In article <nPCdnVJ5FMM_hTzbnZ2dnUVZ_tuonZ2d[at]comcast.com> ,
joetaxpayer[at]nospam.com says...

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I think it's emotional. When the calculations are about money,
then many people start fantasising how great it would be to have
lots and lots of it. And they are afraid of how much of a bummer
it would be to have less. So there is a tendency to see what
they WANT to see, and avoid seeing what they don't want. And to
sort of "negotiate" with the numbers and calculations.

The focus isn't about facing the hard reality of the math.
Instead, they are thinking about merchandise they want to buy, or
the stress-relief of having extra cash, or about the social and
interpersonal coolness associated with financial wealth. Plus,
of course, the fear of deprivation of those things.

Greed and fear make people get stupid.

So it is radically different to dealing with the numbers in
making a computer program, or designing a piece of equipment, or
increasing efficiency at work (as long as that efficiency doesn't
go very directly to his/her own paycheque.)


--
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Maybe you're on to somethin' Joe.

Just think, if we could pound EMH into the heads of investors at a
young age how much more rational the market would be and how much less
volatile (or "over-reactive) its movements. It would wipe most of the
"get-rich-quick" scams right off the map.

Oh well, a boy can dream can't he!!!

Will Trice wrote:
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I find the disconnect between the mathematical skill and its application
to money/finance to be intriguing [in your friend's case]. In my
experience, a strong math background (an 800 on math SATs for those who
are tracking geeks) led to a love of finance, it seemed a natural
progression. I would agree with Elizabeth's sentiment except somehow
I've found a number of people who are great with numbers, but when they
have a dollar sign in front they turn into idiots. You may conclude we
need planners, but I'd say we need some education brought in to the
schools. Kids may not need the deep dive on EMH, or the risks of CMOs,
but the understanding of mortgages, the stock and bond market, in
general, should be required. No one should fall for any mortgage scheme
to accelerate payments for some crazy fee to a third party.
JOE

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:46A1130C.8030804[at]paragondynamics.com...
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??? First, paying $3500 for a calculator doesn't sound like a very good
deal - one with a mathematical mind would surely know you could do this with
Excel. Common sense would tell you there's something fishy here. Second,
borrowing at high interest to pay off low interest doesn't sound like a good
deal and it would only take common sense to realize it. So, you can disagree
with me that the guy doesn't possess an ounce of common sense, but I don't
see how when he apparently was going to fall for two traps.

Elizabeth Richardson

Elizabeth Richardson wrote:

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Well, we'll have to disagree on this. The sales pitch makes this
product sound pretty good, after all, who wouldn't want to pay off their
mortgage early? But I think the time value of money just isn't common
sense. I'm amazed how many people don't understand compound interest,
inflation, equity, and progressive taxation, let alone more advanced
concepts like risk, etc. Isn't this the reason that we, as a society,
need financial planners?

-Will

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:46A00323.5010708[at]paragondynamics.com...
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Oh, c'mon, Will, this guy may be intelligent and mathematically skilled,
but he obviously lacks common sense.

Elizabeth Richardson

Mark Bole wrote:

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C'mon! This is an easy and straight-forward problem. The OP wants to
make a first-order approximation by holding the variables in his current
situation constant. This is a very common, and wise, approach. Joe
outlined what he needs to do. Then, depending on the outcome, he can
start playing with variables (risk), exactly what he said he wanted to do.

-Will

HW \"Skip\" Weldon wrote:

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Maybe this is generally true, but in many cases it is not. It seems to
me that a lot of personal finance is anything but common sense given the
wide array of otherwise intelligent people who are confused by it. Just
this week I built an Excel model for a co-worker to talk him out of
buying a scam software package called MMA (check it out at mmahome.us -
you pay $3500 for software that shows you how to accelerate payments on
a low-interest 30 year fixed mortgage by tapping a high-interest line of
credit and using it for your payments, nothing like paying good money to
nearly double your interest rate on a loan!). This guy is highly
intelligent and mathematically skilled, yet I couldn't use common sense
to talk him out his intended course of action, so I used a spreadsheet
(an expensive calculator). The spreadsheet worked.

-Will

GJ wrote:

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Respectfully, you are missing a point.
There are obvious reasons to not buy a house with cash. As I mentioned
prior, paying any debt that might have a higher rate, all things
considered.

What I feel you are missing is this - a fixed rate mortgage is simple.
It's fixed and you're set for 15-30 years. But the choices for
alternative investments is not fixed. (Of course if you can buy a
government bond yielding more than the rate on your mortgage, that's
good). I take the alternate investment choice to be a stock portfolio,
S&P index fund perhaps. The historical return over any given 15 year
period (since 1871) is 9.2%, but with a standard deviation of 4.1%.
The standard deviation is risk, almost by definition. 1/2 the time the
return will be under 9.2% for even that long a period, and 1/6 the time
it will be less than 5.1%.
(those with a critical eye on my postings please forgive that my reply
assumes that numbers looking forward will somehow reflect the past. not
true. the concept of standard deviation and the variability of returns
is valid, however).

The formula is "can I do better than my mortgage rate investing given my
risk tolerance?"

I can. Only because my after tax cost is 3.4%. But I agree with regular
poster Elizabeth that I need to time my mortgage payoff to my targeted
retirement.

