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General Discussion => Welcome and General Discussion => Topic started by: Cycling Stache on January 11, 2018, 07:31:23 AM

Title: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Cycling Stache on January 11, 2018, 07:31:23 AM
This post is a tip of the hat to @boarder42 and some of the issues he's raised.  It also raises what I believe are the fundamental questions for this board: when do we trust math, and when do we concede to behavioral economics?

To some extent, Mustachianism is about overcoming behavioral irrationalities and applying correct rational analysis in the case of marketing, advertising, etc.  Do I really need that car?  Will the fancy vacation bring me happiness?  We are in the minority because it takes concerted effort to overcome the behavioral tendencies that make us want to do what everyone else is doing, buying, etc.

Boarder42 applies that analysis dogmatically with respect to pre-paying a mortgage (at least at locked-in low interest rates for an extended term).  Over a 30-year period, the market has always had greater returns than the 3% or 4% that current mortgages are at, so from boarder's perspective, it's just a math problem.  The math says invest in the market over pre-paying, so that's what you should do, no exceptions.  If you want to pre-pay your mortgage to feel more secure, etc., that's fine, but understand that you're making a bad math decision and at least know the true cost of your irrational desire for security.

Although the tone is sometimes a little strong, his math analysis is spot on, and it's consistent with the analysis MMM and the forum often dictates when someone wants to buy a new fancy thing.  How much will that cost you compared to investing, and is it really worth it to have fancy car, boat, etc. for that cost?

So far, so good.  But I have been more agnostic about pre-paying the mortgage, because I think we often have trouble with math is math, and the question is not whether we can see math is math, but are we really going to act consistently with that over the 30-year period.  To the extent that people are risk averse (most are, per behavioral economics), what if they end up acting consistently with that risk aversion and try to market time or whatever else that is not the rational response, thus making them unable to successfully live up to the math is math principle. 

I think you see that when you consider whether people will take a loan out on a paid-off house to invest in the market.  Even though it's the same principle as not pre-paying the mortgage, I think most people would view it as very risky.   We'd need data for that of course, but if so, it highlights the impact of behavioral economics.  If the framing of the question causes people to give a different answer, then we have to be skeptical whether people are going to act rationally at all times.

That takes me to asset allocation questions.  Generally, the responses I've seen on this forum when people say that they're nervous about the market are (1) trust the market, it goes up over the long term despite bumps, and (2) if you're nervous, that means your asset allocation is off and you might need to dial back your stock investments to match your risk aversion.

The first is the rational response.  The second is not.  The answer to the second under the math is math principle is that you need to get comfortable with the math and internalize it, not act irrationally by dialing back your risk exposure because you're irrationally uncomfortable with risk.  Yet I don't see the same level of criticism of the response that people should change their asset allocation to match their risk appetite.  Why?  Assuming a person with a 30-year or more time horizon for money (not someone close to retirement who might need a higher bond allocation, for example), the answer under the math is math principle is that the person should do work to become more rational, not change their investments to match their irrationality.

Which takes us to market timing, market efficiency, and the 4% rule.  The overwhelming advice on this forum is to trust the market because we're not smarter than the market.  Buy index funds and don't market time.  That's rational and correct based on the data.  Yet up comes the bitcoin threads, and suddenly the vast majority of posters ridicule the bitcoin price for whatever reason is obvious to them that bitcoin is just the tulip market.  But what about market efficiency?  What is the informational advantage that these posters suddenly have over the bitcoin market that they don't have over the stock market?  If the bitcoin price is "obviously" wrong to a random MMM poster, why has the market not priced that in?  If it's equally "obvious" to another random MMM poster that the stock market is overvalued, why is that person wrong and doesn't know more than the market?

The bitcoin problem highlights the principle that we start making errors in rational analysis as soon as we get outside our comfort zone.  There might be a 1% chance that bitcoin is going to be worth a gazillion dollars, and a 99% chance it's worthless, and the market has potentially priced that correctly.  But because we don't "understand" that math, we dismiss it, and therefore give an irrational assessment of what could be a perfectly efficient market and price.

All of which raises the question to me of how far we take the "math is math" principle, and when do we concede that people are likely to revert to their natural behavioral tendencies.  With respect to risk aversion, everyone talks a good game about never selling stock, and it's been easy to hold that view since 2011 or so.  But if we're being honest, how many of us had nearly as much money at risk then as we do now?  People statistically buy high and sell low because that's behavioral economics (i.e., human nature), but we're all confident we're the exceptions because we understand rationally what to do.  Maybe, and it's worth aspiring to.  But I've just noticed in these threads the many different responses to analytically similar problems based on how the question is worded, and I wonder just how much we can count on overcoming our behavioral tendencies and acting correctly and perfectly rational based on math is math principles.

Again, props to boarder42 for triggering some of these questions.  I'm intrigued by how we reconcile the responses with respect to these issues.  I'm also going to mention @maizeman because I find his responses to be thoughtful and well reasoned and have incorporated some of his terminology into the framing of these issues.  If I did so incorrectly, that's on me!

Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: TexasRunner on January 11, 2018, 07:37:47 AM
I think one of the biggest things is the Investment Policy Statement, how accurately its worded and how systematically it is applied...

I would also bet that most on MMM do not have one.

I would also bet that most who do have one do not mention spending, leveraging or mortgaging specifically in the IPS, which is also a big deal...

Very good post and questions raised, I look forward to following this conversation.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: terran on January 11, 2018, 08:16:23 AM
First of all, great post! Super interesting.

Which takes us to market timing, market efficiency, and the 4% rule.  The overwhelming advice on this forum is to trust the market because we're not smarter than the market.  Buy index funds and don't market time.  That's rational and correct based on the data.  Yet up comes the bitcoin threads, and suddenly the vast majority of posters ridicule the bitcoin price for whatever reason is obvious to them that bitcoin is just the tulip market.  But what about market efficiency?  What is the informational advantage that these posters suddenly have over the bitcoin market that they don't have over the stock market?  If the bitcoin price is "obviously" wrong to a random MMM poster, why has the market not priced that in?  If it's equally "obvious" to another random MMM poster that the stock market is overvalued, why is that person wrong and doesn't know more than the market?

The bitcoin problem highlights the principle that we start making errors in rational analysis as soon as we get outside our comfort zone.  There might be a 1% chance that bitcoin is going to be worth a gazillion dollars, and a 99% chance it's worthless, and the market has potentially priced that correctly.  But because we don't "understand" that math, we dismiss it, and therefore give an irrational assessment of what could be a perfectly efficient market and price.

I do have one quibble with this part. I don't see anyone (at least no bogleheadish indexer) suggesting the market is efficient so that means it would be totally rational to invest in a single stock. The bitcoin market is simply multiple places to buy and sell a single investment, while "the market" is multiple places in which all publicly traded investments are available. You most efficiently invest in (an approximation of) "the market" by buying a few broad index funds. While bitcoin may be priced rationally in the sense that a 1 in 10 chance of getting $10 is worth anything less than $1, you still have a 90% chance of getting no dollars.

I also think that bubbles (whether or not bitcoin actually is one) actually prove your point that we are not purely rational math-is-math beings. Bubbles are the natural result of people seeing success and notoriety and wanting to get in on that regardless of whether the underlying investment is sound. A bubble is the breakdown in the efficient market, so if we accept that we can't personally identify bubbles, we should invest in the whole market so at least the bubbles we don't identify don't wipe us out when they return to efficiency (pop).

I would also suggest that in a pure math-is-math sense we can actually identify bubbles if we look at the underlying assets we buy with an investment. When an underlying asset will provide a future income stream that is worthwhile based on the initial investment then it's not a bubble, when it doesn't then there is at least some bubble going on in the form of speculation. That speculation might pay off or it might not, and the bubble might pop or it might slowly deflate, which is the difference between losing "everything" and slightly underperforming. We're all speculating (even government bonds have some small chance of failing to deliver their expected returns if the government becomes insolvent), so the best way to help avoid losing everything in these speculations is to diversify.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: maizefolk on January 11, 2018, 08:45:13 AM
Thanks for the kind words Cycling Stash!

I do have one quibble with this part. I don't see anyone (at least no bogleheadish indexer) suggesting the market is efficient so that means it would be totally rational to invest in a single stock. The bitcoin market is simply multiple places to buy and sell a single investment, while "the market" is multiple places in which all publicly traded investments are available. You most efficiently invest in (an approximation of) "the market" by buying a few broad index funds.

I think you're using the word "efficient" to mean something different than the way the word is used in the efficient market hypothesis. I think any bogleheadish indexer would agree that the expected value of identifying "underpriced" stocks and buying then, and identifying "overpriced" stocks and shortselling them doesn't exceed the expected value of just buying a broad index. A simpler way of saying the above is that the pricing of stocks is efficient.

Not to single you out, I think the problem a lot of people run into is that thinking an argument over whether or not markets for $X are efficient is the same as the argument for whether or not it makes sense to buy $X as an investment. However, the reality is that the pricing of $X is efficient doesn't necessarily imply that $X is a good investment. It just means there are no apparent opportunities to make free money through arbitrage or other trading strategies.

A good example of this is commodities. The price of most widely traded commodities are generally efficient although just like stocks that doesn't prevent people from speculating and trying to outguess the market. That said, I would highly recommend you NOT invest a significant chunk of your stash in porkbellies, because the expected return on porkbelly futures is zero (sometimes you'll make money, sometimes you'll lose money and over the long term the two will balance out), and the expected return on delivered porkbellies is negative (you'd have to pay a big electric bill to turn your storage space into a freezer, pay rent on that storage space, and people are going to pay a lot less for a five year old porkbelly than a fresh one, even if it's been kept properly frozen).

