A Kick In The Throat

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The key changes in my life have been triggered by a single event that stood out in my mind. My daughter kicking me in the throat was a life changing event. The kick was a clear indication that my approach to parenting needed to change.

In my professional life, I evaluate myself on a simple criteria – am I being effective at helping people achieve their goals. As a negotiator, I’ve trained myself to stay focused on my desired outcome, rather than any emotional responses.

As a parent, the “kick” triggered two realizations. First, I was being ineffective. Second, I needed to focus on my desired outcome.

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How’d I get kicked?

I was tired, my wife was tired and my daughter was tired. All that fatigue was a recipe for disaster when we gave some physical encouragement for Lex to brush her teeth.

It became clear to me that if I’m going to be an effective parent then I need to take responsibility for not being tired. So the first change was cutting down my physical fatigue (exercise & training) and putting the pieces in place to reduce my mental fatigue (business). This change is hard for two main reasons:

  • I have a core belief that I need to train two hours every day for personal sanity and vanity
  • In my business, I feel obligated to my team

As it turns out, the beliefs may not be based on reality. My body is holding out pretty well and I’m fortunate to work with great people.

The second change was the most difficult. Acknowledging my role in creating my daughter’s behaviour. My sentimental side wants my three-year old daughter to act a well-adjusted 25-year old – stable, loving, calm, rational, loyal, supportive.

Reading that sentence, it’s obvious that a three-year old is never going to act like at 25-year old. It is not obvious to my emotional, sentimental side! When I hear the internal dialogue, “why can you just…” then I know that I’ve fallen into a mental trap.

So how can I modify my behaviour to get a more effective result for my daugher, my wife and my myself?

I asked my friends. The act of asking, and a couple good nights sleep, made me feel better. That’s worth repeating – ask for advice in difficult situations – the act of seeking help is comforting.

Some of the tips were more helpful than others. At one end of the spectrum:

  • Break their spirit early
  • Two cans of Guinness per night
  • You get what you deserve
  • Do your best to stay married
  • Try not to get fat

At the other:

  • Treat it like investing – manage for the long term
  • Create a love of books – reading is a valuable skill and engages their minds
  • She might forget if you blow your stack but you won’t – act as if she’s going to remember every-single-thing you do

The single most useful piece of advice was: split the world in two with Lexi-decisions and Daddy-decisions. When something is a Daddy-decision be prepared to withstand whatever it takes to follow through. When something is a Lexi-decision, let her make the call and let it roll.

Be clear, be consistent, don’t offer choices when none exist. When combined with compassionate love, it’s an effective strategy.

Simple, not easy.

 

 

 

40 Months of Fatherhood

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On EnduranceCorner.Com, I’ve written about Fit Pregnancy. The linked article ends with tips that the athletic parent-to-be can apply to the first year of their parenting experience. This series will touch on what happens after that first year.

I have two book recommendations that helped me pull my thoughts together on parenting: How to Love by Livingston; and Beyond Religion by the Dalai Lama. Neither of these books is a how-to-manual for parenting.

The books are useful to help me figure out the sort of father/husband I wanted to be. My longest term friend told me that I’d make a good dad because it will be OK when my kids find out who I really am. I enjoyed the statement but didn’t understand it until six years later.

As a baby, my daughter didn’t challenge my identity. With my wife, a part-time nanny and family available – our first child represented a scheduling challenge (for Dad). Create space, ensure you get enough sleep and life can roll along, pretty much, as before.

In many dual-career households, you could structure parenting as a scheduling challenge. Daycare across the week, creche at the gym for workouts, babysitting coverage across the weekend – all designed to create space for mom/dad to live their pre-kid lives. Now that I’m on the inside, I understand why many parents go down that route.

Here are some principles that have been guiding me:

Like your marriage, your parenting style only needs to work for you. Over the last year, I considered, “Who is Dad?” I’m fortunate to have shifted away from an identity as an elite athlete before my daughter arrived. For me, the constrained years of early fatherhood are incompatible with elite performance.

