Mind Your Decisions

I Introduce The Calculating Guru

(A very special thanks to Tom D. for coming up with the name)

I am sometimes known by my nickname “uncle Presh.” It’s because I generally stay out of other people’s business, but when asked, I provide support like a family member.

I do not judge; I stay calm; I am positive.

This attitude is represented in many of my articles. It is the reason why I liked the book The No Asshole Rule; and why I request people not to yell at me when hailing cabs; and why I talk about how to coordinate for better outcomes.

That’s my usual and good side.

But every now and then, I come across opinions so foolish that my good nature fades away. I transform from “uncle Presh” into someone completely different. I turn into my alter ego, The Calculating Guru.

The Calculating Guru is cold, number-crunching, and strategic. He will make fun of bad financial advice. He will laugh at bad financial math. He will criticize advisers who don’t consider likely reactions of financial counterparties.

Today is an introductory article, so let’s get started with some background. The Calculating Guru is driven by six fundamental ideas:

1. The brain is made for thinking.

The Calculating Guru will not perform freakish mental math or memorize stupid facts. Rules of thumb are good for illustration and calculating tips at meals. Big financial decisions, like whether to rent or buy, should be done with a spreadsheet or calculator.

2. Tricks are temporary.

Your opponent is running the numbers too. Tricks like credit card arbitrage only work temporarily. Companies fight back. Learning hot tips is at best a short-term solution that makes you dependent on news. Make some money while you can because these tricks cannot last.

3. When you think in absolutes, you lose (1 + 1 = 0).

Thinking in absolutes can turn two equally good ideas into one bad idea. I know people who worry about whether to invest in an IRA or a 401(k), and end up doing nothing since they can’t find the “best” option. Most financial decisions involve uncertainty, and you have to deal with that by considering the middle ground. Thinking in absolutes destroys good ideas. It’s like doing math in modulo 2, for which 1 + 1 = 0.

4. Risk has few rules.

Most financial advisers measure risk using the wrong metrics. It’s dangerous. We focus on too much on foreseeable risks of small impact, like getting an extended warranty for an electronic device. We need to prepare more for high impact events. The biggest risks are often the ones you cannot measure or expect—like how your life would change if you get in a freak accident or if the market plummeted just before your retirement.

5. Thinking in total cost is better than thinking in percentages.

A price increase from $0.50 to $1.00 is a 100% increase, whereas a price increase from $1.00 to $1.50 is only a 50% increase. Both cases you’re spending $0.50 more after the price increase. That’s what matters to your bottom line.

6. Preferences trump numbers.

Spending $10 for something useful is better than spending $5 for something useless.

Stay tuned for more thoughts from The Calculating Guru, who plans to make a guest appearance on most Thursdays.

Did you see some bad financial advice that needs to be torn apart? Send it along to me and share your disgust.