That takes me to asset allocation questions.  Generally, the responses I've seen on this forum when people say that they're nervous about the market are (1) trust the market, it goes up over the long term despite bumps, and (2) if you're nervous, that means your asset allocation is off and you might need to dial back your stock investments to match your risk aversion.

The first is the rational response.  The second is not.  The answer to the second under the math is math principle is that you need to get comfortable with the math and internalize it, not act irrationally by dialing back your risk exposure because you're irrationally uncomfortable with risk.  Yet I don't see the same level of criticism of the response that people should change their asset allocation to match their risk appetite.  Why?  Assuming a person with a 30-year or more time horizon for money (not someone close to retirement who might need a higher bond allocation, for example), the answer under the math is math principle is that the person should do work to become more rational, not change their investments to match their irrationality.

When I've seen that advice I've always read it as "if you're already nervous now, there is a significant risk you're not going to be able to stick to your asset allocation in a crash, and the losses from buying stocks high and selling them low are greater than the losses from a constant suboptimally high allocation to bonds." Essentially a rational response to a particular person's recognition that they won't always be able to force themselves to make rational decisions in some future scenarios.

If people can figure out a way to change their mindset to the point that it changes their future potential behavior, that's a financially preferable option to changing their asset allocation. (Changing mindsets on that fundamental a level is hard, but at least a fair number of people can manage it.)

If people think it's a good idea to shift into higher bond portfolios just to avoid FEELING nervous I agree that's incredibly bad advice.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol on January 11, 2018, 08:52:40 AM
"Behavioral Economics" is just code for "bad math".

The beauty of math is that it is correct.  There is no arguing with it.  Your feelings don't matter.  If there is a mathematically correct way to do something, and you choose ANY other way for ANY other reason, then you are wrong. 

Which is fine.  Humans make deliberately wrong decisions all the time.  But we don't need to pretend that our wrong decisions are actually right decisions just to make ourselves feel better.  We don't need to resort euphemisms like behavioral economics.  Just admit you've deliberately made suboptimal choices because you're bad at math, and we can all move on.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: maizefolk on January 11, 2018, 09:23:04 AM
"Behavioral Economics" is just code for "bad math".

No, behavioral economics is the study of why human beings made decisions, particularly when those decisions aren't the ones rational optimization of utility ("the math") would suggest.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 09:37:56 AM
To me if your behavior is irrational with regards to this and you cannot make sound decisions based on the math and follow your ips then you likely would benefit from an advisor who can help you. To compound irrational investing by intentionally skewing an asset allocation or paying down a mortgage to feel better would be a giant red flag that you likely need an advisor and would benefit from their ability to help you ride out down markets without selling. Bc if a mortgage payment pre fire makes you nervous how will you handle drawing down your stache in fire in a down market.  And increasing bonds past 20% is a poor idea based on historical math in most cases outside of doing a reverse equity glide path. But if a person plans to do that they've evaluated alot of math around fire pretty deeply.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy on January 11, 2018, 09:48:45 AM
The beauty of math is that it is correct.  There is no arguing with it. 

Math itself is always correct but garbage in still yields garbage out.  Bad math is probably responsible for a smaller share of the bad decisions described in the OP than is bad risk analysis (though there's plenty of bad math to blame too).

And while there's no arguing with math, there is arguing with risk analysis, which explains the profusion of heated debates that take place in this forum around such topics as leveraged-investing-via-mortgage to a much greater extent than faulty math.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: lonegun on January 11, 2018, 09:57:29 AM
Paying off debt has a magical psychological benefit that math does not show. It lifts a heavy burden from your mind when complete. I almost always would recommend paying off all debt prior to investing even if it bad math.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: GuitarStv on January 11, 2018, 10:01:02 AM
If there is a mathematically correct way to do something, and you choose ANY other way for ANY other reason, then you are wrong.

Assuming that you're accounting for all variables, absolutely.

This is an important point though.  The optimum solution for accumulating wealth will be different than the optimal solution for retiring early.  It's not optimal for either scenario to have kids . . . but many people feel that this is essential to optimizing their happiness.  I figure we're all aiming to achieve maximized happiness in life.  Unfortunately, 'happiness' isn't always easy to measure in concrete ways . . . and many of the things that can lead to happiness conflict with one another.  'Correct' therefore depends on initial assumptions, which are prone to change.  It's hard to come up with a rock solid 'correct' solution built upon a foundation of mushy pleasure seeking.

:P
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 10:05:01 AM
Paying off debt has a magical psychological benefit that math does not show. It lifts a heavy burden from your mind when complete. I almost always would recommend paying off all debt prior to investing even if it bad math.

its a shitty recommendation - these forums exist as was stated in the OP to challenge our current comfort zones to acheive something abnormal in society FIRE.  Using your logic if someone received a magical psychological benefit spending 10% more than they make they should do this regardless of math.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: mm1970 on January 11, 2018, 10:44:34 AM
For me, it's often "don't let the perfect be the enemy of the good enough".

Yes, absolutely investing in the market and not pre-paying your low mortgage is mathematically better.

But for many people, it's not either-or.  You can do both.

In addition to that, pre-paying the mortgage is STILL better than blowing the money on eating out and crap.  So the forced "savings", while not better than investing in the market, is a middle ground.

As someone who went through the housing market crash - well, we were never underwater because we pre-paid our mortgage (despite the fact that the bottom of the market house value was $300,000 less than we paid for it).  Now, we still live in our house.  I know many people who lost their homes during that time, and sold at a loss and were underwater when the house sold.  That's a pretty big hit to your credit rating if you get a foreclosure.  Even if you aren't foreclosed on, it kind of sucks to sell the house and still owe the bank money.  For a house that you don't live in anymore.

As far as timing the market - well, I don't really do that - yet.  But as we get older and approach retirement age, I do see us moving our investments around to those that are less volatile. It's one thing to weather a massive downturn when you are 40, but another entirely at 65 with a kid in college.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: nemesis on January 11, 2018, 10:49:36 AM
Paying off debt has a magical psychological benefit that math does not show. It lifts a heavy burden from your mind when complete. I almost always would recommend paying off all debt prior to investing even if it bad math.
Totally disagree with this.

Having the means and funds to pay off debt is just as fine as paying off the debt.   If you can pay off the debt anytime you want, you're not enslaved by debt. 

Your recommendation is a little too simple.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Prairie Stash on January 11, 2018, 10:50:07 AM
Paying off debt has a magical psychological benefit that math does not show. It lifts a heavy burden from your mind when complete. I almost always would recommend paying off all debt prior to investing even if it bad math.

its a shitty recommendation - these forums exist as was stated in the OP to challenge our current comfort zones to acheive something abnormal in society FIRE.  Using your logic if someone received a magical psychological benefit spending 10% more than they make they should do this regardless of math.
I think you mentioned you had a baby due this year, which is great. Was your house purchased to accommodate the extra person or are you going to need more room. Were you paying an extra large mortgage payment on empty rooms until the arrival of kids?

Optimally the math says to purchase a smaller house and upgrade later when the kids arrive, a cheaper hose is always financially easier to carry the debt on than a larger house and leaves even more for investing. We're all prone to acting emotionally though.

Most homeowners have houses that are wrong size for their family needs and use justifications outside of the math. You'll hear stuff like "planning for the future"or "keeping the kids room for when they return from University". I do it too, I don't pretend otherwise.

If you have a house that has extra bedrooms (at some point), you probably did some behavioral economics yourself.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: VoteCthulu on January 11, 2018, 10:51:37 AM
The primary purpose of my money is to make me happy. Sometimes serving that purpose requires sub-optimal purchases, such as when a I could eat at home for $3 but I choose to eat out with friends for $15 instead.

Some people are far happier paying off their mortgage ASAP, and as long as they understand the total cost of doing so, it can be a good decision for them.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: nemesis on January 11, 2018, 10:52:12 AM
...

The bitcoin problem highlights the principle that we start making errors in rational analysis as soon as we get outside our comfort zone.  There might be a 1% chance that bitcoin is going to be worth a gazillion dollars, and a 99% chance it's worthless, and the market has potentially priced that correctly.  But because we don't "understand" that math, we dismiss it, and therefore give an irrational assessment of what could be a perfectly efficient market and price.
...
This seems completely baffling to me.  Who really understands bitcoin?  Even the bitcoin billionaires don't understand bitcoin. 

Bitcoin is by itself worthless, but there are enough people who are intrigued by the possible of "lottery win" of bitcoin to want to speculate in it (not investing).  It is worse than investing in Tulips because you at least have something physical with tulips.

Bitcoin is just speculation. It has no fundamental value except the energy used to mine it, and if people are willing to pay for that scarcity. 

Your argument about bitcoin seems bizarre and ill-placed here.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL on January 11, 2018, 10:53:19 AM
Out of the many things I learnt when I got my degree in maths, here are a couple that seem relevant:

1) 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.

In this case, that means that Boarder42's maths is correct, IF AND ONLY IF the efficient market hypothesis is true, a 3% 30 year mortgage is available to you, and the stock market this century behaves not too outrageously differently to the stock market last century, by always, on average, trending up. If you, beginning from some other logical source, believe these assumptions to be true for you, then B42 is right from a maths perspective for you. (I say for you because the one about 3% 30 year mortgages will vary from place to place. The other things will be equally true for everyone.)

2) You can have as much completely true maths written down as you want, but unless you know how it's relevant, it's going to be useless to you.

There were a lot of lemmas/theorems that we had to prove that I felt, afterwards, something like, "OK... but what do I do with this information?" This is because a lot of maths at the university level is written in a very abstract and general way, which means that you need a deeper understanding to be able to actually do something with it.

In this case, if you don't understand the maths and the assumptions at least well enough to feel confident in them, or if you know you OUGHT to invest but for whatever reason you haven't done it yet, or there is some other understanding or personality factor at work, you're likely going to fail at applying the maths. You may feel confident it will work for other people, but feel unable to actually apply it yourself. This might be another reason why people might choose to ignore b42.