TIP: If your spouse tends towards anger (or any anti-social behaviors) then the constraints of parenthood will enhance this aspect of their personality.

The media, and our in-built sentimentality, are poor roadmaps for parenting decisions. The books I recommend are about healthy love and secular ethics. Livingston also discusses people we don’t want in our lives. Love and ethics are rarely discussed in Western education, but essential for young people to navigate their lives.

TIP: I have a recurring sentimentality that the family should sit around in a loving circle and sing Kumbaya. The media-driven ideal of a perfect family distracts me from being an effective parent inside a functional family.

You can’t do it all. In my coaching business, I’m constantly reminding athletes about choices and tradeoffs. From the time your first-born turns two until your final child enters first grade, dad is going to be constrained. That’s 2010-2018 for me (42 to 50 years old) and over a decade for my wife (mom’s life changes from conception).

The young family “constraint” will be determined by the role that you choose to have in your kids’ lives, as well as your choice in spouse.

I’d been on the planet for 40 years when my daughter was born and had failed to come across clear writing on this constraint! My wife and I are glad we waited but I was an accident, rather than foresight.

I’m changing my life to embrace the realities of fatherhood.

#1 – Am I going to have a role? While I was figuring out the sort of parent I wanted to be, there were days where I considered (briefly, very briefly) checking out. I certainly understand why many parents find themselves overwhelmed, or uninterested, in the job.

#2 – If I am going to have a role then how to build trust? Just like all areas of my life: clarity, reliability and love – built by shared experiences over time.

#3 – Why am I doing this? When I gave myself freedom of occupation in my 30s, I didn’t choose to open a preschool. For personal sanity, my role is going to be limited but consistent and material.

#4 – What am I good at? In Hawaii, once a week, I spent the day with my daughter. For my daughter, Daddy Day was about getting ice cream after nap (that’s how she describes it). For me, it was a chance for conversations about the world with a three-year old. I’ve found one thing where I can be exceptional – I’m looking for others.

TIP: I suspect that the greatest value to me, as a parent, may be minimizing regret – our ability to impact situations is consistently overstated. Regret often stands out when my friends talk about their parenting experiences.

A great quote from a parent in her 60s, “my relationship with my kids is mixed but I know, in my heart, that I did my best.”

As a parent, I’m getting better each year. I can see improvement and that’s motivating. By the time my kids are teenagers, I should have it all figured out – just in time to be clueless again!

Sabbatical Best Practices

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What can we learn from people that follow their passion and choose the road less travelled?

In conducting my interviews, I realized that the best advice could be applied immediately. I didn’t need to leave my life to apply my friends’ best advice. This week, I’ll share two tips that we can apply now.

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Outcome Focus — some quotes to set the scene:

  • I’d made a little money, I was unemployed and I had some things I wanted to do. Once I gave myself permission to do anything, my bucket list came together very quickly.
  • Don’t seek to find yourself, before you start the journey, know what you want to get done.
  • I gave myself five years to get it done.

Those quotes come from friends that climbed Everest, changed careers and won Ironman triathlons (not all the same person!).

Listening to them, it struck me that outcomes are an effective way to organize a life. Champion athletes are excellent at honing their lives down to a single outcome focus.

I’ve made a shift and created an outcome list that is related to my Top Ten List. The benefit of an Outcome List is it helps me filter opportunities and prioritize. It also gives me comfort when I need to say “no” or focus elsewhere.

Filter through your desired outcomes. What are you trying to get done?

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Re-entry Strategy — before you leave, give thought to your return; because…

  • I didn’t plan on going back but I took a leave of absence in case I changed my mind
  • I had no idea where I would end up but I had a clear idea about the people that I wanted to keep in my life
  • I wanted to change direction but discovered that I was most valuable staying in a similar field.
  • I took a break to discover that my replacement had taken my job, permanently.

High quality opportunites are rare. Think very carefully before you leave a world-class organization, or burn a bridge with anyone.

