pursue that mathematically optimal path. I have a poor grasp of office politics and a medical inability to sit still, amongst other factors. Therefore, I am now in my first year of self-employment, in various ways (as a freelancer, contractor, or entrepreneur - I have several potential plans going in the early stages), and am aiming to work only part-time, from my home or going into offices for no more than two days at a time, whilst earning a sufficient hourly rate to still save towards total FIRE. This means my income is directly related to how many clients I get, and marketing and sales is an area I am mainly having to teach myself from scratch, so at the moment, my main clients are an office I used to work at, my dad, and the occasional small, non-regular client, plus some other income from some writing projects, and my plan to declutter the house and sell anything we don't need that's actually worth something on eBay. And whatever other entrepreneurial ideas I can come up with, but they'll be equally small income gains at the start, due to being new ideas.

Now, due to my low housing costs, I was able to bring my expected expenditure for 2018 to less than £5000. This means that if I want to save/invest £5000, I need to earn £10000 this year. But if I wanted to earn enough to cover mortgage payments IN ADDITION to investing, this would mean I had to earn perhaps £15000 or £20000 this year. Also, I don't know what kind of mortgage they'd be willing to give me on such an unsteady income. I have roughly 2x expected yearly expenses in my stache. It's possible one of my endeavours will take off and I suddenly find myself earning much more, but I'm considering that a potential bonus, not an expectation. It could even be that I end up taking several years of learning lessons from self-employment before I really strike gold. So I'd rather not make plans based on future income that may not materialise, and I expect that lenders won't look that favourably on it, either.

In the situation as described to b42 in which I'm ready to buy a house, at least one endeavour has already taken off to the point where I have earned enough to buy a house with it, so I'd be in a much better position to get a mortgage if I chose to, and would likely have a higher expected income at that point, too. If I reach that point, whatever I'm doing will likely be worth a much higher amount per hour due to reputation and/or skill.
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brooklynguy

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #65 on: January 12, 2018, 01:11:53 PM »
Ok, so you're really just describing why you are not ready to purchase a home in the first place.  None of what you described above is relevant to the leveraged-investing-via-mortgage question.  If you've already saved up enough to purchase a home in cash in full, and you assume that the assumptions necessary to make leveraged-investing-via-mortgage the optimal strategy are true (which, of course, will not necessarily be the case in reality, especially if you don't have access to a U.S.-style fixed rate mortgage loan), then it would make no sense (from a strictly financial perspective) to do this:

then buy a house with no mortgage at all ever. This means that everything I earn on top of my actual expenses is going towards my net worth anyway.

BookLoverL

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #66 on: January 12, 2018, 01:20:55 PM »
Ok, so you're really just describing why you are not ready to purchase a home in the first place.  None of what you described above is relevant to the leveraged-investing-via-mortgage question.  If you've already saved up enough to purchase a home in cash in full, and you assume that the assumptions necessary to make leveraged-investing-via-mortgage the optimal strategy are true (which, of course, will not necessarily be the case in reality, especially if you don't have access to a U.S.-style fixed rate mortgage loan), then it would make no sense (from a strictly financial perspective) to do this:

then buy a house with no mortgage at all ever. This means that everything I earn on top of my actual expenses is going towards my net worth anyway.

Yes, I know that part's not relevant to the mortgage-as-leverage question. You asked what I meant in the earlier quote, so I explained.

In terms of the thing you just quoted, I expect that I'll take into account at the time questions such as whether I still need to actually optimise for net worth, and whether I need to apply behavioural economics to myself to prevent myself from doing something stupid. I do accept that boarder42's maths will likely be the correct maths for the situation in the case that I decide I need to mathematically optimise things, provided that low interest fixed rate mortgages exist in the UK at the time, and the economic and political climate is otherwise broadly similar to how it is at the moment and during the 20th century.
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L.A.S.

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #67 on: January 12, 2018, 01:31:23 PM »
You, Sol, and probably 90% on this board believe they will make correct, rational decisions with respect to investing and applying "math is math" principles. 

You misunderstand.  I'm not suggesting that any one specific person will make the right decision, I'm suggesting that there IS a right decision and if you do anything else then you are wrong.  Being wrong isn't the end of the world.  Sometimes it makes us feel better.

So if you want to be a momentum trading market timer, that is your right.  You're going to end up with less money than if you had been an indexer, but if it makes you happy to have less money that's fine.  If you want to rock 80% bonds, you are going to miss out on vast economic prosperity but if you sleep better at night you go ahead and rock out.

The key here is that this is a financial forum.  We are dealing with dollars, not feelings.  Go party on a psych forum if you want to talk about your emotional vulnerabilities.  Here, there are exact numerical answers to maximizing wealth.  Every choice that reduces your wealth, for reasons psychological or irrational or charitable or accidental, is mathematically wrong when evaluated in terms of wealth maximization.  That doesn't mean it isn't the right choice for you, it just means you will be poorer as a result.