3) Maths as practised in the science, engineering, and social sciences buildings is not really maths, not in the same way.

Now, of course, if these departments have used the logical rules of maths, their answer is correct given that their assumptions are correct. But maths is the only department where absolutely everything is done logically. Physicists make all sorts of assumptions to get their calculations actually calculable - hence the jokes about spherical chickens in a vacuum. Physics is usually looking at basic enough aspects of the universe for it not to be too much of a problem, but depending on the assumptions they've made, everything is going to be just a little bit off. The "softer" the science gets, the more of a problem this becomes. In biology they use statistics everywhere, and by the time you get to social sciences, it sometimes feels like people are pulling their assumptions out of a hat.

This last point is where behavioural economics comes in. Traditionally, economists have assumed that people are totally rational. Given most people that you meet, and the decisions you see them making, I'm sure you can agree that in the vast majority of cases, this is total nonsense. A lot of the old hypotheses are based on that assumption.

Behavioural economics drops the assumption that people are rational, which opens up the solution space significantly. And if you assume that people aren't rational, you find that different behaviours than before may occur in the markets than under the hypothesis that people are rational. And if people aren't rational, you may also find yourself recommending different things for different people, because some of them won't be rational enough to stick to your most rational plan. Some of those people will also be self-aware enough to realise they aren't rational in the moment, and arrange things so that their future self being irrational won't affect them as much. Really, then, any economist who actually wishes to understand the economy can't afford to disregard behavioural economics.



It's true, maths is maths. But, as you can see, in reality, it's often a little more complicated than that.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol on January 11, 2018, 10:54:54 AM
No, behavioral economics is the study of why human beings made decisions

Right.  In the context of this thread, however, behavioral economics is being used to justify mathematical incorrect decisions.  Math doesn't care why we get wrong answers.  The distributive property of multiplication doesn't give you a pass when your grandma dies.  The wrong answer is still wrong.

Then behavioral economics just becomes post-rationalization for our mistakes.  We like to blame human psychology for our inability to be rational.  This is a bug that need to be squashed.

Paying off debt has a magical psychological benefit that math does not show.

Anytime you find yourself arguing with math by invoking magic, you're probably making a terrible mistake.  Here's a tip for all you folks wearing healing crystals and reading tea leaves to make your investment decisions:  magic isn't real! You've been duped! 

It's hard to come up with a rock solid 'correct' solution built upon a foundation of mushy pleasure seeking.

Hard, but not impossible.  I've built a career out of putting exact numerical answers on fuzzy  questions.  You need to assign relative values to all of the things you think matter in your decision matrix, then plug and chug through the math.  We can (and should) argue about how to value different factors, but in a surprising fraction of cases it turns out to matter a whole lot less often than we expect, after we turn the crank on the math. 

In the example at hand, I agree that there is a warm fuzzy feeling from paying off your mortgage.  But you can buy a whole lot more warm fuzzies with an extra $200,000 in the bank from optimally managing your debts vs your investments.  Don't overpay for your happiness.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol on January 11, 2018, 10:59:17 AM
Behavioural economics drops the assumption that people are rational, which opens up the solution space significantly.

I feel like this is making my point for me.  Isn't this just doublespeak for "wrong answers aren't wrong anymore if you redefine what wrong means"?

As a descriptive tool for explaining WHY people make wrong decisions, behavioral economics is a useful tool.  It should never be used to justify deliberately making wrong decisions, though.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: frugalnacho on January 11, 2018, 11:00:54 AM
Paying off debt has a magical psychological benefit that math does not show. It lifts a heavy burden from your mind when complete. I almost always would recommend paying off all debt prior to investing even if it bad math.

its a shitty recommendation - these forums exist as was stated in the OP to challenge our current comfort zones to acheive something abnormal in society FIRE.  Using your logic if someone received a magical psychological benefit spending 10% more than they make they should do this regardless of math.
I think you mentioned you had a baby due this year, which is great. Was your house purchased to accommodate the extra person or are you going to need more room. Were you paying an extra large mortgage payment on empty rooms until the arrival of kids?

Optimally the math says to purchase a smaller house and upgrade later when the kids arrive, a cheaper hose is always financially easier to carry the debt on than a larger house and leaves even more for investing. We're all prone to acting emotionally though.

Most homeowners have houses that are wrong size for their family needs and use justifications outside of the math. You'll hear stuff like "planning for the future"or "keeping the kids room for when they return from University". I do it too, I don't pretend otherwise.

If you have a house that has extra bedrooms (at some point), you probably did some behavioral economics yourself.

It depends on your time frame. Buying and selling homes comes with huge transaction costs, not to mention the stress of it all.  If you go from single to full family of 5 in a matter of 5 years you are probably better off over buying to start with rather than eating 6% in transaction costs each time you upgrade slightly.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: soupcxan on January 11, 2018, 11:03:06 AM
Boarder42 applies that analysis dogmatically with respect to pre-paying a mortgage (at least at locked-in low interest rates for an extended term).  Over a 30-year period, the market has always had greater returns than the 3% or 4% that current mortgages are at, so from boarder's perspective, it's just a math problem.  The math says invest in the market over pre-paying, so that's what you should do, no exceptions.  If you want to pre-pay your mortgage to feel more secure, etc., that's fine, but understand that you're making a bad math decision and at least know the true cost of your irrational desire for security.

It's only a math problem if you are sure the future will repeat the past. While the future is very likely to look like the past, there is a non-zero chance it doesn't. You may estimate the risk of a macro black swan type outcome at <0.1% and therefore ignore it, and someone else might put it at >1% and not ignore it, but that doesn't mean that one person is bad at math.

It will always be true that leverage increases your risk. The fact that using leverage over a 30-year period has worked in the last century does not mean that it will be risk-free in the next century.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 11:10:02 AM
Paying off debt has a magical psychological benefit that math does not show. It lifts a heavy burden from your mind when complete. I almost always would recommend paying off all debt prior to investing even if it bad math.

its a shitty recommendation - these forums exist as was stated in the OP to challenge our current comfort zones to acheive something abnormal in society FIRE.  Using your logic if someone received a magical psychological benefit spending 10% more than they make they should do this regardless of math.
I think you mentioned you had a baby due this year, which is great. Was your house purchased to accommodate the extra person or are you going to need more room. Were you paying an extra large mortgage payment on empty rooms until the arrival of kids?

Optimally the math says to purchase a smaller house and upgrade later when the kids arrive, a cheaper hose is always financially easier to carry the debt on than a larger house and leaves even more for investing. We're all prone to acting emotionally though.

Most homeowners have houses that are wrong size for their family needs and use justifications outside of the math. You'll hear stuff like "planning for the future"or "keeping the kids room for when they return from University". I do it too, I don't pretend otherwise.

If you have a house that has extra bedrooms (at some point), you probably did some behavioral economics yourself.

i have a larger house than we need i bought it knowing it was larger than we need - it came at quite a discount and was purchased with a loan thats sub inflation i did the calculations to determine how it would affect my FIRE time line and chose to purchase it.  what the above poster said that i commented on was none of this they said pay off debts it feels good i dont care about math.  We wanted to be lake front - to buy a lot and build a house would have been much much more expensive than even the additional costs over many years to heat and cool a much larger space than we need. houses historically increase at inflation and my mortgage rate is at inflation for 30 years so my largest cost of ownership is just the little green soldiers tied up in the equity.  If i could have a 100% loan forever

unless you live like a monk everything you have could be attributed to behavioral economics.  i'm not saying we should ignore behavioral economics i'm saying we should still rationally look at the math and then determine if what ever you have is worth it and adds the value to your life compared to what it detracts from a financial stand point.  while i believe almost no one in the US should pay down a mortgage today that doesnt mean you cant choose to after evaluating and understanding its likely impact to your life and your time to FIRE

I've posted many times about the behaviors that eat up life energy that people choose to do like mowing their own lawn or cooking their own meals and more often than not all of these things even combined are worth less than the simple change from auto buying VTSAX instead of autopaying down principal. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL on January 11, 2018, 11:10:40 AM
Behavioural economics drops the assumption that people are rational, which opens up the solution space significantly.

I feel like this is making my point for me.  Isn't this just doublespeak for "wrong answers aren't wrong anymore if you redefine what wrong means"?

As a descriptive tool for explaining WHY people make wrong decisions, behavioral economics is a useful tool.  It should never be used to justify deliberately making wrong decisions, though.

Of course irrational decisions are still irrational. However, given that we know people are irrational, it then becomes irrational to expect yourself or anyone else to always be rational. If somebody knows enough about their own psychology to know that they'll be overly tempted to sell at the lows if they still have debt, for instance, then expecting themselves not to because "that's the rational decision" is like an overweight person on a diet keeping a cupboard full of junk food in their kitchen (perhaps for a relative) and expecting themselves not to eat it because "that's the rational thing to do". Eventually, their temptation is going to get them, and if they'd just thrown out that junk food/made an investing decision that took into account their personality, they may have been able to avoid it. Therefore, the rational thing to do is to expect that you will be irrational in the ways that you know yourself to be irrational and to plan for that.

Another example: if someone consistently comes to leave the house and finds they've forgotten something at the last moment, and therefore frequently ends up leaving the house ten minutes later than they planned, who's more likely to get to their job on time: the person who says, "next time, I won't forget anything, and I will leave on time", or the person who says, "well, I'll probably forget something next time too, knowing me, so I'll plan to leave the house ten minutes earlier"?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: maizefolk on January 11, 2018, 11:17:16 AM
No, behavioral economics is the study of why human beings made decisions

Right.  In the context of this thread, however, behavioral economics is being used to justify mathematical incorrect decisions.  Math doesn't care why we get wrong answers.  The distributive property of multiplication doesn't give you a pass when your grandma dies.  The wrong answer is still wrong.

