The Decision Strategist

There’s a post over at Wise Bread, Six Steps To Eliminating Your Debt that is one of the best simple guides to getting started paying off debt. I like it because it doesn’t use any fancy tools or ideas. Simply start with the debt that has the highest interest rate and pay it off, followed by debt with the next highest interest rate. It’s basically a pareto analysis to figure out which one to use first, since she is making a list and then ranking them according to which one costs the most.

If you are looking for good finance blogs, I recommend these:

• The Simple Dollar
• Get Rich Slowly
• Free Money Finance

If things continue to go well and there are no big surprises, I have only a couple more months to pay of my debts. It’s very exciting.

-zot

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When I remember, I buy a powerball ticket every week. I’m astounded at how much confusion researchers express as to why people buy lottery tickets. Sociologists attribute it to social networks and discussing it with others. Psychologists suggest that it is an impulsive response to feeling lucky or being in a good mood. This guy thinks they are a “tax on stupid people”. Emily Oster believes that people buy powerball tickets because they are fun. I think she is mostly spot on, with a few caveats.

Fun And Dreams, Not Finances

Lottery tickets are fun. For $1, You get several hours of excitement wondering whether you will win. You get the joy of fantasizing about what you would do with the money. You get to talk to other people about what you would do with the money, how nice it would be not to work and whether you would quit work the next day (there’s a lesson in this that employers should ask their employees: “If you won the lottery would you keep working?”).

It’s also about the dreams and desperation. MSN Money says that 20% of people who play provide 82% of the purchases, and that those people are disproportionately low income and less educated. I don’t think that their reasons for purchasing more tickets have to do with not understanding the odds or not knowing that they are throwing money away. I think it has to do with how bad your situation is. If you are deep in debt and on the verge of not making your rent, then saving that $1 isn’t going to help, and it will provide a ray of sunshine in an otherwise bleak existence (anyone see Fun with Dick and Jane?).

All Things In Moderation

I’m not talking about people who cash their paycheck and spend $50 on powerball tickets. If you do that, you probably should stay out of casinos. Maybe this is what people refer to when they say that lotteries are a “tax on stupid people”. But to me $52 dollars a year for some fun is pretty cheap.

Of course, if you took that $52 and invested at an 8% return for 30 years, you’d have $5,890.73. Which might buy you a coffee by then with all this inflation.

Point being that we can get a little crazy about trying to always make the right decision, and sometimes it’s good to relax and let yourself enjoy something. Have a good weekend and tell me your reasons for purchasing lottery tickets!

-zot

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We are trying to get our security deposit back from the property management company for the place my girlfriend rented last year. They charged her for painting, carpet cleaning, yard work, and chimney cleaning. Just to be clear landlords cannot charge you for normal wear and tear. They can charge you for damage to the property or cleaning to make it fit to live in again. We spent days cleaning that house, and their charges are completely inexcusable.

Situation Is Bleak

The situation is in favor of the management company, since they already have the money and the charges amount to roughly $400, a tidy sum of money, but not enough to spend 100 hours arguing with them. To make matters worse, we don’t have the move in form in which you check off all the things that are wrong with the house, and they claim they never got it.

We have already called them and disputed the charges. They have decided to stand by their charges, so what is the next step?

The Goal Is Simple

We just want our (her) money back. Maybe lawyers fees. Also of increasing importance is a sense of outrage at being mistreated. This drives up the value of getting a settlement beyond it’s monetary value.

The Strategy

Our first point of action was to call them and say that we were disputing the charges and to ask them why they think it’s valid to charge us for paint and yardwork. Their response was that “the owner wanted it painted”. Sounds like normal wear and tear paint to me, but unfortunately we didn’t record the call, so it’s only hearsay.

We need to do something to level the playing field here. Of course we are looking into small claims court, but are primarily afraid that if we lost they could counter-sue for lawyers fees.

Our first step then will be to contact the Better Business Bureau. They allow you to file a complaint and can assist with mediation. If that doesn’t get us anywhere, we will entertain mediation through small claims court, and as a last step, actually suing them.