JOE

HW "Skip" Weldon wrote:

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I'm glad you mentioned this - how true. More than once I've gotten all
excited about creating some complicated computer model, thinking that my
latent quant skills would finally do me some good, only to find that the
bottom line in the end was "within the margin of error" or somesuch.

Likewise on the "common sense" comment -- if it was easy or
straightforward to come up with a formula, someone would have done it by
now.

-Mark Bole

"GJ" <gj[at]notonyourlife.com> wrote in message news:9budncRoUOdQ-
We lost sight of my original post. I'm looking for a why to quantify paying
- quote -

You have the cart before the horse as the saying goes. There is no
"formula" which takes all those thing into account. You
need to run the "what if" scenarios first to determine the bottom line
best action based on sets of assumptions. Then look at the risks of
each scenario to see which one you can tolerate. Take your net worth
statement (I assume you have one) and project it item by item for
each scenario for the number of years you desire to look out into
the future. Of course this involves computing your estimated taxes
for those years based on each scenario and projecting any increase
or decrease in the value of the house.

BeachBum(Jim)

"GJ" <gj[at]notonyourlife.com> wrote in message
news:9budncRoUOdQ-gLbnZ2dnUVZ_ridnZ2d[at]comcast.com...

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The reason you can't come up with a formula, is because of the "what if."
"What if" interest rates drop. "What if" the stock market crashes. "What if"
the price of housing increases faster than inflation. "What if" we discover
another large pool of oil. Too many "what ifs".

Elizabeth Richardson

On Thu, 19 Jul 2007 09:57:51 -0500, "GJ" <gj[at]notonyourlife.com> wrote:

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What I think you are missing is that there is no formula that takes
everything into account. At least no formula with which everyone
agrees. This explains why "pay off debts or not" is one of the most
debated subjects in personal finance.

Personally - and this always gets me in hot water <grin> - I also
think that personal finance is based on common sense, not number
crunching. So my reaction to your question is that if you need a
calculator to see the difference between two choices, there's not
enough difference to matter.




-HW "Skip" Weldon
Columbia, SC

- quote -

We lost sight of my original post. I'm looking for a why to quantify paying
cash for a house or taking out a mortgage.
I need to see the numbers based on my present situation, i.e.
the interest rate of the proposed loan,
where the money is coming from in both cases -- interest rate, retirement
savings, etc.,
my income at present and associated tax and deductions,
and anything else that comes into play.
All of these things are known to me because they exist today. It is my
present situation. I want to take the risk out of the equation. In other
words if all of the rates stay constant what is my net worth in the
following year, 2 years, etc. What I don't know is the "formula" that takes
all of these things into account.
Once I know how the two decisions interplay with my funds, rates, taxes,
etc., I can introduce risk and play what if.

Of course, maybe I'm missing a point -- its been know to happen.

I appreciate all of the responses.

JW

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You can't have it both ways. You can take the emotion out, to a degree,
but even that is just assuming that one has a high risk tollerance.

Risk cannot be ignored. Anticipated returns always come with a measure
of varience or standard deviation. When choosing from one's options, the
shape of the expected return is as important as the mean of that return.
I may choose a fixed, guaranteed, 6% return over an 8% expected return
with a 10% STDEV, not because my 'feelings' tell me to, but perhaps I'm
going to retire, and the numbers show that the higher return offers me a
Monte Carlo result that I will outlive my money with a high probability.
I suppose I could then say "I'll risk it". But at least I need to
acknowledge the numbers.
JOE

"GJ" <gj[at]notonyourlife.com> wrote:

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You can't say X creates a larger net worth unless you include the
probability that X will actually create a larger net worth. That's a
risk measurement.

Mark Bole <makbo[at]pacbell.net> wrote:
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The problem with the above is that the thought of inflation being a
"major factor in the future" is a risk measurement. *Any* reference to
possible future outcomes is a risk measurement. GJ doesn't want to
discuss risk...

GJ wrote:

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I appreciate the effort, but I think you have just replaced undefined
"monetary advantage" with undefined "net worth". The problem with net
worth that includes home ownership is, how much is unrealized gain that
may disappear tomorrow (illiquid asset)? How much is subject to future
(unknown) taxes?

The earlier replies contain useful suggestions and items to consider,
and I'm not trying to say there is nothing to take into account besides
emotional issues.

Here's one item I didn't see mentioned, which favors maximizing
loan-to-value: inflation expectations. If you think inflation will be a
major factor in the future, then a long-term loan at a fixed rate is a
great "investment", since you will paying back with cheaper dollars.

-Mark Bole

<SNIP> > > > I'm not interested in the emotional issues or the security issues...
- quote -

How about if I have a decision, either X or Y (ignoring the emotional and
risk issues) and if X creates a larger net worth after time T then I should
probably decide X.

I realize that both risk and emotion are important, but the above gives me
the numbers to measure whether taking the added risk (if any) or losing the
sleep (if any) is worth it.

JW

Daniel T. wrote:
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Totally agree. Your affinity for or aversion to risk (in the broadest
sense) is yours and yours alone. That's ultimately what makes the
financial world go 'round.

Or, try this: can you come up with a quantifiable definition of
"monetary advantage"? No definition, no formula.

-Mark Bole