With that in mind, the best ideas that I received for staying in touch were:

  • Schedule something fun to share with the key people in your life
  • When you do something unique, write about it
  • Consider researching a new business opportunity for your current employer

Each of the above, creates options within your life.

Related to the above, in my 20s, I had the opportunity to attend business school. I declined because I realized that I was exactly where I wanted to be. I was living my desired outcome.

Most my friends that took sabbaticals re-discovered how much they loved their current life (that they thought they needed to change). They were grateful for an effective re-entry strategy.

Genuine friendships, based on shared experiences, have tremendous value.

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Advice From My Peers

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I’ve been conducting interviews with my friends to get their best advice on what they’ve learned so far.

The discussion has been centered on advice for people taking a sabbatical but, I’ve discovered, most people rarely pause to consider how to direct their lives. So we talk about the key transitions that have shaped them. Having an inner circle that runs from elite athletes to CEOs, I have been able to chat with folks that share values while living in different socio-economic segments.

Most of what I learned in my first 40 years is summed up in PMarcA’s series on career planning (Intro, Part 1, Part 2, Part 3). The best tip from PMarcA, be open to “drop everything” opportunities (see Part 1 for specifics). Somewhere, I learned to spot these and I find them irresistible. I’m in the process of transforming my life to take advantage of one that’s popped up.

If you follow PMarcA’s career advice (and apply the financial tips that I share here) then you will have a choice for significant personal freedom in your 30s or 40s. The exact timing of this freedom will depends on when, and if, you choose to have kids (more on that soon).

Life, and opportunity, have a shelf life. There are windows to follow our dreams; become elite athletes; start a new business; spend time with grandparents; and watch our kids grow. If we don’t grasp those opportunities then the window closes. New windows will open later, but they will be different.

One of the key things that I failed to appreciate in my early-30s was the shelf life of my physical power. I’m extremely grateful that I gave myself a chance to go for it as the lessons of my 30s are no longer available for me. At 43, I look at my young family and will be making changes to apply the same lesson in a different phase of my life.

Looking to my 50s, factoring in a further waning of physical power and remembering how, as a a teenager, I felt about adults 40+ years my senior – I suspect that the tug I feel towards my first career will get stronger. While living in the present, I keep an eye on the future.

My successful friends advise me to put yourself in the middle of people that are what you want to become. Is it any wonder that my dream of winning Ironman Canada brought me to Boulder, Colorado?

This is also good relationship advice, and the true gift from Boulder (my wife is far superior to any race victory) I turned myself into the person I wanted to meet and went to where a lot of those people were living. We have a much better shot at meeting a high-quality athletic spouse at 2pm at the pool, than 2am at a bar. Surprised that it took me so long to figure that one out, but grateful that I lucked into it.

When I look at my friends that have an enviable lifestyle, regardless of wealth, they follow their own advice to simplify as much as possible – I wrote about downsizing last week but this runs deeper. Specific quotes are:

  • get rid of anything that sends you a bill
  • you don’t realize the energy that something takes until you get rid of it
  • new experiences, not more stuff
  • give yourself the space to focus on doing one thing really, really well
  • say no, a lot

It’s important to remember that a simple life isn’t financial management. While it will save you money, the largest payoff is not financial.

With kids in my life, creating simplicity runs completely counter to what society tells me I ought to do – juggle marriage, fatherhood, career and athletics, while seeking to provide the best home life I can afford.

However, I’ve been spending the last three weeks sharing a bedroom with my daughter, my infant son is sleeping in a walk-in closet and a family friend is staying in our loft.  We’ve gone from 1,550 sq. feet per person (Boulder) to 340 sq. feet per person (Hawaii). I’m surrounded by natural beauty, living out of half a suitcase and couldn’t be happier.

Keep it simple, do it now, be true to yourself.

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Managing Personal Satisfaction

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Last week’s post started the transition from looking at the financial cost of decisions (housing, education, supplements) to considering a deeper question of how to “manufacture” satisfaction and happiness.

We often hear that money can’t buy happiness but that ignores the reality that money CAN be used to increase personal freedom as well as purchase unique experiences – both of which link strongly to personal satisfaction.

