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.