Then behavioral economics just becomes post-rationalization for our mistakes.  We like to blame human psychology for our inability to be rational.  This is a bug that need to be squashed.

Ah, here perhaps is the divergence in our thinking. You feel that I'm deploying behavioral economics to justify my own bad decisions. I see it as providing extremely useful information about why other people -- who I cannot control -- often make decisions that are not utility maximizing.

If I can better understand why they are making those decisions, I'm in a much better position to give advice or suggestions to get them to make decisions which are closer to optimal than the ones they are currently making than if I'm just shouting at them about how they're wrong ... and sadly also a much better position than if I'm walking them through the math on why their decisions aren't in their own long term self interest over and over again.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 11:51:57 AM
What is rational and irrational depends on a human value judgment, sorry people. Our rules of logic don't exist in some Platonic heaven outside of human existence and language. In fact, there is a good amount of empirical evidence that cause and effect aren't foundational characteristics of our universe, even if it often appears that way.

Whether a decision is the "right" decision depends on what you value. A good example was raised earlier.

If you accept the assumption that the ultimate and best use of your life and money is to maximize your returns, which is being argued by some of the people in this thread, then you cannot justify having a child.

Most people use money as a tool for their happiness. If happiness is the goal, the value of debt reduction is therefore subjective, and you can't say what the exact benefit is from one person to the next. You can argue that it doesn't belong in a mathematical analysis, but the ultimate goal of the mathematical analysis is to generate happiness through financial independence. If debt reduction is relevant to happiness, it follows that it is worth considering for some people.

Pretty much everything that is espoused on this website is a subjective perspective that isn't 'right' by some "objective", true nature. We just all find it appealing and value the perks of the lifestyle espoused.

thats all well and good around here we discuss how to optimize and promote the best paths forward from an optimal use of green soldiers - its easy to see i pay someone 1500 a year to mow my lawn if i cut that cost i save 1500 - its harder to grasp and understand why paying down a mortgage is a very very sub optimal decision and people fall into a few categories on this

1. ignorant and dont care to learn - frequently post poor mathematical justifications or just talk about the feeling side - this is face punch worthy
2. new and ignorant but open to understanding - could easily be lead astray by bad mathematics
3. understand all the math and how it affects them and have chosen to pay it down - happiness justification or whatever it happens to be - i have no real issue with these people except when they promote their stance to others as a good path to take.
4. understand the math and choose to not pay it down. 

obviously my biggest issues lie with number 1 and number 3 b/c it is not valuable to this forum to promote buying mcmansions or trucks or boats or 10000 dollar vacations or paying down low fixed rate mortgages etc.  Can you choose to do it and justify it internally - i guess we're now calling that  behavioral economics - yes you can.

For whatever reason - societal norms of debt being bad or maybe looking at your costs and going my mortgage is my largest cost if i get rid of that i dont need as much money and i FIRE faster.  These are the easy warm fuzzy feeling ways people approach it but people should control their behavior to the point that they at least get to number 3 and understand what in fact they are giving up to do it. 

And as i posted above if you cant control your behavior to the point of learning and understanding what is really simple math behind why keeping low fixed mortgages is better than not.  Then you may really need to evaluate if you need to Hire someone and pay them 1% of your money to manage it for you b/c that same person is likely to panic in a market downturn when FIREd.

b/c cyclestache raises a very good question. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: big_owl on January 11, 2018, 12:19:56 PM
I don't really have a dog in this fight since I'm paying my mortgage off early AND investing at the same time so whatever, I'm happy.  Has it been figured out that although in the past the market vs. mortgage would be a better mathematical decision that this is guaranteed to be the case going forward?  I guess I need to wait and see what happens during the next recession with interest rates already at zero before I decide what I think.  That hasn't happened in modern times so I'm still skeptical at assuming the math guarantees the market will win vs. reducing debt during the next major downturn.  But again, I just do both so I'm covered either way. 

Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL on January 11, 2018, 12:26:18 PM
What is rational and irrational depends on a human value judgment, sorry people. Our rules of logic don't exist in some Platonic heaven outside of human existence and language. In fact, there is a good amount of empirical evidence that cause and effect aren't foundational characteristics of our universe, even if it often appears that way.

Whether a decision is the "right" decision depends on what you value. A good example was raised earlier.

If you accept the assumption that the ultimate and best use of your life and money is to maximize your returns, which is being argued by some of the people in this thread, then you cannot justify having a child.

Most people use money as a tool for their happiness. If happiness is the goal, the value of debt reduction is therefore subjective, and you can't say what the exact benefit is from one person to the next. You can argue that it doesn't belong in a mathematical analysis, but the ultimate goal of the mathematical analysis is to generate happiness through financial independence. If debt reduction is relevant to happiness, it follows that it is worth considering for some people.

Pretty much everything that is espoused on this website is a subjective perspective that isn't 'right' by some "objective", true nature. We just all find it appealing and value the perks of the lifestyle espoused.

thats all well and good around here we discuss how to optimize and promote the best paths forward from an optimal use of green soldiers - its easy to see i pay someone 1500 a year to mow my lawn if i cut that cost i save 1500 - its harder to grasp and understand why paying down a mortgage is a very very sub optimal decision and people fall into a few categories on this

1. ignorant and dont care to learn - frequently post poor mathematical justifications or just talk about the feeling side - this is face punch worthy
2. new and ignorant but open to understanding - could easily be lead astray by bad mathematics
3. understand all the math and how it affects them and have chosen to pay it down - happiness justification or whatever it happens to be - i have no real issue with these people except when they promote their stance to others as a good path to take.
4. understand the math and choose to not pay it down. 

obviously my biggest issues lie with number 1 and number 3 b/c it is not valuable to this forum to promote buying mcmansions or trucks or boats or 10000 dollar vacations or paying down low fixed rate mortgages etc.  Can you choose to do it and justify it internally - i guess we're now calling that  behavioral economics - yes you can.

For whatever reason - societal norms of debt being bad or maybe looking at your costs and going my mortgage is my largest cost if i get rid of that i dont need as much money and i FIRE faster.  These are the easy warm fuzzy feeling ways people approach it but people should control their behavior to the point that they at least get to number 3 and understand what in fact they are giving up to do it. 

And as i posted above if you cant control your behavior to the point of learning and understanding what is really simple math behind why keeping low fixed mortgages is better than not.  Then you may really need to evaluate if you need to Hire someone and pay them 1% of your money to manage it for you b/c that same person is likely to panic in a market downturn when FIREd.

b/c cyclestache raises a very good question. 

Behavioural economics isn't an excuse to do what you wish, though. It's about recognising that people, and therefore you, and me, and MMM, and Warren Buffett, and Albert Einstein - everyone - is irrational in some way or another. It'll be different for each person, of course.

People can be good enough at maths to understand the argument for keeping a mortgage, and indeed good enough at investing to make it not worth it for them to pay one percent fees, without necessarily having a temperament that lets them make good decisions while in debt. If the debt causes them to lose sleep, and the gradual sleep deprivation causes them to make 100 tiny decisions each day that were just that little bit worse than otherwise, and they end up impulse-purchasing, or eating a whole box of donuts, or yelling at their family, and then they get so stressed that they draw money out of their investments and use it to pay down their mortgage anyway just to get rid of the stress, would using their mortgage as leverage be right for them? The interest rates haven't changed on either, but the situation looks quite different.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 12:28:44 PM
I don't really have a dog in this fight since I'm paying my mortgage off early AND investing at the same time so whatever, I'm happy.  Has it been figured out that although in the past the market vs. mortgage would be a better mathematical decision that this is guaranteed to be the case going forward?  I guess I need to wait and see what happens during the next recession with interest rates already at zero before I decide what I think.  That hasn't happened in modern times so I'm still skeptical at assuming the math guarantees the market will win vs. reducing debt during the next major downturn.  But again, I just do both so I'm covered either way.

1st just about everyone here who is paying down their mortgage is investing as well - b/c if they arent they are greatly losing tax advantaged space that should be utilized fully prior to considering a paydown. so you do have a dog in the fight you're on the paydown side.

2nd no we cant guarantee any return but we assume returns will be similar to history.  We use the same assumptions that most here using the 4% SWR in retirement will be using so if you dont believe those assumptions to be true you'll likely have to work decades longer. 

3rd you cant time the market and thats what you're trying to indicate with your last comment

stastically you are extremely unlikely to hit the perfect paydown window in which paying down your mortgage then investing your full payment would have beaten investing in the market and letting your mortgage go to term.  its worse than betting on green on a roulette wheel. 

So if we cant time the market what do we do? we choose the most statistically(mathmatical) likely path to help us atain our goal (FIRE here)  could you get lucky and hit a 2000 to 2010 paydown window and come out ahead yep - odds you hit that slim to none.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: big_owl on January 11, 2018, 12:41:09 PM
I don't really have a dog in this fight since I'm paying my mortgage off early AND investing at the same time so whatever, I'm happy.  Has it been figured out that although in the past the market vs. mortgage would be a better mathematical decision that this is guaranteed to be the case going forward?  I guess I need to wait and see what happens during the next recession with interest rates already at zero before I decide what I think.  That hasn't happened in modern times so I'm still skeptical at assuming the math guarantees the market will win vs. reducing debt during the next major downturn.  But again, I just do both so I'm covered either way.

1st just about everyone here who is paying down their mortgage is investing as well - b/c if they arent they are greatly losing tax advantaged space that should be utilized fully prior to considering a paydown. so you do have a dog in the fight you're on the paydown side.

2nd no we cant guarantee any return but we assume returns will be similar to history.  We use the same assumptions that most here using the 4% SWR in retirement will be using so if you dont believe those assumptions to be true you'll likely have to work decades longer. 