If you’ve read Kahneman’s book then you’ll find his explanation why the following seem to work well for creating personal satisfaction. I’m going to share practical techniques that I’ve used to change my life – usually for the better but also to mitigate when life shifts against me.

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Take pain in large doses and quickly because the direction of movement, not the size of the movement, is what dominates how we feel. 

My best example of this tip is to downsize every few years.

Voluntary downsizing — In 2001, I moved to New Zealand and managed to live on 5% (five percent) of my 2000 cost of living in Hong Kong. My life satisfaction went way up due to an increase in fresh air, exercise, personal freedom and fitness.

Surprise downsizing — In 2009, my family was facing a 95% reduction in our income. I cut 90% from my personal expenditure and 50% of my family’s expenditure. That time my satisfaction went down (the cuts were painful). However, we quickly adapted to our lower expenditure and our satisfaction fell much less than our expenditure.

Setbacks, both planned and unplanned, can give us a new appreciation for things we take for granted: nature, spare time, personal health, friends and family.

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Be aware that the attraction of remote possibilities and an aversion of certain losses will skew your decisions. Take pain decisively and eliminate your underperformers.

I touched on this last week with regard to relationships. However, it applies in all areas of our lives. A good test for whether you should cut losses is “how does this situation/person/job/choice make me feel about myself?”

We have a tendency to hold onto under performing situations because we will favor a remote chance of success over the certainty of crystallizing an existing loss. We also anchor on past investments of time, money and emotion that are already gone within a situation.

In my life, the most dangerous under performers come with high fixed costs and emotional attachment. Examples include prestige assets (boats, cars, homes) and investments that can cost you money if they underperform.

Within investments I’ve been caught by: high fixed costs; unexpected cash calls; and leverage. You’ll find these risks in: early stage companies, capital intensive businesses, cyclical industries, vacancy rates, and businesses with inventory that loses value quickly over time.

It goes against human nature to take pain quickly but it is a useful habit to reinforce, especially when investments, or relationships, are off target early.

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Because happiness is relative, make incremental positive gains visible.

Athletes: get out of shape each year but not out of health! Build fitness slowly and make your gradual progress visible to yourself.

Finances: each month increase your core capital (low risk, low volatility, visible). I built a habit in my teens of saving 10% of everything I earned. The habit served me well and I grew accustomed to watching a small, incremental increase each month. Even with a stable net worth, you can reallocate capital (say, towards a college fund for your kids) and achieve satisfaction.

Benchmarks: choose targets that you can hit every single day. Create a habit of keeping small promises to yourself. Every day that I get up before 7am scores me a “win”. Every day that I do some form of exercise scores me another “win”. Daily wins reinforce my self-esteem and strengthen my will, when required.

Motivation: frequent smaller gifts are far more valuable than infrequent larger gifts. Small gifts are particularly effective when not expected. I’m most generous on the 364 days a year that aren’t Christmas.

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Priming and Framing – each of these gets a chapter in Kahneman’s book, so I won’t repeat his findings but I will tell you how I use my automatic mind to shape my life:

I use cues:

  • As an elite athlete, I had a sign that said “The Best” on my car’s speedometer.
  • The door to my bedroom had the splits to a 8:29 Ironman visible for more than a year before I got it done, perhaps I should have written down 8:24!
  • When my daughter is difficult I ask myself what the Dalai Lama would do. The reference to Buddhism confuses me a little bit, makes me less aggressive and I pause before following my automatic response to follow aggression with aggression. Break the chain, break the chain!

I seek, and spend time with, people that are relentlessly positive and unreasonably loyal. The flipside is avoiding liars, gossips and those with confused minds.

I buy photos and paintings that remind me of my favorite places and hang them where I see them often. You can tell a lot about someone by what’s stuck on their fridge, or printed on their t-shirts. It doesn’t need to be a Monet to have a positive impact.

All of these tips can work against us when inverted. Stress priming and framing for failure are extremely common – most prevalently through the news media and advertising, which feed on fear and lowering our self-esteem.

