i’ve been reading a few chapters of misbehaving by richard thaler. i have not completed it. in fact, i hardly finish books. i just read about half; the parts i think are interesting, and i speed up my understanding of the writer’s ideas from watching their interviews. you can find thaler’s interview here: talks at google
the book discusses events, surveys and experiments he’s done to study how irrational people are, and some of the survey questions in the book also made me question my own level of rationality. in many life decisions, it seems that most people, myself included, don’t make the right choices even when we think we’ve thought out something through. as for me, apparently, not through enough to accommodate my own irrationality.
i’m not doing a book review here, and i have no new theory to advance. i’m just trying to relate some of the ideas in the book to being a rational actor with three examples.
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i’ve wanted to grow a property portfolio, as many as i could afford. i’ll tabulate the numbers on a spreadsheet, and if the rents and potential appreciation of the property exceed my costs, then it should be a good purchase. i have also taken into account the time/effort needed for property maintenance, communicating with the property agent as well as dealing with the tenant if there are any issues.
what i did not take into account was that just a few years later, i have just become lazier. online investing is, to me, is a better way to accumulate wealth. sometimes it may underperform the real estate market, but it’s much “cleaner”. any buying or selling is done with a click of a button and instantly concluded.
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i have been taking flight lessons last year but i didn’t complete the whole thing, so i’m not a private pilot’s license holder. initially, i thought the idea of flying might be interesting, and many pilot clients i know are nice people, so i had good vibes about flying. after a few flights, the novelty of it wore off and i found it a chore going to flying classes. i like completing what i started, so i wanted to tell myself that i might as well finish it since i’ve already paid about 1/3rd of the fees (we pay as we fly, not a lump sum pre-payment).
good thing i remembered sunk-cost fallacy, and i had great comfort in aborting the course.
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two insurance proposals were discussed with a client, the first a traditional plan where it’s cheaper but it goes up in price with age, and the second one investment-linked where the price is higher but it stays the same until old age. numbers wise, it also made sense to take up the investment-linked plan, as you’d pay half in total premiums in the long run vs traditional plans.
the client said that the future value of the present value saved from taking up the traditional plan would outweigh the future increase in premium from a traditional policy. i’m sure the math didn’t check out, but even if it did, it’s a considerable mental effort to invest the amount difference, then track the growth of the few RM’s saved, and make sure the outcome is as you intended, compared to just leaving things on auto-pilot with an investment-linked plan.
(i hope the last point didn’t make it sound like i’m outing a client or hard-selling you a policy you don’t want, but you get the idea.)
selamat hari raya folks! - wan