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!