+1.


soontoberich

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #68 on: January 12, 2018, 01:52:15 PM »
Is this math correct?

I currently have a $120000 mortgage. My P + I payment for the mortgage is $640/month, and there are 25 years left in the term at 3.875%

Pay off mortgage:
I have an extra $640/month to invest, with 7% returns over 25 years I end up with $485,752 and a paid off house

Don't pay off mortgage:
I start with $120000 invested, after 25 years of 7% returns I end up with $651,292 and a paid off house

So not paying it off I end up with an extra $165,540 after 25 years?

scantee

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #69 on: January 12, 2018, 01:59:06 PM »
Quote
Maths is 100% correct, IF AND ONLY IF the internally consistent axioms/assumptions that you started with were correct. And as discovered by Gödel, it is impossible to prove your axioms/assumptions only using the same set of axioms/assumptions.

This is the best and truest comment in this entire thread. Investing in the market instead of paying down a mortgage is also cookie math, it is math that only works if the structure that girds it stays consistent forever. And while that structure has been consistent for some time it will not be consistent forever. It will probably remain stable for our lifetimes, but how about in 100 years? 200? 500? At some point the conditions that make this math rational and correct will change fundamentally and this mathematical truth will no longer be quite as true as we think of it now.

You may be thinking “what do I care what happens in 500 years, I’ll be dead” which is true, but it is also true that there will  be a group of people who invest assuming that markets are always efficient in the long run, only to see conditions fundamentally change in ways that make their “rational” decisions the worse ones. Like I said, probably won’t happen in our  lifetimes, but maybe it will! Whenever it happens, it is silly for us now to pretend that the math and “rational” decisions described in this post exist in some otherworldly plane, free from the effects of future human intervention and change.

boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #70 on: January 12, 2018, 02:06:31 PM »
Is this math correct?

I currently have a $120000 mortgage. My P + I payment for the mortgage is $640/month, and there are 25 years left in the term at 3.875%

Pay off mortgage:
I have an extra $640/month to invest, with 7% returns over 25 years I end up with $485,752 and a paid off house

Don't pay off mortgage:
I start with $120000 invested, after 25 years of 7% returns I end up with $651,292 and a paid off house

So not paying it off I end up with an extra $165,540 after 25 years?

kinda - i like to use 10% returns when calcing it though b/c your mortgage doesnt index with inflation and that extra 3% compounding for 25 years makes a huge difference.

so you're looking at 1.3MM vs 830k
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boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #71 on: January 12, 2018, 02:21:01 PM »
Quote
Maths is 100% correct, IF AND ONLY IF the internally consistent axioms/assumptions that you started with were correct. And as discovered by Gödel, it is impossible to prove your axioms/assumptions only using the same set of axioms/assumptions.

This is the best and truest comment in this entire thread. Investing in the market instead of paying down a mortgage is also cookie math, it is math that only works if the structure that girds it stays consistent forever. And while that structure has been consistent for some time it will not be consistent forever. It will probably remain stable for our lifetimes, but how about in 100 years? 200? 500? At some point the conditions that make this math rational and correct will change fundamentally and this mathematical truth will no longer be quite as true as we think of it now.

You may be thinking “what do I care what happens in 500 years, I’ll be dead” which is true, but it is also true that there will  be a group of people who invest assuming that markets are always efficient in the long run, only to see conditions fundamentally change in ways that make their “rational” decisions the worse ones. Like I said, probably won’t happen in our  lifetimes, but maybe it will! Whenever it happens, it is silly for us now to pretend that the math and “rational” decisions described in this post exist in some otherworldly plane, free from the effects of future human intervention and change.

while yes this is correct - it fundamentally changes almost every single person's FIRE plans on this site as greater than 90% plan to use a 4% SWR which relies on the market to continue.  so once you've put your faith in that it doesnt really make sense to pay down a mortgage with interest rates this low fixed for that long a time.
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GuitarStv

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #72 on: January 12, 2018, 06:50:25 PM »
So, serious question for boarder42 and others purporting that there is an absolutely 'correct' way to do things.

Do any of you live without roommates?  Do any of you own a car?  Do you have more than seven pairs of underwear or seven shirts?  Do you eat meat?  Have you ever taken a vacation?

If you say yes to any of the above, did you know that you're objectively wrong?  Exactly the same reasoning that you're using to tell people that paying off their mortgage wrong can be used to argue that any of the above is wrong.

Do you as aggressively attempt to stop people from the horrors of living in a place of their own (much more expensive, less investment money available)?  If not, why not?

NoraLenderbee

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #73 on: January 12, 2018, 07:16:18 PM »
So, serious question for boarder42 and others purporting that there is an absolutely 'correct' way to do things.