This is a classic strategy of escalating force until we get a desired response. The major benefit of not going straight to court is that it may reduce our costs. It also allows us to back out if at any time we feel that it is no longer worth it. It does miss out on the shock value that going straight to the “nuclear option” provides, but in this case we aren’t prepared to do that.

Unfortunately, the company is probably aware of our hesitance, and hopes that by dragging their feet they can get us to just give up. In this situation it would probably be better if we could just go straight to court, but we aren’t informed enough to make that choice.

One strategy to make sure this doesn’t happen again is to withhold the last months rent, or pay the difference between the deposit and the rent. This shifts the balance of power significantly in your direction because the property manager has to come to you to get the money instead of you going to them. I don’t think I would do this when renting from an owner directly if I thought they were good upstanding people, but I think I will definitely do this when renting from a property management company in the future.

If any of you have had problems with a landlord charging for wear and tear, I’d love to hear how you solved it. I was in the same situation a few years ago and just ate the costs because I was young and didn’t care much, but this time we are both much more interested in fighting it.

I’ll probably do a game theory analysis of this situation here in a couple days.

-zot

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There’s a good post over at Free Money Finance that talks about what to do with investments in the current economic situation. The article basically says that stocks are probably approaching their bottom in value and won’t drop much further. There is another article at Generation X Finance that more or less says the same thing, if I’m reading it right. The stock market is one of the most interesting things to analyze from a decision making perspective because it highlights so many quirky human behaviors. Referring back to our ever-growing list of Decision Making Errors:

Do what everyone else does

We are incredibly affected by what the people around us are thinking and doing. We see this in the stock market constantly, with huge groups of people buying in when things have approached their peak, and huge numbers selling out when values have dropped significantly. It almost makes me thing that the upswing in amateur investing is just a way to transfer income from average people to day traders. This is the conformity bias at work

“But it was worth twice as much six months ago!”

People succumb to referencing when valuing their investments, and they think that their investment is worth what it was when the market was booming. Worse, the endowment effect encourages them to value their asset as more than it is worth to sellers. Finally, the original investment is a sunk cost, and shouldn’t be considered in determining whether or not to sell, but it almost always plays a role.

You can see how in a declining market the conformity bias would encourage people to sell, while referencing, sunk costs, and the endowment effect would encourage people to buy. It’s plain though from historical trends that at some point panic takes over and the conformity bias becomes stronger. I like this post from Dr Housing Bubble

So what do we do?

So are the good folks at Generation X Finance and Free Money Finance right or wrong? It’s hard to say. They are right in warning that just because everyone else is worried about the markets doesn’t mean that we should be. What concerns me about this is that sometimes everyone is worried because the situation warrants it. Here are some numbers that should give you cause for concern:

• Public Debt: $8.9 Trillion or $29,653 per person.
• Consumer Debt: $2.4 Trillion, including $1.556 Trillion in non-revolving and $904 Billion in revolving debt.
• Imaginary Wealth: The economy has been sustained by an imaginary increase in wealth known as real estate values.
• ARM Resets: We still have several years of adjustable rate mortgages resetting to higher rates, and the resulting foreclosures, as shown by this image from Dr Housing Bubble.

These numbers make me cringe. I’ve seen a lot of different estimates of the expected losses due to the sketchy repackaging of high-risk mortgages to create class A investments, but it seems to be in the hundreds of billions. That’s hundreds of billions of money that didn’t actually exist.

While some people may be being alarmist about the situation, the economy stands to suffer from a major drop in wealth that just up and disappeared. When you combine this with the amount of debt that we all face, I don’t expect the economy to recover any time soon. Losses of wealth cause less investment in stocks, which leads to lower stock prices. I don’t think we’ve seen the bottom yet.

Of course, this is from the perspective of someone getting ready to start investing. If I held stocks or funds already, I’d probably stay in them just because I wouldn’t want to sell now at a loss (all those effects at work!).

Good luck. If you have a strategy you are pursuing post a comment or send me an email, I’d love to hear what you have to say.

In How To Invest In A Recessionary Economy Part I, I looked at the different places we could put our money if worried about a crashing stock market.

-zot

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