Look around where you spend your time, what do you see?

Choose wisely.

What I Read

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This came in via email and I thought I’d crosspost here.

I like Barry Ritholz daily summary of news – he embeds John Mauldin’s weekly eletter, which I also like. http://www.ritholtz.com/blog/ is where I subscribed to his daily email. With that email, I don’t need to read much else for current events.

I don’t subscribe to the Times or the Wall Street Journal but when their articles rise on Google News, I tend to read those.
I read all the stuff on our site – endurancecorner.com – as the writers are people that I know and trust. I don’t read forums, other than Endurance Corner, as I avoid sources of noise.
I check google news too often – I’d be fine checking every 48 hours but check a few times per day.
That’s about it. When I have time, I read non-fiction. A key focus for me in 2012/2013 is creating more space in my life for kids, writing and reading.
The book list that follows has been helpful – I particularly like all of Gordon Livingston’s writings. For business, Charlie Munger’s essays and books are excellent. I read the Drucker essay, below, once a year.
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Great Reads

Buffett: The Essays of Warren Buffett

Cialdini: Influence

Drucker: Managing Oneself

Karp: Happiest Baby On The Block

Kahneman: Thinking, Fast and Slow

Le Guin: Tao Te Ching

Livingston: Too Soon Old, Too Late Smart & Always Keep Dancing & How To Love

Munger: The Psychology of Human Misjudgment

Munger: Poor Charlie’s Almanack & Seeking Wisdom

Shiller: Irrational Exuberance

Taleb: The Black Swan, Fooled by Randomness and Antifragile

Risk and Pain

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Reading my last two columns, you may have felt an emotional response. If you aspire to a big house, or send your kids to private school, then you likely stopped reading. Why?

Ideas that conflict with the default decision create pain. Our brains don’t like pain so switch off.

For high value topics, both financially and emotionally, it is worth training the ability to stay engaged and work through the answers. Adding together the last two columns, most of us are looking at $3 to $8 MILLION worth of expenditure. That’s simply two topics – smart decision making is worth serious cash for you, and your employer.

The last sentence is an example of how I stay engaged — make the question “bigger” that the local issue that’s causing you pain. I have to stay engaged with housing and education because my larger issue is an ethical life with meaning (that’s free from unnecessary financial stress).

Making the issue bigger is called “broad framing” and it’s an effective tool for pain management. In addition to framing, I ask:

  • Where is the pain?
  • Is it a gain, or a loss?
  • Is it small, or large?

Kahneman’s book contains a risk matrix that lays out situations where we will seek/avoid risk. What most interested me is that we can frame choices so our “irrationality” works in our self-interest. Kahneman has excellent examples (litigation, negotiation, organ donation) that you may have heard over the years.

Two weeks ago: I asked if the big house is worth $7,400 every single month?

  • I made the financial costs visible
  • I made the financial payments frequent
  • I wrote the article while living alone in a small two-bedroom condo

I made owning my “big house” more painful. Then I asked myself, am I feeling a million dollars worth of pain? Hell no, I replied!

One week ago: I asked if private education is the best way to invest in my children?

  • I framed the question as broadly as possible
  • I made the goal to maximize the overall benefit to my family
  • I used a reference group of other people’s children

This removed feelings of pain. The default option had me thinking that spending on education equals love. That’s an emotional error. The true choice is directing family investment to maximize benefits for everyone. Broad framing is an effective counterbalance when people seek to link spending with love. 

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Let’s consider two more areas where framing might be useful: nutritional supplements and helping family members.

Nutritional supplements remind me of lottery tickets. We accept that they are largely a waste of money but there is a remote payoff of everlasting life.

As a public service announcement, a friend of mine pointed out that we might be increasing our risk of death through unnecessary supplementation. My buddy is a nephrologist, Vice-Chair at the Mayo Clinic and an assistant professor of medicine.

Does that reframing change how I feel when I watch my daughter eat multi-vitamins? You betcha!