3rd you cant time the market and thats what you're trying to indicate with your last comment

stastically you are extremely unlikely to hit the perfect paydown window in which paying down your mortgage then investing your full payment would have beaten investing in the market and letting your mortgage go to term.  its worse than betting on green on a roulette wheel. 

So if we cant time the market what do we do? we choose the most statistically(mathmatical) likely path to help us atain our goal (FIRE here)  could you get lucky and hit a 2000 to 2010 paydown window and come out ahead yep - odds you hit that slim to none.

I guess I was trying to say that I'm going to continue to invest significantly and pay down mortgage significantly no matter what the argument is so that's why I don't really care about it.  There's going to be opportunity cost I'm missing out on no matter which way it goes since I'm doing both, but I've found the best way for me to feel better is to significantly grow active income so that we can do both those things simultaneously and still afford to do what we want in life and feel good about it.

We'll see what happens after the next big downturn, nobody knows what will happen.  Maybe it'll be long term debt hangover or maybe the fed will price target and inflate away. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Maenad on January 11, 2018, 12:43:20 PM
I find it irritating that people are confounding optimal/suboptimal with right/wrong.

Yes, there is probably one financially optimal answer for each question, but that doesn't make the others "wrong", just "suboptimal". A 60/40 stock/bond split may not have as much longevity as 85/15 if you're planning for a 60-year payout, and may therefore require a lower WR in order to make it to 95% confidence, but if someone is willing to work longer for that lower WR, and the 60/40 lets them sleep at night and keeps them from panicking in a down market, that's a hell of a lot better than insisting on 85/15 and that they should magically become more "rational" and risk-tolerant.

Encouraging people to be more rational and data-driven is awesome. Beating them about the head and shoulders with the math is jerkish. And I say this as an engineer who spends a lot of time in risk management.

Also, re: market efficiency. The markets may be overall efficient, but sectors can and do go into bubbles on a fairly regular basis. Efficient Market Theory and the existence of bubbles are not mutually exclusive. Read up on The Growth Stock/New Issue Craze (also known as the 'tronics boom) that started in the late 1950s, the Conglomerate Boom in the mid-60s, "performance investing" of concept-stocks of the late 60s, the Nifty Fifty in the 70s, the New Issues and biotech stocks in the 80s, plus of course the internet bubble in the late 90s. You'll see all of the same signs as we're seeing in crypto today. Forty-third verse, same as the first.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 12:50:40 PM
@BookLoverL  i did not say everyone who chooses to pay down their mortgage should probably enlist a financial advisor - i said those who do so with no regard to the math b/c of those feelings you listed and refuse to learn or understand the math b/c of feelings likely have a higher predisposition to also freaking out in market down turns.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Prairie Stash on January 11, 2018, 01:12:17 PM
Paying off debt has a magical psychological benefit that math does not show. It lifts a heavy burden from your mind when complete. I almost always would recommend paying off all debt prior to investing even if it bad math.

its a shitty recommendation - these forums exist as was stated in the OP to challenge our current comfort zones to acheive something abnormal in society FIRE.  Using your logic if someone received a magical psychological benefit spending 10% more than they make they should do this regardless of math.
I think you mentioned you had a baby due this year, which is great. Was your house purchased to accommodate the extra person or are you going to need more room. Were you paying an extra large mortgage payment on empty rooms until the arrival of kids?

Optimally the math says to purchase a smaller house and upgrade later when the kids arrive, a cheaper hose is always financially easier to carry the debt on than a larger house and leaves even more for investing. We're all prone to acting emotionally though.

Most homeowners have houses that are wrong size for their family needs and use justifications outside of the math. You'll hear stuff like "planning for the future"or "keeping the kids room for when they return from University". I do it too, I don't pretend otherwise.

If you have a house that has extra bedrooms (at some point), you probably did some behavioral economics yourself.

i have a larger house than we need i bought it knowing it was larger than we need - it came at quite a discount and was purchased with a loan thats sub inflation i did the calculations to determine how it would affect my FIRE time line and chose to purchase it.  what the above poster said that i commented on was none of this they said pay off debts it feels good i dont care about math.  We wanted to be lake front - to buy a lot and build a house would have been much much more expensive than even the additional costs over many years to heat and cool a much larger space than we need. houses historically increase at inflation and my mortgage rate is at inflation for 30 years so my largest cost of ownership is just the little green soldiers tied up in the equity.  If i could have a 100% loan forever

unless you live like a monk everything you have could be attributed to behavioral economics.  i'm not saying we should ignore behavioral economics i'm saying we should still rationally look at the math and then determine if what ever you have is worth it and adds the value to your life compared to what it detracts from a financial stand point.  while i believe almost no one in the US should pay down a mortgage today that doesnt mean you cant choose to after evaluating and understanding its likely impact to your life and your time to FIRE

I've posted many times about the behaviors that eat up life energy that people choose to do like mowing their own lawn or cooking their own meals and more often than not all of these things even combined are worth less than the simple change from auto buying VTSAX instead of autopaying down principal.
I agree about using logic to maximize your choices. 

For the record, you made a math mistake. House prices do not track inflation, they track wage growth. Inflation also tracks wage growth (in general), so why mention it? Where its important though is if you're buying a house in a region with a depressed, stagnant or booming economy. House prices will not track national inflation rates, they will track local wage growth (or shrink in areas with massive job losses - coal country perhaps? the small town I was born in?). Those same regions that see house prices decrease may see overall inflation, as fuel, food and the rest continue to rise.

There is a famous example on this board of someone who recognized this - ARS. He recognized that the wages in Las Vegas did not decrease during the housing crisis while the house prices did. Over 9 years he bought a bunch of house prices that had dipped from the predicted prices, based on wages, and made a small fortune. Contrast that with some regions where hosing and wages decreased, fortunes weren't made there. I'm over simplifying, its hard for people to get when first introduced (otherwise they wouldn't have made the error to begin with).

Perhaps you should revisit your math though and plugin the forecast wage growth for your region instead of inflation, would it really matter though? You might notice though, while inflation tends to be predicted for the long term, wage growth isn't. If it was easy to predict wage growth, we all would have bought houses in Silicon valley 30 years ago.

For every graph you can produce that shows housing tracking inflation, you can find one that shows housing tracking wage growth (with greater accuracy). Compare for yourself, all three look similiar but wages explain it on the small scale (the most dramatic is small towns that lose their main employer).

P.S. I enjoy your comments, you're fun to respond to (I like that you don't hold back).
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 01:24:56 PM
you're right they track wage growth not inflation. 


i really like this topic - the more i think about it if a person cannot take the time to put emotion aside and calc something and then determine if its worth it to them i think this is a real problem and it could show its ugly head in a downturn in FIRE in a very bad way. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Scortius on January 11, 2018, 01:31:52 PM
Encouraging people to be more rational and data-driven is awesome. Beating them about the head and shoulders with the math is jerkish. And I say this as an engineer who spends a lot of time in risk management.

I actually feel like this is where a big disconnect is coming from. Boarder doesn't argue that you should maximize expectation in a vacuum. He certainly doesn't "beat them over the head in a jerkish manner", yet when he does come to offer his analysis people who disagree with him often act offended and insulted.

Here's what I see happening. I see people come into threads or start new threads where the topic will involve paying off their mortgage early for a number of reasons, very often including desires to 1) reduce risk of bankruptcy when losing their job, 2) pay off the mortgage quickly so they can invest the savings into the market and make more money once it's paid off, or in general 3) lower the time it takes for them to achieve financial independence. Others incorrectly assume you have to increase your FI stach by 25x your mortgage (you don't, you just need to save an additional amount equal to your outstanding pay-down balance). Others complain that they shouldn't be 'lectured' because they are holding higher rate loans, ARMs, or are not in the US where 30 year fixed are available (and Boarder and others are always quick to point out that this analysis is ONLY for people with 30 year fixed at ~4% and below). Others even come in here and talk about paying off their mortgage before even maxing their tax-advantaged space.

The point is that for people who emotionally want to prioritize any of these goals, it is highly advantageous to not pay off the mortgage. Boarder isn't arguing to these people that they have to maximize their expectation regardless of risk.  He is arguing that if they are being truthful to themselves about their own peace-of-mind goals, then they are going about it the wrong way. His advice generally benefits many people who are risk-adverse but don't understand that they are actually choosing a path with a higher risk of ruin. Hell, for those with fixed 30 years at 3.5 or lower, it's not unreasonable to expect that in a few years you'll be able to buy bonds that will outperform your mortgage. That's as much of a risk-adverse win as you could ever find.

So no, I reject that those in the "don't pay" camp are arguing from a robotic risk-agnostic perspective. Quite the opposite, people who want to lower their risk are often very unaware that the choices they are making are both lowering their expectation and increasing their risk of ruin. This is why so many of us continue to push the debate.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: neil on January 11, 2018, 01:39:23 PM
Are people really doing the math?  I think we ignore boatloads of available data because it is information overload, and justify it for various reasons.  And to invoke behavioral into that context, we generally don't revisit assumptions unless those assumptions directly and provably cause us harm.  It's easy to forget the "math" involved here is statistics and not algebra and it is heavily data and variable dependent.  Human beings are deciding on the variables and that makes the conclusions biased in some percentage based on behavioral factors. 

The reason I can FIRE is because I'm willing to execute on backup plans, and accept personal circumstances might fuck me regardless.  Not because a FIRE tool said 4% is ok.  Economic models are nice and pretty... and largely piles of shit, as proven over and over by massive historical failures of anyone trying to predict things with them.

