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Twenty basic rules for intelligent money management

32 James_Miller 19 March 2015 05:57PM

1.  Start investing early in life.

The power of compound interest means you will have much more money at retirement if you start investing early in your career.  For example, imagine that at age eighteen you invest $1,000 and earn an 8% return per year.  At age seventy you will have $54,706.  In contrast, if you make the same investment at age fifty you will have a paltry $4,661 when you turn seventy.
Many people who haven't saved for retirement panic upon reaching middle age.  So if you are young don't think that saving today will help you only when you retire, but know that such savings will give you greater peace of mind when you turn forty.
When evaluating  potential marriage partners give bonus points to those who have a history of saving.  Do this not because you want to marry into wealth, but because you should want to marry someone who has discipline, intelligence and foresight.

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Convincing Arguments Aren’t Necessarily Correct – They’re Merely Convincing

9 lionhearted 25 April 2011 12:43PM

I've been studying a lot of finance lately, and it strikes me that it's a field that requires a very high degree of rationality and ability to cut through the noise to get to correct arguments.

What's nice about investing especially, though, is that it has a very similar utility curve for all players. People have slightly different goals in terms of finance and investing, but generally speaking, people are measuring utility in terms of financial return. There's some differences between time preferences and risk tolerance, but generally speaking, we can sort the winning strategies from the losing ones over time. There's a fairly clear and objective standard for what worked and what didn't, which could make it a very helpful field for the aspiring rationalist to study and learn from.

I originally wrote this post, "Convincing Arguments Aren’t Necessarily Correct – They’re Merely Convincing" for my blog, so the tone is more colloquial than you'd normally see on LessWrong, and the audience is slightly different. A friend of mine suggested I post it up here too as it might be interesting to the LW crowd, so here we go -

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Optimal Employment

60 Louie 31 January 2011 12:50PM

Related to: Best career models for doing research?, (Virtual) Employment Open Thread

In the spirit of offering some practical real world advice, let's talk about employment rationality. Let’s talk about optimal employment.1

You're young, smart, and hoping to have a positive impact on the world. Maybe you finished college, maybe you didn't. You want to pay your bills but also have time to pursue your intellectual goals. You want a low-stress job that doesn't leave you drained at the end of the day. And it would be nice to earn lots of extra money, because whatever you value, money tends to be a good way to get it.

And it is possible to find easily obtained, low-stress jobs with flexible hours that allow you to save as much money as someone in the USA making $100,000/yr... if you leave the USA to look for them.

Your instinctive reaction is probably that there’s no free lunch, so I must be mistaken or dishonest. And while you may have the right prior, I hope to persuade you that these jobs exist and tell you how to get one if you're interested.

This, I think, is a special opportunity for rationalists, an illustration that we can get better life outcomes from our investment in rationality - better outcomes such as low-stress jobs that leave us with ample discretionary income and enough free time to pursue whatever else we're interested in, obtained by being willing to break habits and think in numbers.

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(Virtual) Employment Open Thread

35 Will_Newsome 23 September 2010 04:25AM

tl;dr: Some people on LW have a hard time finding worthwhile employment. Share advice and help them out!

Working sucks. I'd rather not work. But alas, a lot of the time, we have to choose between working and starvation. At the very least I'd like to minimize work. I'd like to work somewhere cheap and comfortable... you know, like on the beach in Thailand, like LW (ab)user Louie did. Then I could spend my spare time on things like self-improvement and ahem 'studying nootropics' all day. I'd like to travel, if possible, and not be chained to an iffy job. It'd be cool to have flexible hours. I've read The 4-Hour Work Week but it seemed kinda difficult and scary and... I just don't wanna do it. I can't code, and I'd rather not learn how to. At least, I'd rather not have my job depend on it. I never graduated from college. Hell, I never got my high school diploma, even. A team of medical experts has confirmed that my sleep cycle is of the Chaotic Evil variety. (For those who read HP:MoR, imagine Harry Potter Syndrome, except on crack. I bet a lot of people have similar sleep cycles.) I'm 18, and therefore automatically low status for employment purposes: I'm obviously much too young to make a good teacher, or store manager, or police officer. I can imagine having health problems, or severe social anxiety, or a nearly useless liberal arts degree, or just a general setback limiting my employment opportunities. And if it turned out that I wanted to work 14 hour days all of a sudden because I really needed the money, well then it'd be cool to have that option as well. Alas, none of this is possible, so I might as well just give up and keep on being stressed and feeling useless... or should I?