Do any of you live without roommates?  Do any of you own a car?  Do you have more than seven pairs of underwear or seven shirts?  Do you eat meat?  Have you ever taken a vacation?

If you say yes to any of the above, did you know that you're objectively wrong?  Exactly the same reasoning that you're using to tell people that paying off their mortgage wrong can be used to argue that any of the above is wrong.

Do you as aggressively attempt to stop people from the horrors of living in a place of their own (much more expensive, less investment money available)?  If not, why not?

I asked a similar question in another mortgage thread and got crickets in response.

Keeping the mortgage is "mathematically correct" IF and ONLY IF you define correctness as "maximum ROI." You end up with more money if you invest than if you pay off the mortgage. NOBODY DOUBTS THAT.

You also end up with more money if you get the highest-paying job you can, regardless of the stress. You end up with more money if you work until you're 65 and take a second job on the weekends.

Is this entire forum/blog about making the most money you can, or is it about living a life in accord with your values? If someone values security above maximizing ROI, that's not "bad math." It's deciding to optimize for a value other than maximum financial return.

It also isn't weakness or allowing emotions to overrule logic. It's a very logical behavior, if you value certain things above maximum ROI.

Scortius

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #74 on: January 12, 2018, 08:19:27 PM »
So, serious question for boarder42 and others purporting that there is an absolutely 'correct' way to do things.

Do any of you live without roommates?  Do any of you own a car?  Do you have more than seven pairs of underwear or seven shirts?  Do you eat meat?  Have you ever taken a vacation?

If you say yes to any of the above, did you know that you're objectively wrong?  Exactly the same reasoning that you're using to tell people that paying off their mortgage wrong can be used to argue that any of the above is wrong.

Do you as aggressively attempt to stop people from the horrors of living in a place of their own (much more expensive, less investment money available)?  If not, why not?

I asked a similar question in another mortgage thread and got crickets in response.

Keeping the mortgage is "mathematically correct" IF and ONLY IF you define correctness as "maximum ROI." You end up with more money if you invest than if you pay off the mortgage. NOBODY DOUBTS THAT.

You also end up with more money if you get the highest-paying job you can, regardless of the stress. You end up with more money if you work until you're 65 and take a second job on the weekends.

Is this entire forum/blog about making the most money you can, or is it about living a life in accord with your values? If someone values security above maximizing ROI, that's not "bad math." It's deciding to optimize for a value other than maximum financial return.

It also isn't weakness or allowing emotions to overrule logic. It's a very logical behavior, if you value certain things above maximum ROI.

Please see my post earlier. It's often more risky for people to pay down their mortgage than it is for them to invest the excess. We are not arguing in a vacuum about pure ROI. We are often arguing because common reasons people give for paying down their mortgage can be antithetical to the actual choice of paying down their mortgage. It is not true that paying off your mortgage is the correct choice if and only if you want to maximize your ROI. Return on investment maximization just happens to be a nice side effect. The fact that people continue to come into these threads and make these claims offers a glimpse into why we continue to point out the advantages of holding low interest rate fixed mortgages.
« Last Edit: January 12, 2018, 08:20:58 PM by Scortius »

boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #75 on: January 12, 2018, 11:06:52 PM »
I'm not celebrating my wardrobe. My car or my large house. I do celebrate my vacations bc they are travel hacked and cost next to nothing.

And as scortius mentioned above it's not just simple roi in most cases it's stastically safer to not slowly pay off a mortgage with extra payments. It's not just ROI.
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TomTX

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #76 on: January 13, 2018, 05:45:41 AM »
So, serious question for boarder42 and others purporting that there is an absolutely 'correct' way to do things.

Do any of you live without roommates?  Do any of you own a car?  Do you have more than seven pairs of underwear or seven shirts?  Do you eat meat?  Have you ever taken a vacation?

If you say yes to any of the above, did you know that you're objectively wrong?  Exactly the same reasoning that you're using to tell people that paying off their mortgage wrong can be used to argue that any of the above is wrong.

Do you as aggressively attempt to stop people from the horrors of living in a place of their own (much more expensive, less investment money available)?  If not, why not?

False equivalence. We're not discussing "own a house or don't own a house" - which is the closest parallel to your examples. The decision to buy has already been made.

Owning the house (and presumably living in it) is part of the premise. The question is the optimal way to pay for it.
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TomTX

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #77 on: January 13, 2018, 05:47:02 AM »

Is this entire forum/blog about making the most money you can, or is it about living a life in accord with your values? If someone values security above maximizing ROI, that's not "bad math." It's deciding to optimize for a value other than maximum financial return.

Please explain how a house payment method which is almost certain to result in having less money is somehow more "secure."
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brooklynguy

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #78 on: January 13, 2018, 06:22:07 AM »
Please explain how a house payment method which is almost certain to result in having less money is somehow more "secure."