I don't think the tools are shit but there's some odd kind of reverence for 150 years of sequential stock returns and using that to make predictions on 50 year retirement schemes.  It's the best we can do, but humans as a collective have no proven track record for getting this right.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 01:40:42 PM
well said @Scortius and that specific behavoir that many take to getting up in arms and refusing to understand - i think is what the OP of this thread was trying to get at - and i would think that if you're going to act irrationally about a large financial decision even when presented with data that your path actually harms your goals - then this is something we should be discussing on a much deeper level here.

The issue at hand is people act irrationally even when they think they are being rational and Scortius points out 3 very common reasons brought up - So if they cannot accept the data presented them and change their path on the mortgage - how can one reasonably expect that they personally will hold their stocks to their intended AA during a down turn in FIRE.  I would think they have a much higher risk of actually failing at FIRE if a downturn happened due to their past history of being presented data and for the most part ignoring it.  so when someone here says just hold to your AA they say no the markets tanking i have to get out.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Prairie Stash on January 11, 2018, 01:41:39 PM
you're right they track wage growth not inflation. 


i really like this topic - the more i think about it if a person cannot take the time to put emotion aside and calc something and then determine if its worth it to them i think this is a real problem and it could show its ugly head in a downturn in FIRE in a very bad way.
Wow, I was really expecting you to disagree, most people do out of instinct. You can actually apply this to the positive, I might buy a house in the city Amazon chooses for its second head office for example.  Ultimately I'm a little bit lazy ( or busy with other more interesting endeavours) I tend towards the easy route of buying ETF.

You seemed to accept it too quickly, perhaps you have some prime real estate on Vulcan?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 11, 2018, 01:46:04 PM
you're right they track wage growth not inflation. 


i really like this topic - the more i think about it if a person cannot take the time to put emotion aside and calc something and then determine if its worth it to them i think this is a real problem and it could show its ugly head in a downturn in FIRE in a very bad way.
Wow, I was really expecting you to disagree, most people do out of instinct. You can actually apply this to the positive, I might buy a house in the city Amazon chooses for its second head office for example.  Ultimately I'm a little bit lazy ( or busy with other more interesting endeavours) I tend towards the easy route of buying ETF.

You seemed to accept it too quickly, perhaps you have some prime real estate on Vulcan?

its been discussed at length here before its easy/common to say inflation but wage growth is really what drives it and i've seen the data.  i'm currently making a killing on my lake front mcmansion easily sitting over 100% ROI on what we've got "invested" in it.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Stachless on January 11, 2018, 10:01:27 PM
I do believe Pete (the dude who's blog we are all on right now) paid his mortgage off early.  Maybe even twice.

Boarder42, I agree with your math and appreciate what you do here fighting the good fight.  I was surprised at first when so many were offended by your comments in this 'cult' of 'facepunchers', but after really thinking about how hard so many of these good folks worked and all the sacrifices they made to do so, can better understand why they are so emotionally invested (or not invested!) in paying off the mortgage.

I see this topic as being a lot like sex.  Just because doing it one way may be 'optimal' doesn't mean the other ways of doing it aren't great!
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 12, 2018, 04:25:53 AM
I do believe Pete (the dude who's blog we are all on right now) paid his mortgage off early.  Maybe even twice.

Boarder42, I agree with your math and appreciate what you do here fighting the good fight.  I was surprised at first when so many were offended by your comments in this 'cult' of 'facepunchers', but after really thinking about how hard so many of these good folks worked and all the sacrifices they made to do so, can better understand why they are so emotionally invested (or not invested!) in paying off the mortgage.

I see this topic as being a lot like sex.  Just because doing it one way may be 'optimal' doesn't mean the other ways of doing it aren't great!

Pete had much higher mortgage rates that wouldn't apply to today's scenario.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: markbike528CBX on January 12, 2018, 06:35:02 AM
Great discussion.   While I'm one of the suboptimal, emotional mortgage killers ( just did it), I spent most of my life saving, then investing when I realized that simply saving wasn't optimal. 
 Since I now have "enough", a comfortable 4% Fire stache, plus 20% more, I don't have to maximize utility to increase my happiness.

My advantage is that I didn't have the options of mortgage pay down vs investing, since I had no house (single, didn't need/want one).
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Cycling Stache on January 12, 2018, 07:25:17 AM
First, thank you for all the thoughtful responses.  I spent some time with this, so I appreciate the insight.  A couple responses:

...

The bitcoin problem highlights the principle that we start making errors in rational analysis as soon as we get outside our comfort zone.  There might be a 1% chance that bitcoin is going to be worth a gazillion dollars, and a 99% chance it's worthless, and the market has potentially priced that correctly.  But because we don't "understand" that math, we dismiss it, and therefore give an irrational assessment of what could be a perfectly efficient market and price.
...
This seems completely baffling to me.  Who really understands bitcoin?  Even the bitcoin billionaires don't understand bitcoin. 

Bitcoin is by itself worthless, but there are enough people who are intrigued by the possible of "lottery win" of bitcoin to want to speculate in it (not investing).  It is worse than investing in Tulips because you at least have something physical with tulips.

Bitcoin is just speculation. It has no fundamental value except the energy used to mine it, and if people are willing to pay for that scarcity. 

Your argument about bitcoin seems bizarre and ill-placed here.

This is a good example of believing you know more than the market and why it's so hard to internalize the correct rational analysis.  You can't simultaneously hold the view that you don't understand the market and yet you know that it's worthless.  Bitcoin may well be worthless.  But there's enough money being put into estimates of its potential worth to create a sufficient market, and so you have to ask what informational advantage do you have that allows you to know more than the market.  If something is "clear" to you (or here, clear that it's unclear), then why is it not clear to the $224 billion market for bitcoin?  We understand that analysis with respect to Ford when we invest in index funds.  I may see a new Ford and think wow that looks great, maybe Ford will go up, but I don't invest extra in Ford because I realize that the market for Ford is large enough that my information (the new model looks good to some people) has already been priced in.  There may be a 99% chance that bitcoin is worthless and a 1% chance that it's worth a gazillion dollars, and the market can therefore be rational even though it seems crazy.  The "rational" analysis for considering any market that is sufficiently developed is what informational advantage do I have.  We get it for the index funds, but it's tougher to apply to a new potential market.

"Behavioral Economics" is just code for "bad math".

The beauty of math is that it is correct.  There is no arguing with it.  Your feelings don't matter.  If there is a mathematically correct way to do something, and you choose ANY other way for ANY other reason, then you are wrong. 

Which is fine.  Humans make deliberately wrong decisions all the time.  But we don't need to pretend that our wrong decisions are actually right decisions just to make ourselves feel better.  We don't need to resort euphemisms like behavioral economics.  Just admit you've deliberately made suboptimal choices because you're bad at math, and we can all move on.

@maizeman  and @BookLoverL provided excellent responses to this, but I wanted to emphasize the point because Sol's post highlights a common misunderstanding of behavioral economics that is central to understanding the point I'm trying to make above.

Behavioral economics is not about bad math.  It's about people making irrational decisions that they believe to be rational at the time, in consistent and predictable ways.

If I asked you if you wanted to go buy some cookies right now, there's a good chance you'd say no.  Don't need the extra calories, not that healthy, etc.  But if I put a bag of cookies in front of you, you're statistically more likely to take one.  If I then put you under stress, you're even more likely to take one.  If I ask you to work on a hard math question, you're statistically more likely to take a cookie.

Why?  The analysis from your perspective never changed.  You ability to do the cookie math (is short-term enjoyment worth long-term unhealthiness) never changed.  But you--and everyone else--are statistically more likely to take a cookie when I change fact patterns that should have no rational impact on the cookie math.

Even more interesting is what happens when you ask people what they think will happen?  Do you want a cookie?  No.  Would that change if I put a bag in front of you?  No.  What if I asked you a hard math question while the cookie is in front of you?  No, I don't want a cookie.  But statistically, you are more likely to take a cookie in those situations.

That's the point.  It's not a question of being able to do rational analysis.   It's whether people are going to make rational decisions when we know statistically that they won't, even though they believe they will.  That's why I express skepticism about the general forum's ability to hold stocks during a crash.  We are all trying to internalize the rational points that there's always a risk of a crash and that in the long-term the market goes up.  But, statistically, most people buy high and sell low, even when they believe they won't.

So the test is to figure out the extent to which we can so internalize the "math is math" principles that we continue to make rational decisions in times of crisis--in short, that we can become less human.  Or alternatively, the extent to which we need to take steps to protect ourselves (investment policy statement, automatic investing, low information diet, more conservative portfolio) from the statistically likely irrational behavior.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 12, 2018, 07:40:08 AM
so thats all well and good you've isolated a problem that may effect some people.  so what do we do about it and how do we determine who would be must suceptible to selling in a down turn.  just saying humans act irrationally doesnt really benefit readers and posters, we need to understand how why and when and how to mitigate it.

as i've indicated a couple times i think people who make the emotional decision of paying off their house are more likely to sell in a down turn - i also think this decreases alot if they take the time and understand the math and just determine they'd rather have it paid off for what could be a number reasons. 

I also think this community will help people not sell and be more celebratory on the way down for those in accumulation.  So the real risk lies for those who are retired. 

So IMO those at highest risk for acting irrationally in a down turn are those who are RE and chose to not understand the math enough to know holding on to their stocks and rebalancing creates the best outcome. And those people are likely the same ones who paid down there mortgage and didnt care to learn about the math. - and who likely would actually benefit from a good financial advisor that will put their money in low cost index funds and help them ride out the market dips by keeping them to their plan. 