I bet a whole bunch of Less Wrongers aren't aware of chances for alternative employment. I myself hear myths of people who work via the internet, or blog for a living, or code an hour a day and still make enough to survive comfortably. Sites like elance and vworker (which looks kinda intimidating) exist, and I bet we could find others. Are there such people on Less Wrong that could tell us their secret? Do others know about how to snag one of these gigs? What sorts of skills are easiest to specialize in that could get returns in virtual work? Are virtual markets hard to break into? Can I just blog for an hour or two a day and afford to live a life of simplistic luxury in Thailand? Pretty much everyone on Less Wrong has exceptional writing ability: are there relatively well-paying writing gigs we could get? Alternatively, are there other non-internet jobs that people can break into that don't require tons of experience or great connections or that dreaded and inscrutable bane of nerds everywhere, 'people skills'? Share your knowledge or do some research and help Less Wrong become more happy, more productive, and more awesome!

Oh, and this is really important: we don't have to reinvent the wheel. As wedrifid demonstrated in the earlier Intelligence Amplification Open Thread, a link to an already existent forum is worth ten thousand words or more.

What Cost for Irrationality?

60 Kaj_Sotala 01 July 2010 06:25PM

This is the first part in a mini-sequence presenting content from Keith E. Stanovich's excellent book What Intelligence Tests Miss: The psychology of rational thought. It will culminate in a review of the book itself.

People who care a lot about rationality may frequently be asked why they do so. There are various answers, but I think that many of ones discussed here won't be very persuasive to people who don't already have an interest in the issue. But in real life, most people don't try to stay healthy because of various far-mode arguments for the virtue of health: instead, they try to stay healthy in order to avoid various forms of illness. In the same spirit, I present you with a list of real-world events that have been caused by failures of rationality, so that you might better persuade others of this being important.

What happens if you, or the people around you, are not rational? Well, in order from least serious to worst, you may...

Have a worse quality of living. Status Quo bias is a general human tendency to prefer the default state, regardless of whether the default is actually good or not. In the 1980's, Pacific Gas and Electric conducted a survey of their customers. Because the company was serving a lot of people in a variety of regions, some of their customers suffered from more outages than others. Pacific Gas asked customers with unreliable service whether they'd be willing to pay extra for more reliable service, and customers with reliable service whether they'd be willing to accept a less reliable service in exchange for a discount. The customers were presented with increases and decreases of various percentages, and asked which ones they'd be willing to accept. The percentages were same for both groups, only with the other having increases instead of decreases. Even though both groups had the same income, customers of both groups overwhelmingly wanted to stay with their status quo. Yet the service difference between the groups was large: the unreliable service group suffered 15 outages per year of 4 hours' average duration and the reliable service group suffered 3 outages per year of 2 hours' average duration! (Though note caveats.)

A study by Philips Electronics found that one half of their products had nothing wrong in them, but the consumers couldn't figure out how to use the devices. This can be partially explained by egocentric bias on behalf of the engineers. Cognitive scientist Chip Heath notes that he has "a DVD remote control with 52 buttons on it, and every one of them is there because some engineer along the line knew how to use that button and believed I would want to use it, too. People who design products are experts... and they can't imagine what it's like to be as ignorant as the rest of us."

Suffer financial harm. John Allen Paulos is a professor of mathematics at Temple University. Yet he fell prey to serious irrationality which began when he purchased WorldCom stock at $47 per share in early 2000. As bad news about the industry began mounting, WorldCom's stock price started falling - and as it did so, Paulos kept buying, regardless of accumulating evidence that he should be selling. Later on, he admitted that his "purchases were not completely rational" and that "I bought shares even though I knew better". He was still buying - partially on borrowed money - when the stock price was $5. When it momentarily rose to $7, he finally decided to sell. Unfortunately, he didn't get off from work until the market closed, and on the next market day the stock had lost a third of its value. Paulos finally sold everything, at a huge loss.

