Terhorst and coin flipping
Posted: Wed Oct 29, 2003 11:34 am
Nice post from FMO
From Terhorst's "Cashing in on the American Dream"
"LESS IS MORE
Perhaps more than anything else, retiring on $50 a day requires a new state of mind. Simplify your life by having only the things you need or want. Consume less to enjoy life more. Living with this new state of mind works because of what economists call the Law of Diminishing Marginal Utility. I call it the Coin Toss Law.
I offer to toss a fair coin. If it comes up tails, I pay you a dollar. If it comes up heads, you pay me a dollar. Sure, you say. Why not? We play a couple of times. Then I ask if you want to play for $10. Of course. We continue to play. Then I offer to play for, say, $500,000, your entire net worth. You laugh. It's ridiculous. Yet, the game hasn't changed at all. The coin is still fair and the odds are the same. What's happened?
What's happened is that you've moved down your "utility" curve. Lose the $500,000 coin toss and you're wiped out. You're without a house, car, furniture, savings, everything. If you're retired, you'll have to go back to work. If you have one. job, you'll have to work at two. You're in worse shape than a chow-mein joint without a reliable noodle supply. You'll probably have a nervous breakdown. It's a disaster.
Winning half a million dollars, on the other hand, wouldn't do that much for you. You could buy a shiny car and a house a couple of blocks farther up the bill. You could stick the kids into a more expensive private school. You'd like to have an extra half-million dollars. But your day-to-day life would change hardly at all. To the extent that you become a victim of upscale marketing, your life could even deteriorate. Status cars upset us when something scratches them. Home computers that do our banking and lock our house can make us feel helpless and frustrated when something goes wrong. Fine furniture and paintings demand that our fire insurance become. a part of our life rather than an annual bill. Modern insurance ads show smiling, wealthy couples surrounded by their possessions. In the next sequence we see the possessions destroyed by fire, flood, or theft. At best the couple recuperates, but only after hours of paperwork, phone calls, and tense talks.
Result: winning the toss offers little or nothing. Losing is a mess. You don't want to play the game.
The Coin Toss Law means that the upside, past a certain point, isn't all that great. If you already have forty pairs of shoes, adding ten more isn't a big deal. If you already have a Mercedes with a small engine, getting one with a bigger engine is a cheap thrill that costs a fortune. Buying a new car makes you feel good, but it doesn't excite like that first clunker when you were sixteen. A bigger house can be pleasant, but it brings bigger problems as well. Compact discs are cute but you have to strain to hear the improved sound.
Millions of Americans in their 30s and 40s already have much of the American dream along with some fun little extras. You're a candidate for retirement at this point if you feel you want more out of life than a new car. You're a candidate for retirement if you suspect that time isn't money. - it's better than money. If you live in a four-thousand-square-foot house with two extra rooms, would adding on make you that much happier? How many fur coats are enough? If you already have $40,000 dollars' worth of jewelry you never wear, would a new necklace make a big difference?
It's ironic, but the only way to change this state of affairs is to have less, not more. If it's been four years since you bought a new tie, choosing a tie might be fun. If you've lived ten years in a small apartment, having a place with a yard might be very pleasant. In every case the marginal whoopee is greater, the less you have to begin with.
From Terhorst's "Cashing in on the American Dream"
"LESS IS MORE
Perhaps more than anything else, retiring on $50 a day requires a new state of mind. Simplify your life by having only the things you need or want. Consume less to enjoy life more. Living with this new state of mind works because of what economists call the Law of Diminishing Marginal Utility. I call it the Coin Toss Law.
I offer to toss a fair coin. If it comes up tails, I pay you a dollar. If it comes up heads, you pay me a dollar. Sure, you say. Why not? We play a couple of times. Then I ask if you want to play for $10. Of course. We continue to play. Then I offer to play for, say, $500,000, your entire net worth. You laugh. It's ridiculous. Yet, the game hasn't changed at all. The coin is still fair and the odds are the same. What's happened?
What's happened is that you've moved down your "utility" curve. Lose the $500,000 coin toss and you're wiped out. You're without a house, car, furniture, savings, everything. If you're retired, you'll have to go back to work. If you have one. job, you'll have to work at two. You're in worse shape than a chow-mein joint without a reliable noodle supply. You'll probably have a nervous breakdown. It's a disaster.
Winning half a million dollars, on the other hand, wouldn't do that much for you. You could buy a shiny car and a house a couple of blocks farther up the bill. You could stick the kids into a more expensive private school. You'd like to have an extra half-million dollars. But your day-to-day life would change hardly at all. To the extent that you become a victim of upscale marketing, your life could even deteriorate. Status cars upset us when something scratches them. Home computers that do our banking and lock our house can make us feel helpless and frustrated when something goes wrong. Fine furniture and paintings demand that our fire insurance become. a part of our life rather than an annual bill. Modern insurance ads show smiling, wealthy couples surrounded by their possessions. In the next sequence we see the possessions destroyed by fire, flood, or theft. At best the couple recuperates, but only after hours of paperwork, phone calls, and tense talks.
Result: winning the toss offers little or nothing. Losing is a mess. You don't want to play the game.
The Coin Toss Law means that the upside, past a certain point, isn't all that great. If you already have forty pairs of shoes, adding ten more isn't a big deal. If you already have a Mercedes with a small engine, getting one with a bigger engine is a cheap thrill that costs a fortune. Buying a new car makes you feel good, but it doesn't excite like that first clunker when you were sixteen. A bigger house can be pleasant, but it brings bigger problems as well. Compact discs are cute but you have to strain to hear the improved sound.
Millions of Americans in their 30s and 40s already have much of the American dream along with some fun little extras. You're a candidate for retirement at this point if you feel you want more out of life than a new car. You're a candidate for retirement if you suspect that time isn't money. - it's better than money. If you live in a four-thousand-square-foot house with two extra rooms, would adding on make you that much happier? How many fur coats are enough? If you already have $40,000 dollars' worth of jewelry you never wear, would a new necklace make a big difference?
It's ironic, but the only way to change this state of affairs is to have less, not more. If it's been four years since you bought a new tie, choosing a tie might be fun. If you've lived ten years in a small apartment, having a place with a yard might be very pleasant. In every case the marginal whoopee is greater, the less you have to begin with.