I'm very excited for a market crash b/c i want to see how i will personally react to it, since i havent been thru one since joining up here and getting a real understanding for how things have worked in the past.  I'm pretty confident as analytical as i am it wont be hard to hold on and enjoy the ride down. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy on January 12, 2018, 07:46:33 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.  And part of the reason that there is so much pushback in the threads on leveraged-investing-via-mortgage and similar topics is the tendency by some posters to conflate non-math with math (although, as I said above, bad math is also a big part of the reason, but that tends to get corrected quickly enough, because there is no arguing with math).  We can (and should) identify poor cost-benefit analysis, or poor risk analysis, without invoking math to defend non-math.  It's harder to defend those aspects of our positions that do not rely on immutable laws of the universe, but so be it.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol on January 12, 2018, 08:14:27 AM
Behavioral economics is not about bad math.  It's about people making irrational decisions that they believe to be rational at the time, in consistent and predictable ways.

I think these two sentences contradict each other.

Behavioral economics describes why people make mathematically incorrect decisions.  It's all about bad math.

Using it to understand the motivations behind bad math is fine.  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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 12, 2018, 08:38:55 AM
Behavioral economics is not about bad math.  It's about people making irrational decisions that they believe to be rational at the time, in consistent and predictable ways.

I think these two sentences contradict each other.

Behavioral economics describes why people make mathematically incorrect decisions.  It's all about bad math.

Using it to understand the motivations behind bad math is fine.  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.

correct and for those who cannot come around to the math part of this simple formula and still choose to pay it down i think they are at real risk for other irrational decisions like selling in a down market.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Cycling Stache on January 12, 2018, 09:12:09 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. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 12, 2018, 09:19:31 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? 

cool you pointed out a problem with how people act typically - we are in a subset of society that intentionally acts differently in many ways - likely making us less likely to make the poor decision.  but some of the actions of people here probably put them in a camp that make them more likely.  i dont think people who choose to have a lawn service or larger house fit into the camp of making an irrational decision based on math as much as people who choose to pay a mortgage down b/c there is no change to your lifestyle to simply fund a taxable account over a mortgage prepayment.  just like shifting money into bonds when the market starts crashing doesnt appear to affect your lifestyle on the surface and feels safer.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Seradoc on January 12, 2018, 09:39:00 AM
as i've indicated a couple times i think people who make the emotional decision of paying off their house are more likely to sell in a down turn - i also think this decreases alot if they take the time and understand the math and just determine they'd rather have it paid off for what could be a number reasons. 

I disagree that people who realize gains during an appreciating market and apply them towards a mortgage are likely the same as those who do not realize their gains and then cash out of the market immediately after a market crash.  They may disagree with and feel partonized by this assessment of their personal maturity.

I do think that this group is timing a market correction though, and that this decision is likely based off of a, likely emotional, "gut check" risk assessment.  Humans are terrible at assessing risk.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: mm1970 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?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Cycling Stache 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. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy 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).
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Cycling Stache 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.   
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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. 
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: mm1970 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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 .
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy 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.")
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BiggerFishToFI 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?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: scantee 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: GuitarStv 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?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: NoraLenderbee 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Scortius 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: TomTX 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: TomTX 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."
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy 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 (https://forum.mrmoneymustache.com/welcome-to-the-forum/mr-math-and-paying-off-your-mortgage/msg1519884/#msg1519884) 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: GuitarStv 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: GuitarStv 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.

Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: BookLoverL 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. ;)
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: TomTX 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: GuitarStv 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: GuitarStv 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.)
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: NoraLenderbee 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").
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Zola. 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: elementz_m 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.

Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: elementz_m 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?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol 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?

Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: elementz_m 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?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: elementz_m 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: TomTX 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: TomTX 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.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: NoraLenderbee on January 13, 2018, 03:22:46 PM


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.

"Security" is just one reason that some people have cited. There are other reasons. As I said,  there are things that people value more than the highest possible ROI. You keep going as if the only conceivable correct goal was to maximize ROI.

You've mentioned being a cafeteria Mustachian in other threads. You have a boat. Someone else has a paid-off mortgage. Neither is the most frugal option. Having a boat is no big deal, but paying off a mortgage is a terrible mistake that must be denounced in thread after thread?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy on January 13, 2018, 03:43:04 PM
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.

This isn't quite true.  If you backtest it using a tool like cFIREsim, you will see that there were a handful of historical cases where a leveraged-investing-via-mortgage plan would have failed even using a 4% mortgage loan (with starting years clustered around 1929) (ignoring, of course, tax consequences, transaction costs and other factors not accounted for by cFIREsim).  But the success rate is still comparable to a 4% SWR, in the 95%+ range.

Why on earth would any bank offer any mortgage if they could otherwise outperform it?

See this recent discussion (https://forum.mrmoneymustache.com/welcome-to-the-forum/do-you-regret-paying-off-your-mortgage-early/msg1791246/#msg1791246) for detailed explanation of the reason why.

Remember that the bank technically owns your house until your mortgage is paid off. 

As a technical matter, in most jurisdictions in the U.S., the mortgagee (the bank) obtains a security interest (a lien) in the property, and the mortgagor (the borrower/homeowner) retains title to the property and continues to own it, subject to the mortgagee's security interest.

But in America, the banks can take all of a $100,000 house for a $10,000 debt? Wow.

No.  Generally speaking, if the bank forecloses on the property and sells it, it can't keep the excess.  The borrower/homeowner is generally entitled to receive any remainder from the proceeds after the loan obligations (and the bank's expenses) have been satisfied in full.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: sol on January 13, 2018, 04:09:23 PM
If you backtest it using a tool like cFIREsim, you will see that there were a handful of historical cases where a leveraged-investing-via-mortgage plan would have failed even using a 4% mortgage loan

That's not what I've found, but there could be differences in methodology.  Because the mortgage is a fixed dollar amount per month instead of being inflation adjusted, the usual SWR math doesn't quite work.  What's the lowest total 30 year return for various portfolio compositions?  This site (http://observationsandnotes.blogspot.com/2010/05/best-worst-35-years-in-stock-market.html), for example, cites the lowest 35 year rolling return (starting 1906) as 6.1% annualized.  Maybe the last five years make a big difference?
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: aceyou on January 13, 2018, 04:15:08 PM
Math teacher chiming in with my two cents.  The paying off the mortgage early thing is something I've put a lot of thought into. 

The general thought is that math says keep the mortgage...because math, but often behavioral theory says pay if off...because emotions.  My thought is that the math isn't as clear cut as people like boarder suggest (disclaimer: boarder is one of my favorite posters, and I respect his opinions).  But here's why I don't think it's so clear cut:

Mathematically, you have to take into account variance.  For example, investment A and B both have the same expectation, but B has higher variance, the A is mathematically the better investment. 

Paying off a mortgage lowers your long term net worth expectation(a bad thing), but it also reduces your variance(a good thing).  Boarder's strategy of keeping the mortgage gives you a higher ceiling(increased expectation), but it also gives you a lower floor due to increased variance. 

Because a person like Boarder (and most other's on this site who follow his strategy) are highly skilled individuals, I'm completely confident that they could roll with the punches if a market crash presents itself.  They are some of the last people I'd worry about.  But to be fair, a person who pays down their mortgage earlier has an easier punch to absorb if that same event happened to them. 

Disclosure:  I'm taking the middle road regarding the mortgage.  I have a 15 year note, and don't make extra payments.  I put about 70k/year towards investments, and about 14,000/year towards the mortgage(9k towards principal, 5k to interest).  So in practice, I am probably more like boarder and those who value investing over owning the home ASAP.  But I don't think my decision is as mathematically superior of a decision as boarder and others think.  Both sides make a valid case.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: brooklynguy on January 13, 2018, 04:22:48 PM
This site (http://observationsandnotes.blogspot.com/2010/05/best-worst-35-years-in-stock-market.html), for example, cites the lowest 35 year rolling return (starting 1906) as 6.1% annualized.  Maybe the last five years make a big difference?

The issue is that because a mortgage loan has required scheduled principal repayments, leveraged-investing-via-mortgage could fail even if the annualized investment return over the life of the mortgage loan exceeds the mortgage loan's interest rate (in the same way that sequence of returns matters for a retiree's spending plan).  If there were no amortization, then it would be as simple as comparing the annualized investment return to the mortgage loan's interest rate (ignoring tax consequences and the like).
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 13, 2018, 05:00:54 PM


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.

"Security" is just one reason that some people have cited. There are other reasons. As I said,  there are things that people value more than the highest possible ROI. You keep going as if the only conceivable correct goal was to maximize ROI.

You've mentioned being a cafeteria Mustachian in other threads. You have a boat. Someone else has a paid-off mortgage. Neither is the most frugal option. Having a boat is no big deal, but paying off a mortgage is a terrible mistake that must be denounced in thread after thread?

Correct it should be just like owning a boat should be if there were people here asking if they should buy a boat or sell their boat.

I didn't say having a boat was no big deal I said it has no place for promotion here. Just like a mortgage. But thanks again for showing yet another example and comparison as to where that thread belongs.

It's actually much more detrimental than owning a boat the way I do or the cost of my house or my commute. But unless you do the math you never know.

So now that I think we're on the same page this is a shitty unmustachian thing to do. Do you think you could go ahead and work on moving that paydown club to the antimustachian wall of shame and comedy.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 13, 2018, 05:02:50 PM
This site (http://observationsandnotes.blogspot.com/2010/05/best-worst-35-years-in-stock-market.html), for example, cites the lowest 35 year rolling return (starting 1906) as 6.1% annualized.  Maybe the last five years make a big difference?

The issue is that because a mortgage loan has required scheduled principal repayments, leveraged-investing-via-mortgage could fail even if the annualized investment return over the life of the mortgage loan exceeds the mortgage loan's interest rate (in the same way that sequence of returns matters for a retiree's spending plan).  If there were no amortization, then it would be as simple as comparing the annualized investment return to the mortgage loan's interest rate (ignoring tax consequences and the like).

Correct you can find specific paydown periods where it wins. But your talking 1% or less of the time a target that's almost impossible to hit. 