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Disclosure vs. Bans: Reply to Robin Hanson

6 David_J_Balan 04 January 2010 01:09AM

A little while back I wrote a post arguing that the existence of abusive terms in credit card contracts (such as huge jumps in interest rates for being one day late with a payment) do not satisfy the conditions for standard economic models of asymmetric information between rational agents, but rather are trickery, pure and simple. If this is right, then the standard remedy of mandating the provision of more information to the less-informed party, but not otherwise interfering in the market (the idea being that any voluntary agreement must make both parties better off, no matter how strange or one-sided the terms may appear, so any interference in contracts beyond providing information will reduce welfare), is not the right one. There is no decent argument that those terms would appear in any contract where both parties knew what they were doing, so if you see terms like that, the appropriate conclusion is that someone has been screwed, not that Goddess of Capitalism, in her infinite-but-inscrutable wisdom, has uncovered the only terms that, strange as they may seem to mere mortals, make a mutually beneficial contract possible. The goal is to get rid of those terms, and the most direct way to do that is simply to prohibit them. There are some good reasons to be reluctant to have the government go around prohibiting things, so mandatory disclosure might still be a good policy (though the Federal Reserve has investigated this and concluded that it isn't), but the goal would be to use the disclosures to eliminate the abusive terms. There is no justification for the standard economist's agnosticism about whether the terms are good or not: they're bad and the only question is how best to get rid of them.

Robin Hanson left some comments to that post, in which he made the point that since people voluntarily choose these terms, they must like them and so prohibiting them would have to mean protecting people against their will. I answered that while I'm enough of a paternalist to be willing, under some circumstances, to impose limited protections on people even if those people would oppose them, that I didn't think that was an issue here, as I would guess (though I have no proof), that the Federal Reserve's recent decision to ban certain credit card practices was probably very popular, even (especially?) among the people who are harmed by those practices. Robin's reply, as I understand it, is that this may be true, but since people can't simultaneously want to accept credit cards with those terms and at the same time favor banning those terms, it must be the case that they either don't understand the terms of the credit card contracts or they don't understand the effects of the ban. Somewhere there must just be some missing information, and therefore we must be back where we started, with the problem being a lack of information that could be resolved by providing more information.

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Mandating Information Disclosure vs. Banning Deceptive Contract Terms

21 David_J_Balan 20 December 2009 08:55PM

Economists are very into the idea of mutually beneficial exchange. The standard argument is that if two parties voluntarily agree to a deal, then they must be better off with the deal than without it, otherwise they wouldn't have agreed. And if the terms of that deal don't harm any third parties,* then the deal must be welfare-improving, and any regulatory restrictions on making it must be bad.

One objection to this argument is that it's not always clear what is and what is not "voluntary." I once has a well-published economist friend argue that there are no gradations of voluntariness: either a deal was made under some kind of compulsion or it wasn't. I asked him if he would be OK letting his then pre-adolescent son make any schoolyard deal he wanted as long as it was not made under any overt threat, and I think (but am not totally sure) that he has since backed off this position. So there is an argument for purely paternalistic restrictions on freedom of contract. 

Another objection, one which economists tend to take more seriously, relates to information. Specifically, there is the idea that maybe one party to the contract is not fully informed about its terms. For this reason, many economists are willing to entertain policies by which firms are required to disclose certain information, and to do so in a way that is comprehensible to consumers. So for example we now have "Schumer boxes" that govern the ways in which credit card companies present certain information in promotional materials. This seems to many people to be a reasonable remedy: if the problem was that one side of the transaction was ignorant, then a regulation that eliminates that ignorance, while at the same time not interfering with their freedom to engage in mutually beneficial exchange, must be a good thing.

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Markets are Anti-Inductive

30 Eliezer_Yudkowsky 26 February 2009 12:55AM

I suspect there's a Pons Asinorum of probability between the bettor who thinks that you make money on horse races by betting on the horse you think will win, and the bettor who realizes that you can only make money on horse races if you find horses whose odds seem poorly calibrated relative to superior probabilistic guesses.