Investments of time are often more costly than investments of money. Munger’s Psychology of Human Misjudgment (and many other sources, including Kahneman) point out a few things about how we see our role in the world:

  • We overestimate our ability to influence events
  • We overvalue the recent, the present and the status quo
  • When we think about risk, we overestimate the risk of highly-salient negative events (terrorism, plane crashes, homicide).

Combine all of the above and we are prone to large errors when it comes to people that are close to us (peers, friends, family, kids). That’s hardly news, until you consider the top two emotional drains in your life.

Do it now – what are the top two emotional drains in your life? Do you have key relationships that are more about negotiation, than love?

Unless a supplement-eating friend dies of cancer, the vitamin discussion is unlikely to have a visible impact in your life. There’s a financial cost from buying unnecessary goods but most of us would spend our vitamin money elsewhere, rather than save it.

However, the emotional drain from continuing to pour love and money into the worst performers in our life is worth considering. To help myself here, I set my goals looking to the future:

  • Break the chain – pain that comes to me, stops with me
  • Forgive – by acknowledging that people who bring the pain, received it from someone else
  • Acknowledge – that my ability to impact the world is limited, and mainly achieved via how I improve myself

If that seems a bit soft then consider a risk-policy to never fund a losing situation. In the acquisitions business there is a simple mantra, never fund operating losses. In the markets the mantra is only losers average down.

In human terms, it could mean that I help pay for education, addiction treatment, health care… but we each need to take care of our basic living costs. If someone can’t help themselves then I’ll take the pain (of watching them fail) to create the motivation for a change that will result in future benefits.

The re-framing is a change from “prevent pain” to “create the conditions for positive change.”

These are difficult decisions to make with close friends and family. However, the expected payoff (time, money, emotion, love) is far greater.

Bottom Line: Break the chain and frame wisely.

A Million Dollars of Education

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What first got my attention on education was realizing that a month of my daughter’s pre-school was costing more than a semester of my finance degree at McGill University. Digging a little deeper, the long-term cost of education blew me away when I ran the numbers.

Like most parents, we believe our daughter is a gifted genius and we want the best for her. Since I’m the CFO of my family, I’ve been approached to share my thoughts on private education.

What’s the default option with private education?

  • We want the best for our kids
  • Private education costs more so it must be better
  • I can afford it, today
  • Therefore, let’s start down the path

Duscussing education with parents I see the full range of human misjudgement. We all want our kids to succeed so our most-human tendencies manifest. I won’t give specifics as my sources are good friends. Just ask around and you’ll see what I mean.

Similar to our discussion on housing, let’s run some numbers using actual education costs in 2012 dollars. The first figure is Colorado and the second is California. These are figures for the private track:

  • Pre-school: $6,000/$12,000
  • Elementary/Middle: $15,000/$25,000
  • High School: $25,000/$50,000
  • University: $50,000/$62,500

I did a little research on education inflation and it’s been running at 6% per annum. I created a spreadsheet to look at the cost per kid at a 5% inflation rate, which also matches my forecast portfolio return if I don’t spend that money on education. If you want to play with my assumptions then make a copy of the spreadsheet (file/make a copy).

Depending on where you live, the private track has a future value of $875,000 to $1,375,000 per kid.

Knowing that we won’t be rational when we look at our own kids, think about the brothers and sisters of your peers, spouse’s family and your cousins (that’s your reference group). Would it have been a good investment drop a million bucks (each) on all of their educations?

The questions are worth asking but most of us don’t ask, we default:

  • I love my kids
  • Private is better
  • I can afford today
  • I’ll do it

Stack the education default on top of the housing default and many of my peers are looking at $3-8 million worth of expenditure. That kind of money can make a lasting difference in your city when directed wisely.

Likewise, if you think carefully about your goals (and frame broadly) then you might discover alternative uses for those funds.

…you might enjoy working less and teaching your kids what you know

…you might have superior ethics because you haven’t placed pressure on yourself to earn millions over the next two decades

…you may be a better spouse without all that pressure

…your kids might do better if you back them financially as adults

…if you’re in a weak public school district then your relocation budget might be bigger than you think

A very successful friend of mine always wondered why his father refused to pay for any of his education. My friend got himself through MIT and, as it turned out, didn’t need help from anyone.