Presumably Nora was referring to security against the risk that the investment returns will underperform the mortgage loan expense, but since that wasn’t made explicit and I believe these discussions of risk could always benefit from greater precision in language I’m going to insert my stock response advocating for the same:

We all tend to use the word "risk" too loosely, without precisely defining what it means, and that is why everyone always ends up talking past each other in these mortgage debates.  If "risk" means "exposure to an adverse possibility," then when we use that term we should be clear about which specific adverse possibility or possibilities we are referring to, or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities.

As between "leveraged-investing-via-mortgage" and "mortgage-payoff," the former unquestionably exposes you to certain adverse possibilities that are not present in the latter, including the possibility of underperforming the worst-case possible outcome of the alternative strategy and the possibility of capital loss (which should be obvious, given that leveraged-investing-via-mortgage is, after all, a form of leveraged-investing).

But there is a panoply of other specific risks that are (or should be) material to the decision-maker, and that therefore should also be accounted for in the analysis, including, not least of which for the aspiring early retiree, the risk of having to work longer than necessary before achieving self-declared financial independence.  In my view, on balance, when all relevant risks are taken into consideration, paying off "fixed-rate non-callable low-interest long-term government-favored possibly-tax-deductible possibly-non-recourse debt secured by an instrument on which creditors are generally slow to foreclose" is risker for the prototypical early retiree or aspiring early retiree than retaining such debt and investing the proceeds in the stock market.

Note:  This post is a modified version of this post from an earlier mortgage thread, which I am restating here because every one of these mortgage debate threads (like all discussions of "risk") could benefit from more precision in language.

GuitarStv

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #79 on: January 13, 2018, 07:24:49 AM »
I'm not celebrating my wardrobe. My car or my large house. I do celebrate my vacations bc they are travel hacked and cost next to nothing.

And as scortius mentioned above it's not just simple roi in most cases it's stastically safer to not slowly pay off a mortgage with extra payments. It's not just ROI.

You're saying that it's not about ROI, but the only reason given for investing rather than paying off a mortgage that you've ever provided is that it's likely to increase net returns long term in comparison to paying off a mortgage.  That was the whole reason it was determined to be a 'safer' choice.

It's therefore statistically safer to own less clothing because the money that you would have spent on clothes will be invested rather than serving no purpose at all (not even paying down debt as a mortgage payment).  The fact that you spend any money on travel at all is an emotionally driven waste, and again it is therefore the less safe choice to make.  You own not just a house to yourself (less safe than having roomies), but a LARGE house . . . Another example of emotion short circuiting your logic process to make a less safe descision.  You've chosen the convenience of a car over living closer to work and walking.  These are a lot of emotionally driven wrong descisions that you're making.  Every one of them makes you less safe.

Every one of these choices is riskier than investing the money you're spending for emotional reasons.  So either lighten the fuck up . . . or own the fact that you're a raging hypocrite.

GuitarStv

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #80 on: January 13, 2018, 07:28:37 AM »
So, serious question for boarder42 and others purporting that there is an absolutely 'correct' way to do things.

Do any of you live without roommates?  Do any of you own a car?  Do you have more than seven pairs of underwear or seven shirts?  Do you eat meat?  Have you ever taken a vacation?

If you say yes to any of the above, did you know that you're objectively wrong?  Exactly the same reasoning that you're using to tell people that paying off their mortgage wrong can be used to argue that any of the above is wrong.

Do you as aggressively attempt to stop people from the horrors of living in a place of their own (much more expensive, less investment money available)?  If not, why not?

False equivalence. We're not discussing "own a house or don't own a house" - which is the closest parallel to your examples. The decision to buy has already been made.

Owning the house (and presumably living in it) is part of the premise. The question is the optimal way to pay for it.

No, it's not a false equivalence.  Everyone needs to do something in their spare time.  Some choose to go on vacation, some choose to stay at home.  The descision to have the time off has already been made.  We're discussing the optimal way to have that time off.  Just like everyone needs clothing, everyone needs to travel to work, etc.

Paying off a mortgage because it makes you feel better is very similar to going on a travel hacked vacation because it makes you feel better.  They're both sub-optimal behaviours that you might choose to make, both will reduce your net worth long term, people often choose to do them anyway for emotional reasons.