I mean you're talking about having to hit the perfect storm of paydown start year and how many years it takes you to pay it off before you can start dumping in the difference. 1% is probably incredibly generous.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: aspiringnomad on January 13, 2018, 08:23:15 PM
Math teacher chiming in with my two cents.  The paying off the mortgage early thing is something I've put a lot of thought into. 

The general thought is that math says keep the mortgage...because math, but often behavioral theory says pay if off...because emotions.  My thought is that the math isn't as clear cut as people like boarder suggest (disclaimer: boarder is one of my favorite posters, and I respect his opinions).  But here's why I don't think it's so clear cut:

Mathematically, you have to take into account variance.  For example, investment A and B both have the same expectation, but B has higher variance, the A is mathematically the better investment. 

Paying off a mortgage lowers your long term net worth expectation(a bad thing), but it also reduces your variance(a good thing).  Boarder's strategy of keeping the mortgage gives you a higher ceiling(increased expectation), but it also gives you a lower floor due to increased variance. 

Because a person like Boarder (and most other's on this site who follow his strategy) are highly skilled individuals, I'm completely confident that they could roll with the punches if a market crash presents itself.  They are some of the last people I'd worry about.  But to be fair, a person who pays down their mortgage earlier has an easier punch to absorb if that same event happened to them. 

Disclosure:  I'm taking the middle road regarding the mortgage.  I have a 15 year note, and don't make extra payments.  I put about 70k/year towards investments, and about 14,000/year towards the mortgage(9k towards principal, 5k to interest).  So in practice, I am probably more like boarder and those who value investing over owning the home ASAP.  But I don't think my decision is as mathematically superior of a decision as boarder and others think.  Both sides make a valid case.

I think that variance is only significant in the shorter term. Over a 30 year period, it narrows considerably going by historical data, and the expected outcomes all sit above a 4% annual return.

FWIW, I also have a 15 year mortgage at a low 2.75 rate, refinanced in late 2012. But with the benefit of hindsight and a better understanding of the math, a 30 year mortgage and plowing the difference into the market would have left me with substantially more money by this point. I lose zero sleep over it, but I’m also certainly not going to entertain something as irrational as making extra payments on the note.

You’re comparing apples to oranges if you argue that the emotional security you feel from making that suboptimal paydown choice is akin to people deciding to take a vacation or to spend anything less than the bare minimum in life. A decision about what to consume is patently different from a decision about how to pay for your consumption. If you can’t see that, you’re bringing too much emotion to the discussion.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: aceyou on January 14, 2018, 06:38:54 AM
Thank you for your reply, I've been wanting to discuss this with other smart people to see if I can poke holes in my thoughts.  I'm still sticking to my theory, but I'm willing to be persuaded!

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I think that variance is only significant in the shorter term. Over a 30 year period, it narrows considerably going by historical data, and the expected outcomes all sit above a 4% annual return.

The variance certainly lessens over time as you've said.  But a person truly utilizing this strategy would get a 30 year note, and after 10 years on a 30 year note, you still owe about 75% of what you did originally.  So I'd argue that while you are right, the "short term" lasts for a little while.  And the short term is what's important anyway, because in all historical cases where portfolios run into trouble, it's because a negative event occurs in the first 5-10 years.  So, the strategy to maintain the mortgage would just exacerbate an event like that. 

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FWIW, I also have a 15 year mortgage at a low 2.75 rate, refinanced in late 2012. But with the benefit of hindsight and a better understanding of the math, a 30 year mortgage and plowing the difference into the market would have left me with substantially more money by this point. I lose zero sleep over it, but I’m also certainly not going to entertain something as irrational as making extra payments on the note.

Right.  You and I are basically identical with how we have handled our mortgages, including the timeframe.  And you are right that we'd have substantially more money...most times out of 10, that's what would happen.  But the key is that you said hindsight.  We know that between 2012 and 2018 we went through a period of insane market growth...this was not one of those bad periods.  Variance disappears if you have a crystal ball (hindsight).

I could use hindsight and say that if you'd have retired in 2007 using the 4% rule and a mortgage with 30 years to go, then you'd have been worse for wear.  For 5 years you'd have been depleting an already depressed stache, while making payments on a home that is severely underwater.  By the time the boom times occurred, you'd have had very little of your stache remaining.  In this case, a person who'd have retired with a smaller stache and no mortgage (aka far lower spending) would have came through in a stronger position to capitalize on the subsequent bull run.     

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You’re comparing apples to oranges if you argue that the emotional security you feel from making that suboptimal paydown choice is akin to people deciding to take a vacation or to spend anything less than the bare minimum in life. A decision about what to consume is patently different from a decision about how to pay for your consumption. If you can’t see that, you’re bringing too much emotion to the discussion.

Good point and I agree, but I didn't say this...maybe someone else used this analogy in an earlier comment? :)
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on January 14, 2018, 06:45:37 AM
Yes cherry picking a start year at a market peak and the top of a bubble in hindsight can achieve better results. But the odds of hitting that are miniscule.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: aspiringnomad on January 14, 2018, 12:43:27 PM
Thank you for your reply, I've been wanting to discuss this with other smart people to see if I can poke holes in my thoughts.  I'm still sticking to my theory, but I'm willing to be persuaded!

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I think that variance is only significant in the shorter term. Over a 30 year period, it narrows considerably going by historical data, and the expected outcomes all sit above a 4% annual return.

The variance certainly lessens over time as you've said.  But a person truly utilizing this strategy would get a 30 year note, and after 10 years on a 30 year note, you still owe about 75% of what you did originally.  So I'd argue that while you are right, the "short term" lasts for a little while.  And the short term is what's important anyway, because in all historical cases where portfolios run into trouble, it's because a negative event occurs in the first 5-10 years.  So, the strategy to maintain the mortgage would just exacerbate an event like that.

I used "short term" as shorthand, but I really meant short-to-medium term. Portfolios running into trouble due to sequence of return risk is only an issue at retirement. I would agree that the calculation changes for those retiring and relying on their portfolio to fund expenses, specifically because of that risk.

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FWIW, I also have a 15 year mortgage at a low 2.75 rate, refinanced in late 2012. But with the benefit of hindsight and a better understanding of the math, a 30 year mortgage and plowing the difference into the market would have left me with substantially more money by this point. I lose zero sleep over it, but I’m also certainly not going to entertain something as irrational as making extra payments on the note.

Right.  You and I are basically identical with how we have handled our mortgages, including the timeframe.  And you are right that we'd have substantially more money...most times out of 10, that's what would happen.  But the key is that you said hindsight.  We know that between 2012 and 2018 we went through a period of insane market growth...this was not one of those bad periods.  Variance disappears if you have a crystal ball (hindsight).

I could use hindsight and say that if you'd have retired in 2007 using the 4% rule and a mortgage with 30 years to go, then you'd have been worse for wear.  For 5 years you'd have been depleting an already depressed stache, while making payments on a home that is severely underwater.  By the time the boom times occurred, you'd have had very little of your stache remaining.  In this case, a person who'd have retired with a smaller stache and no mortgage (aka far lower spending) would have came through in a stronger position to capitalize on the subsequent bull run.

I realize that hindsight from that particular time frame is not really helpful, just pointing out that events unfolded as empirical data suggested they would. It's also hard to argue that a basket of companies extracting income from all corners of the world is less safe than plowing money into an illiquid asset based in one location and subject to all the economic or catastrophic vagaries that might befall that location. I know you haven't argued that, just adding this to the broader conversation.

As you note, over the short term, anything can and has happened. But we tend to invest for the long term here, and the 30-year mortgage product available to American homeowners gives us a useful long term period to test that empirically.

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You’re comparing apples to oranges if you argue that the emotional security you feel from making that suboptimal paydown choice is akin to people deciding to take a vacation or to spend anything less than the bare minimum in life. A decision about what to consume is patently different from a decision about how to pay for your consumption. If you can’t see that, you’re bringing too much emotion to the discussion.

Good point and I agree, but I didn't say this...maybe someone else used this analogy in an earlier comment? :)

Yeah, sorry. This wasn't directed at you and I should have been more clear about that.
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: Cycling Stache on February 06, 2018, 08:58:09 AM
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.

Just so the thread is clear, this is incorrect.  The house is security for the loan.  If you fail to pay the loan, the bank can force the sale of the home (foreclosure) in order to satisfy the remaining amount owed on the loan.  But after that--and after whatever costs are incurred throughout the foreclosure process--the remaining equity goes to the homeowner.

I wanted to update this thread because of the flurry of new threads questioning investments decisions in light of the recent drop in the market.  If the market continues to fall, we might get some insight into how people actually handle it versus how they thought they would.  It will be interesting to see if people can "stay rational."
Title: Re: Towards a Unifying Theory of Math is Math and Behavioral Economics
Post by: boarder42 on February 06, 2018, 09:51:19 AM
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.

Just so the thread is clear, this is incorrect.  The house is security for the loan.  If you fail to pay the loan, the bank can force the sale of the home (foreclosure) in order to satisfy the remaining amount owed on the loan.  But after that--and after whatever costs are incurred throughout the foreclosure process--the remaining equity goes to the homeowner.

I wanted to update this thread because of the flurry of new threads questioning investments decisions in light of the recent drop in the market.  If the market continues to fall, we might get some insight into how people actually handle it versus how they thought they would.  It will be interesting to see if people can "stay rational."

i have no issues staying rational - but i may change my AA as we further discuss the 150 year history of everything - as there appears to be a strong case for 50% or higher REIT allocation - coupled with small caps it could be a very lucrative work time cutting endeavor that allows for higher SWRs. its just a coincednce this topic was brought up b/c the paper was published very recently (4 months ago)  and now is coinciding with a pull back in the market - i likely will change nothing on my accumulation plan but may alter my post FIRE plans - as my REIT options in my 401k are too limited