Perhaps his Dad ran the numbers.

A Million Dollars of Housing

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This article is twice a long as normal but it might save you some big money.

Get a pen and paper – I’ve made it easy for you to follow along.

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When it comes to housing, I’m tempted to follow the crowd because it’s easier. However, there is a cost to going-with-the-flow and this article will make that visible.

Using the decision framework from my last post we start by considering the default decision. Watch any housing-based TV program and you’ll see the default decision in action.  There are three components:

  • We want to live in X neighborhood
  • We think buying is better than renting
  • We optimize for size relative to maximum budget

I’ve never heard a person brag that they decided to rent a small, convenient place because it was a better financial deal and they were going to live free of financial concern. We certainly don’t bother watching television shows about these people but we might read a blog, or two!

Let’s calculate the financial cost of the default option to “buy the largest place in the best neighborhood we can afford.” We’re going to use my hometown of Boulder, Colorado – one of America’s most livable cities!

I’m 43 and moved out on my own when I was 17. Over 25 years, what might the default option cost me? I’m going to explain in a way that you can calculate your own position. Start with asking yourself three questions:

  • What’s the absolute cheapest that you could live?
  • What’s the cheapest that you would like to live?
  • What’s the implication of the default decision?

At the start of 2012, the three monthly costs are $1,000, $2,650 and $7,400, respectively, and include:

  • Rent or mortgage-equivalent rent (MER) [1]
  • Insurance
  • Maintenance
  • Utilities
  • Taxes and homeowners association (HOA) fees

If you rent then you avoid many of costs of ownership (building insurance, maintenance, taxes, HOA). You also have much greater freedom in your life – freedom allows us to pursue opportunity. We never see the true cost of the status quo within our lives.

To make it real, let’s work through two choices that would apply to a family moving to Boulder.

Option A – $400,000 house in secondary neighborhood. The total cost is $31,750 per annum ($2,650 per month) which includes:

  • MER = $20,000 per annum (5% of $400,000)
  • Insurance = $750 per annum
  • Maintenance = $1,000 per annum
  • Utilities = $6,000 per annum
  • Taxes/HOA = $4,000 per annum

Option B – $1,400,000 house in a prime neighborhood. The total cost is $89,000 per annum ($7,400 per month) and include:

  • MER = $70,000 per annum
  • Insurance = $1,500 per annum
  • Maintenance = $1,500 per annum
  • Utilities = $6,000 per annum
  • Taxes = $10,000 per annum

Keep in mind that the opportunity cost of being “all in” on a house is understated because it doesn’t reflect:

  • The time to manage the house
  • The investments that you miss because you’re locked into a property asset
  • The option value implicit in the ability to change cities rapidly when you’re a renter

Our minds are extremely poor at putting a value on time, lost opportunity and geographic freedom. How can we value the path not taken?

I am able to see these benefits when I consider my key investment decisions and career moves. The ability to move, or invest, quickly has been useful to me in 1990, 1993, 1998, 2000, 2002, 2005 and 2010. [2]

Each “jump” was worth more than $100,000. Sitting here, I struggle to place a value on being able to take future jumps, and assess their likelihood. However, being trained in finance, I can calculate the future value of incremental cash flows.

What happens if I invest the incremental cost of Option B, rather than buy the default option?

  • Upgrading from $1,000 to $2,650 monthly => forsake $966,462 of future value
  • Upgrading from $2,650 to $7,400 monthly => forsake $2,782,239 of future value

The part that catches my eye is the default option (biggest place, best location) costs nearly $3 million for a place that’s exactly the same size in a secondary location. 

To make it easier for your calculations – each $100 per month is worth $58,575 over 25 years at 5%. However, you only get the future value if you save in the present and earn the target investment return. [3]

Our minds are constructed to find faults with stories that go against the default option.  Perhaps you’re thinking:

  • But what about the house – it will increase in value
  • I don’t have to pay the money myself – a bank will lend to me and that “costs” less than my own money
  • The bigger house will make me happier
  • The assumptions aren’t accurate [4]

Perhaps, but these are default options in their own right, which I’ll address over time.