« Last Edit: January 13, 2018, 07:35:41 AM by GuitarStv »

BookLoverL

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #81 on: January 13, 2018, 08:19:36 AM »
Owning a house yourself (either with mortgage payments or without) is certainly not the only way of fulfilling the need for shelter, and it's often not the financially optimal way, so if you've chosen to own a house, it's at least partially based on personal preference and emotion, it's true. (For instance, I would like to own a house in the future sometime because I have an interest in gardening and would like to try something more radical with the garden than my parents will let me do with their garden.) Here are some other options for housing that people could consider, some of which would admittedly go down better over at ERE:

-Renting instead of owning. Whether this is actually cheaper will depend on the local real estate market.
-Owning a house jointly with a partner, and paying half each.
-Owning or renting a house jointly with one or more friends or acquaintances.
-Owning or renting a house jointly with one or more strangers.
-Staying with family members or friends in a house that they own or rent and paying money towards bills/a reduced rent.
-Housesitting other people's houses for them while they go on holiday.
-Living in a tiny house.
-Living in an off-grid cabin or hut in the wilderness.
-Camping on land which it is permitted to camp on for free (whether this is possible will depend on the laws of each country).
-Living in an RV, camper van, caravan, or other mobile home.
-Sleeping in your regular car or van.
-Becoming homeless and living under a bridge. This one's probably not recommended, to be honest.
-Probably something else that I haven't listed here.

As you can see, multiple of these options are cheaper than the standard home ownership model, however you pay for it. So if you choose to buy a house, you've decided your emotional preference for a comfortable bed/central heating/a place to store your belongings/a place you can call your own and modify as you choose is more important than maximising your net worth. ;)
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TomTX

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #82 on: January 13, 2018, 09:28:08 AM »
So, serious question for boarder42 and others purporting that there is an absolutely 'correct' way to do things.

Do any of you live without roommates?  Do any of you own a car?  Do you have more than seven pairs of underwear or seven shirts?  Do you eat meat?  Have you ever taken a vacation?

If you say yes to any of the above, did you know that you're objectively wrong?  Exactly the same reasoning that you're using to tell people that paying off their mortgage wrong can be used to argue that any of the above is wrong.

Do you as aggressively attempt to stop people from the horrors of living in a place of their own (much more expensive, less investment money available)?  If not, why not?

False equivalence. We're not discussing "own a house or don't own a house" - which is the closest parallel to your examples. The decision to buy has already been made.

Owning the house (and presumably living in it) is part of the premise. The question is the optimal way to pay for it.

No, it's not a false equivalence.  Everyone needs to do something in their spare time.  Some choose to go on vacation, some choose to stay at home.  The descision to have the time off has already been made.  We're discussing the optimal way to have that time off.  Just like everyone needs clothing, everyone needs to travel to work, etc.

Paying off a mortgage because it makes you feel better is very similar to going on a travel hacked vacation because it makes you feel better.  They're both sub-optimal behaviours that you might choose to make, both will reduce your net worth long term, people often choose to do them anyway for emotional reasons.
If you can't parse the difference between:

Choosing to buy something or not

and

Choosing how you will pay for it once you decide to buy it

 ...I guess we will have to just disagree.
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boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #83 on: January 13, 2018, 11:45:36 AM »
so lets just say for a second you're correct choosing to buy something or not and how you pay for it are equivalent.  Then the hypocrisy in these forums would lie with those who promote things that are anti mustachian i'm not promoting commuting to work or starting a mega thread on lets all live in mcmansions - there is however a mega thread many users choose to participate in that would be hypocritical. since these things are equivalent.  So if we assume what you say is correct for 90% of the users of the paydown your mortgage club - it really belongs in the antimustachian wall of shame and comedy.  which interstingly enough is where i put my boat cost analysis. 

We all can choose how we spend our money but to openly support paying down low fixed rate mortgages - well thats just detrimental to all.
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GuitarStv

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #84 on: January 13, 2018, 12:03:51 PM »
So, serious question for boarder42 and others purporting that there is an absolutely 'correct' way to do things.

Do any of you live without roommates?  Do any of you own a car?  Do you have more than seven pairs of underwear or seven shirts?  Do you eat meat?  Have you ever taken a vacation?

If you say yes to any of the above, did you know that you're objectively wrong?  Exactly the same reasoning that you're using to tell people that paying off their mortgage wrong can be used to argue that any of the above is wrong.

Do you as aggressively attempt to stop people from the horrors of living in a place of their own (much more expensive, less investment money available)?  If not, why not?

False equivalence. We're not discussing "own a house or don't own a house" - which is the closest parallel to your examples. The decision to buy has already been made.

Owning the house (and presumably living in it) is part of the premise. The question is the optimal way to pay for it.

No, it's not a false equivalence.  Everyone needs to do something in their spare time.  Some choose to go on vacation, some choose to stay at home.  The descision to have the time off has already been made.  We're discussing the optimal way to have that time off.  Just like everyone needs clothing, everyone needs to travel to work, etc.

Paying off a mortgage because it makes you feel better is very similar to going on a travel hacked vacation because it makes you feel better.  They're both sub-optimal behaviours that you might choose to make, both will reduce your net worth long term, people often choose to do them anyway for emotional reasons.
If you can't parse the difference between:

Choosing to buy something or not

and

Choosing how you will pay for it once you decide to buy it

 ...I guess we will have to just disagree.