There is, I think, a second Pons Asinorum associated with more advanced finance, and it is the concept that markets are an anti-inductive environment.

Let's say you see me flipping a coin.  It is not necessarily a fair coin.  It's a biased coin, and you don't know the bias.  I flip the coin nine times, and the coin comes up "heads" each time.  I flip the coin a tenth time.  What is the probability that it comes up heads?

If you answered "ten-elevenths, by Laplace's Rule of Succession", you are a fine scientist in ordinary environments, but you will lose money in finance.

In finance the correct reply is, "Well... if everyone else also saw the coin coming up heads... then by now the odds are probably back to fifty-fifty."

Recently on Hacker News I saw a commenter insisting that stock prices had nowhere to go but down, because the economy was in such awful shape.  If stock prices have nowhere to go but down, and everyone knows it, then trades won't clear - remember, for every seller there must be a buyer - until prices have gone down far enough that there is once again a possibility of prices going up.

So you can see the bizarreness of someone saying, "Real estate prices have gone up by 10% a year for the last N years, and we've never seen a drop."  This treats the market like it was the mass of an electron or something.  Markets are anti-inductive.  If, historically, real estate prices have always gone up, they will keep rising until they can go down.

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On Not Having an Advance Abyssal Plan

21 Eliezer_Yudkowsky 23 February 2009 08:20PM

"Even though he could foresee the problem then, we can see it equally well now.  Therefore, if he could foresee the solution then, we should be able to see it now.  After all, Seldon was not a magician.  There are no trick methods of escaping a dilemma that he can see and we can't."
        -- Salvor Hardin

Years ago at the Singularity Institute, the Board was entertaining a proposal to expand somewhat.  I wasn't sure our funding was able to support the expansion, so I insisted that - if we started running out of money - we decide in advance who got fired and what got shut down, in what order.

Even over the electronic aether, you could hear the uncomfortable silence.

"Why can't we decide that at the time, if the worst happens?" they said, or something along those lines.

"For the same reason that when you're buying a stock you think will go up, you decide how far it has to decline before it means you were wrong," I said, or something along those lines; this being far back enough in time that I would still have used stock-trading in a rationality example.  "If we can make that decision during a crisis, we ought to be able to make it now.  And if I can't trust that we can make this decision in a crisis, I can't trust this to go forward."

People are really, really reluctant to plan in advance for the abyss.  But what good reason is there not to?  How can you be worse off from knowing in advance what you'll do in the worse cases?

I have been trying fairly hard to keep my mouth shut about the current economic crisis.  But still -

Why didn't various governments create and publish a plan for what they would do in the event of various forms of financial collapse, before it actually happened?

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Investing for the Long Slump

8 Eliezer_Yudkowsky 22 January 2009 08:56AM

I have no crystal ball with which to predict the Future, a confession that comes as a surprise to some journalists who interview me.  Still less do I think I have the ability to out-predict markets.  On every occasion when I've considered betting against a prediction market - most recently, betting against Barack Obama as President - I've been glad that I didn't.  I admit that I was concerned in advance about the recent complexity crash, but then I've been concerned about it since 1994, which isn't very good market timing.

I say all this so that no one panics when I ask:

Suppose that the whole global economy goes the way of Japan (which, by the Nikkei 225, has now lost two decades).

Suppose the global economy is still in the Long Slump in 2039.

Most market participants seem to think this scenario is extremely implausible.  Is there a simple way to bet on it at a very low price?

If most traders act as if this scenario has a probability of 1%, is there a simple bet, executable using an ordinary brokerage account, that pays off 100 to 1?

Why do I ask?  Well... in general, it seems to me that other people are not pessimistic enough; they prefer not to stare overlong or overhard into the dark; and they attach too little probability to things operating in a mode outside their past experience.

But in this particular case, the question is motivated by my thinking, "Conditioning on the proposition that the Earth as we know it is still here in 2040, what might have happened during the preceding thirty years?"

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