If you frame the happiness/satisfaction decision as broadly as possible then you might find that you can purchase one heck of a lifestyle by purchasing frequent, novel experiences rather than being locked into an enviable, but excessive, housing situation.

Personally, I feel happy when I can exercise, read, write, share experiences with my wife and hug my kids. I have also noticed that my family responds best to time with me when I’m relaxed. [5]

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NOTES

[1] What do I mean by mortgage-equivalent rent? 30-year mortgage rates are ~5% right now in the US so derive your mortgage-equivalent rent by charging yourself 5% of the net capital value of your target house. Depending on your geography, this could be more, or less, than what it would cost to rent your target house. This is an interest only calculation.

[2] I am likely to underestimate the role of luck and I’ll address that later in this series.

[3] Many corporate pensions are using long-term return figures of up to 10% per annum. At 10% annual forecast return, each $100 per month is worth $123,332 at the end of 25 years. Depending on your investment return, $100 per month is worth $50,000 to $125,000 when done consistantly and invested conservatively over the long run. 

[4] 5% is the key assumption and likely understated because, in my lifetime, mortgage rates have varied between 4% and 18%. The exact assumptions aren’t essential to make the larger point that long-term costs lie hidden from consideration.

[5] When seeking to reduce expenditure, I bribe myself by spending a portion of the savings during my adjustment period. In 2011, I funded a trip to Bora Bora by downgrading my travel choices for the year. Balance the pain from adverse shifts by using strategic purchases. 

Million Dollar Decisions

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I’m going to kick off 2012 with a series of essays based on the book Thinking, Fast and Slow by Kahneman. The book has all the entertainment value of Blink, by Gladwell, with superior information for action. To keep it real, and make it interesting, I’m going to use case studies from my own life.

If you get yourself a copy of the book, and read in parallel to my essays, then you will improve how you make decisions in your life. I learned a lot by spacing my reading with personal reflection.

In many ways Kahneman’s book is similar to The Black Swan, by Taleb, a book that saved me from personal bankruptcy. However, in one important way, the book is different. Throughout the text, Kahneman inserts simple exercises that illustrate our tendencies towards risk seeking and risk aversion.

I think of myself as rational but I “failed” most tests of rationality! The fact that the author failed the same “tests”, yet won a Nobel Prize, soothed my ego but didn’t release me from a sense that I was costing myself big bucks.

A review of my life highlighted that I was making most decisions on autopilot. I’ll share my case studies on:

  • Housing
  • Education
  • Work
  • Portfolio Allocation
  • The Status Quo – the hidden costs of being attached to it
  • The Role of Luck – how it skews us
  • Managing Personal Experience – duration neglect, peak experience sensitivity, relativity
I’m 43 years old. By the time I am 63, I will have made million dollar decisions on each of the topics above – for myself and for my family. Further, there are non-financial decisions (spouse and peers) that will have a massive impact on my life experience over the next twenty years (as well as this week!). 

Being highly rational… I’ll explain my key decisions using a framework to counteract the common errors outlined in the book:
  • Frame the problem as broadly as possible
  • Identify the stars and dogs within the framework
  • Identify the goal of the decision as well as the sunk costs that might skew judgments
  • Gain accurate information about a reference group of similar people making similar decisions
  • Understand the social norms and default decision options
  • Consider the implications of inverting the norms, defaults and preferred course of action
  • Research risk polices that might govern the decision
The above takes a lot of effort and I find myself constantly tempted to default to social norms. Going further, when I default to the norms I feel pleasure (because the pressure is off to think).

Knowing that mental laziness costs me satisfaction and money, gives me motivation to think things through. Stating that I’m going to share my thinking in a series of essays, creates social pressure for me to follow through.

Next Thursday: Housing – you’ll get to learn from my mistakes on this one.