Sure, there's a difference between buying something or not and paying for something via a 10 year or 40 year mortgage.  I'm saying that the distinction is unimportant for the topic at hand though.

At the heart of the matter, we're talking about making descisions.  Some in this thread are claiming that there's an optimum descision regarding paying a mortgage.  This is based on the amount of money you're likely to end up with long term.  It's hypocritical if they are going to berate people for making suboptimal descisions for emotional reasons while living a life that is chok full of suboptimal descisions made for emotional reasons.

I'm attempting to point out this hypocrisy in the hopes that it will engender a little more good will and understanding in forum discussion going forward.

boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #85 on: January 13, 2018, 12:06:14 PM »
So those who are in a single thread are really the hypocrites here. Thanks for clarifying that @GuitarStv

We berate people for trucks and large houses and boats. But the mortgage paydown oh no don't touch that bc it's different. Well you've just said it's the same. And repeatedly said it.
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boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #86 on: January 13, 2018, 12:09:53 PM »
Being a cafeteria mustachian and determining what works for your life doesn't make you a hypocrite for promotion of certain ideals while not following others. What does make you a hypocrite is saying something is the same thing as something else and then saying but it's different.

By your logic 0 face punches should be given and we should just encourage everyone regardless of their choices bc no one person here is living on barebones mustachian lifestyle. But if that person we're here they would be the only one allowed to throw any punches.

Thats a pretty shitty forum.
« Last Edit: January 13, 2018, 12:12:08 PM by boarder42 »
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GuitarStv

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #87 on: January 13, 2018, 12:13:17 PM »
so lets just say for a second you're correct choosing to buy something or not and how you pay for it are equivalent.  Then the hypocrisy in these forums would lie with those who promote things that are anti mustachian i'm not promoting commuting to work or starting a mega thread on lets all live in mcmansions - there is however a mega thread many users choose to participate in that would be hypocritical. since these things are equivalent.  So if we assume what you say is correct for 90% of the users of the paydown your mortgage club - it really belongs in the antimustachian wall of shame and comedy.  which interstingly enough is where i put my boat cost analysis. 

We all can choose how we spend our money but to openly support paying down low fixed rate mortgages - well thats just detrimental to all.

My issue is how the subjects are treated.  If you're going to spend (multiple) dozens of posts telling people that paying off a mortgage is terrible, spend the same amount of time telling them that spending any money travel hacking a vacation is also terrible.  There are many threads about this very issue on the forums.

Or . . . Y'know . . . Just chill out a bit on the whole thing.  Say your piece without attempting to browbeat everyone in the world into your personal value set.  Because some of us get more happiness and contentment from a paid off mortgage than multiple travel vacations.  (After all, enabling someone to go on a trip for vacation is detrimental to us all as well . . . it means they'll retire later.  It makes early retirement less safe.  It is a purely emotional descision.)

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #88 on: January 13, 2018, 12:14:06 PM »

Is this entire forum/blog about making the most money you can, or is it about living a life in accord with your values? If someone values security above maximizing ROI, that's not "bad math." It's deciding to optimize for a value other than maximum financial return.

Please explain how a house payment method which is almost certain to result in having less money is somehow more "secure."

I mentioned security because that is a common reason people give for paying off. Different people have different reasons. For example: The security of knowing you own your home entirely. The security of lowering your expenses. The freedom of having no debt. Privacy--the bank doesn't know your business.


My point is that there are things that people value more than the highest possible ROI. You seem to be absolutely unwilling to acknowledge that (except to call it "emotional" and "weak").

boarder42

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #89 on: January 13, 2018, 12:21:55 PM »
so lets just say for a second you're correct choosing to buy something or not and how you pay for it are equivalent.  Then the hypocrisy in these forums would lie with those who promote things that are anti mustachian i'm not promoting commuting to work or starting a mega thread on lets all live in mcmansions - there is however a mega thread many users choose to participate in that would be hypocritical. since these things are equivalent.  So if we assume what you say is correct for 90% of the users of the paydown your mortgage club - it really belongs in the antimustachian wall of shame and comedy.  which interstingly enough is where i put my boat cost analysis. 

We all can choose how we spend our money but to openly support paying down low fixed rate mortgages - well thats just detrimental to all.

My issue is how the subjects are treated.  If you're going to spend (multiple) dozens of posts telling people that paying off a mortgage is terrible, spend the same amount of time telling them that spending any money travel hacking a vacation is also terrible.  There are many threads about this very issue on the forums.

Or . . . Y'know . . . Just chill out a bit on the whole thing.  Say your piece without attempting to browbeat everyone in the world into your personal value set.  Because some of us get more happiness and contentment from a paid off mortgage than multiple travel vacations.  (After all, enabling someone to go on a trip for vacation is detrimental to us all as well . . . it means they'll retire later.  It makes early retirement less safe.  It is a purely emotional descision.)

Travel hacking a free trip with 0 extra costs is not equivalent to choosing to pay down a mortgage over invest this is laughable. I like how youre now trying to back down from your other comparisons though to isolate it to something many find acceptable to promote here.

And no I'm not going to chill out on it bc it's not as simple as should I buy this car or not. That math is easy to do and show people the advantages. The mortgage math is not simple for most and counterintuitive to how many are wired. I was incorrect about this for awhile until it was discussed at length here. 

And as @NoraLenderbee keeps missing in the above post while there may be additional security in paying off a house entirely.(which the chance this is more secure is smaller than the chance it's less secure). The act of slowly paying down a mortgage with additional principal payments is less secure than investing over this time.
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Zola.

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #90 on: January 13, 2018, 01:06:51 PM »
I don't see it as black and white, there are clear benefits for each argument.

I pre pay the mortgage on occasion (once every 3 or 4 months), but I invest every month.

elementz_m

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #91 on: January 13, 2018, 01:58:23 PM »
This piqued my interest to a certain extent, because I've seen the following in a few places online:

"Don't overpay the mortgage, investing the money is better in the current climate"

But at the same time, if investing the money provided better returns, why would banks offer mortgages if they could earn more money elsewhere?

So I googled "average mortgage rates" and "S&P 500 historical" and the top result in both cases gave data back to 1971. It's low-effort on my part, but hey ho.

In 58% of cases, on any given year, assuming zero fees and a 30 year mortgage, you're better off investing your money and taking out a mortgage for the same amount.

I'm not looking to FIRE with 58% success, I would rather reduce the risk somewhat and lessen my average returns for greater peace of mind.

So yes, investing gives a better return most years than paying off your mortgage, but not by all that much.

Looking a tad deeper, into how much better off you are investing as opposed to paying down, it swings back the other way. You'd lose 0.67% on average keeping the money invested. So you're better off paying the mortgage off ASAP  by this metric.

It's close either way, and emotion will always play a big part, but it's not as cut-and-dried as a lot of people on these forums seem to think.


sol

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #92 on: January 13, 2018, 02:22:06 PM »
In 58% of cases, on any given year, assuming zero fees and a 30 year mortgage, you're better off investing your money and taking out a mortgage for the same amount.

I'm not looking to FIRE with 58% success

Unless you have a one year mortgage, this analysis is very wrong. 

Instead, compare whether or not you're better off investing for 30 years or prepaying your mortgage for 30 years (assuming you have a 30 year mortgage).  Guess what?  The stock market including dividends outperforms current mortgage rates in 100% of 30 year histories.  There are no exceptions.  If you have a fixed rate mortgage at under 5%, there is literally not a single case in US history when prepaying the mortgage for 30 years was the more profitable choice.

Additionally, investing in the stock market instead of prepaying your mortgage has absolutely zero impact on your ability to prepay your mortgage later.  Prepaying your mortgage is a one way irreversible decision that locks you in forever.  Investing in the stock market means you preserve your options to prepay at any point in the future.  It's really hard to go wrong by preserving your options for the future.

But as we've now discussed at length, you get to spend your money however you want.  If you want to spend an extra $100k on your mortgage for the lulz, you go right ahead.  Personally, I'd buy a bigger boat if I was looking to blow that kind of cash.

elementz_m

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #93 on: January 13, 2018, 02:33:49 PM »
Instead, compare whether or not you're better off investing for 30 years or prepaying your mortgage for 30 years (assuming you have a 30 year mortgage).  Guess what?  The stock market including dividends outperforms current mortgage rates in 100% of 30 year histories.

As I said, it was fairly low-effort. I didn't immediately happen upon enough data to compare full-term, so it was just a first-year thing, but my original musing still stands:

Why on earth would any bank offer any mortgage if they could otherwise outperform it? Wouldn't competition in the mortgage market drive it to be more or less equal?

sol

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #94 on: January 13, 2018, 02:43:11 PM »
Why on earth would any bank offer any mortgage if they could otherwise outperform it? Wouldn't competition in the mortgage market drive it to be more or less equal?

Banking is considerably more complex than this.  They build income portfolios comprised of many investments with various risk profiles, and that means they need to find investments of all different types.  Retail mortgages are low-risk fixed rate investments for them, and there is enormous demand for investments like that, mostly from incredibly wealthy people who are risk averse and have no need for capital appreciation and are just trying to outperform inflation.  Since there are many more dollars seeking low-risk low-return investments, there is a constant demand for low rate mortgages.

There are also structural advantages to owning mortgages, namely that you retain 100% control of the asset in addition to the monthly cash flow.  Remember that the bank technically owns your house until your mortgage is paid off.  How many other investments do you know where someone sells you an asset (bank gives them money, they give the bank a house) for the current market price and then gives you monthly payments for 30 years?


elementz_m

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #95 on: January 13, 2018, 02:58:07 PM »
Why on earth would any bank offer any mortgage if they could otherwise outperform it? Wouldn't competition in the mortgage market drive it to be more or less equal?

Banking is considerably more complex than this.  They build income portfolios comprised of many investments with various risk profiles, and that means they need to find investments of all different types.  Retail mortgages are low-risk fixed rate investments for them, and there is enormous demand for investments like that, mostly from incredibly wealthy people who are risk averse and have no need for capital appreciation and are just trying to outperform inflation.  Since there are many more dollars seeking low-risk low-return investments, there is a constant demand for low rate mortgages.

There are also structural advantages to owning mortgages, namely that you retain 100% control of the asset in addition to the monthly cash flow.  Remember that the bank technically owns your house until your mortgage is paid off.  How many other investments do you know where someone sells you an asset (bank gives them money, they give the bank a house) for the current market price and then gives you monthly payments for 30 years?

That first part makes a lot of sense, and isn't something that I'd thought about, so thank you. I guess youre right about the overarching theme of the thread, and its something I'd look into in more detail now, if I had a mortgage.

It's not something I know, so please tell me, what happens if you stop paying after 26 years? You ignore all advice, the bank foreclosed, and sells the property at auction for 1000% of the loan. Do you get 90% of that? Or does the bank still officially own 100% of the house, and pocket all of the money? I appreciate that this is a supremely unlikely situation, but just want to get my head around it. Does the bank own the house, or do they own 10% of it?

sol

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #96 on: January 13, 2018, 03:00:54 PM »
what happens if you stop paying after 26 years?

If you walk away from a 30 year mortgage after 29.9 years, you get nothing.  The bank owns the house.  You own nothing.  You defaulted on a 30 year contract, and the house is the collateral.  The bank repossesses it and you're out on your ass.

In reality the bank is going to evaluate the current market price of the house and their costs to repossess it, hold it, and then sell it, and then compare their net expected value from that transaction against their net expected value from renegotiating your loan.  They might offer you a new 30 year loan for the remaining balance, or they might boot you out immediately if they think they can sell it for 10x as you suggested.  Banks maintain a limited staff headcount devoted to managing real estate, and if they're already in the middle of a bunch of repossessions and sales you're more likely to get a deal on yours.  They're a business like any other, and they're trying to make money.  They usually prefer to make it on financial products, not on real estate.
« Last Edit: January 13, 2018, 03:06:29 PM by sol »

elementz_m

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #97 on: January 13, 2018, 03:13:37 PM »
what happens if you stop paying after 26 years?

If you walk away from a 30 year mortgage after 29.9 years, you get nothing.  The bank owns the house.  You own nothing.

Wow. That's a bit of a kick in the teeth. I mean, wow. It's different in the UK, the lender has to give the borrower any surplus on the sale. But in America, the banks can take all of a $100,000 house for a $10,000 debt? Wow.

So surely, that makes the smart investor lean more towards paying off the mortgage in the US, if your " investing is better 100% of the time" is hyperbole? Obviously if it's not, the answer is "It's not hyperbole". But if it is, I'd much rather have a guaranteed return than any risk of 0% value of my investments. But then again, you could always sell to get the bank off your back, so I suppose that's not a realistic scenario. And we end up right back at "I don't know enough about this to be commenting on it" and you win again.

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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #98 on: January 13, 2018, 03:19:24 PM »

Is this entire forum/blog about making the most money you can, or is it about living a life in accord with your values? If someone values security above maximizing ROI, that's not "bad math." It's deciding to optimize for a value other than maximum financial return.

Please explain how a house payment method which is almost certain to result in having less money is somehow more "secure."

I mentioned security because that is a common reason people give for paying off. Different people have different reasons. For example: The security of knowing you own your home entirely. The security of lowering your expenses. The freedom of having no debt. Privacy--the bank doesn't know your business.


My point is that there are things that people value more than the highest possible ROI. You seem to be absolutely unwilling to acknowledge that (except to call it "emotional" and "weak").

Where did I call it weak?

The point of all this is that the "security" you describe is an illusion.  They may feel more secure, but they are more likely to run out of money and/or have delayed FIRE.  Doing something because it feels more secure but really isn't - is an emotional decision, not a logical one.

Privacy has value. It is rarely brought up in these discussions.
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Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
« Reply #99 on: January 13, 2018, 03:20:45 PM »
I don't see it as black and white, there are clear benefits for each argument.

I pre pay the mortgage on occasion (once every 3 or 4 months), but I invest every month.

In the UK it is far less black and white.

In the USA if you are already sitting on a 30 year loan at 4% or less, the math is pretty clear.
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