## Intuitively Obvious Is Usually Wrong

It has been my experience that when I receive summarized data and there is an obviously right conclusion, I should worry.  My rule is that when something is intuitively obvious, it is likely wrong.  I find that it usually pays to be a skeptic with summarized, and especially averaged, data.  Here’s why.

People have intuitive belief systems that are incomplete and the incompleteness provides a source of error.  Worse it is outside their knowledge so they cannot analyze it effectively.

For example, if I tell you that product X has an average approval rating of 7 out of 10, what does that mean to you?  Probably pretty good.  At least average satisfaction.  Okay to own it.

Let’s see.

The population of all those who rated the item gives it an average rating of 7, but the 7 does not tell us anything about the population who rated it.  We fill in that information by assuming the ratings are normally (bell curve) distributed.  What if they are not?  Suppose out of 100 people, 70 rated it 10 and 30 rated it 0.  A U-shaped curve.  The average is still 7 but it means nothing.  You would need to know the characteristics of each group of raters before you could decide if the item is satisfactory in your context.

Mistrust averages.

Using statistical information intuitively tends to create policy errors with both individuals and governments.  It is remarkably common in social policies.

Suppose I tell you that at the University of California Berkley, the grad school discriminates against females.  As proof, I offer the information that of 1,835 women who applied to graduate school 30% were admitted, while in the same period, of 2,590 males who applied, 46% were admitted.  Should the government intervene with quotas to make the acceptance rate more equal?  Pretty clear, right.  Assuming you agree with the intervention idea at all.

Actually not so much.  You do not have enough information to make the assessment.  The part you are missing is the answer to a question  “To which programs did they apply?”  Grad school is an amalgam of many programs and they don’t have the same characteristics.  You assumed equality of base information.   When the breakdown is known, the answer becomes more clear.

 Males Females Program Apply Admit Apply Admit A 825 512 62% 108 89 82% B 560 353 63% 25 17 68% C 325 120 37% 593 202 34% D 417 138 33% 375 131 35% E 191 53 28% 393 94 24% F 272 16 6% 341 24 7% Total 2,590 1,192 46% 1,835 557 30%

Now we see that in four out of six programs females were more likely to be admitted than males and in the other two programs, it was close.  In any program where more males applied, the female acceptance rate was higher.

Here’s is where it gets interesting.  For programs C,D,E, and F there were 327 of 1,205 males admitted and 451 of 1,702 females.  24% each.

The key to the puzzle is in the relative number of applicants.  In programs with a high acceptance rate A and B, there were not many females who applied.  In programs with lower acceptance rates females outnumbered males.

The conclusion is not that Berkley grad school discriminates against females but rather that the programs females prefer at Berkley have inherently lower acceptance rates.  A quota system would not fix that.  Expanding the facilities for programs C,D,E, and F might.

The data is drawn from Wikipedia and P.J. Bickel, E.A. Hammel and J.W. O’Connell (1975). “Sex Bias in Graduate Admissions: Data From Berkeley”. Science 187 (4175): 398–404. doi:10.1126/science.187.4175.398. PMID 17835295.

I wonder how many quotas are based on faulty but intuitively obvious data?

When you see a summary like this, you are seeing an average of averages.  Always a misleading item.  You cannot average averages unless all the components are identical in population size.

Statistical information looks intuitive but it usually is not.  Our minds are made for simpler things.  It is a bit like compound interest in that you need to work it out to get the real underlying ideas.

In your financial planning, be very cautious with average yield or average inflation rate especially over a long time.  The averages do not mean what you think they mean.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

## Garage Sales are Your Friend

Spring cleaning time is here and I love it! With even the hint of warmer weather and sunshine I get a major itch to simplify my life and clean my spaces from unwanted clutter. Freeing yourself from the over accumulation of “stuff” in your life serves so many positive purposes.

The first advantage of a good spring clean is you take time to sort through everything. Find what works; what needs fixing; what has been outgrown; what you don’t need, want, use, or have space for anymore; and forgotten, yet still loved items. You can then make a plan to deal with it. Get it fixed. Throw it out. Recycle it. Clean it and put it where you can find it and use it. Put it into your “have a garage sale pile.”

The second advantage is you get the opportunity to better organize your life. Put things in their place. Get rid of the things you’ve been storing for who knows how long or for what reason. How much time do we lose and how much stress do we cause ourselves because we cannot find the thing we want buried amongst all the things you don’t want.

The third advantage is it gives you an opportunity to make some money. Garage sale season is approaching and it is the perfect opportunity to clear your space of your no longer loved items while making some cash. If you don’t think you have enough for your own garage sale, get together with a group of friends that also want to free their lives of a few things. You can then take the money you earn and put it into something you actually want like your vacation fund.

The fourth advantage is getting a good look at all the things you have spent your hard earned money on. Do they bring you joy? Do you use them regularly? Or do they just collect dust, take up space, and add to the debt on your credit card? Facing our consumption head on gives us the opportunity to choose to be more conscious in our lives going forward.

The fifth advantage is seeing what you need to replace or figure out what you want to get before garage sale season. If your kids need to get new skates or sporting equipment because they have outgrown it you can keep your eyes open to replace it at garage sales. If you are wanting to try out a new sport or replace worn out equipment this is also a great opportunity for you.

The fifth advantage to a good spring clean is how much lighter and more energized you feel after completing it. You know where your stuff is, you’ve dealt with the clutter, and you made some new, and hopefully healthier, decisions.

I challenge you to tackle the closets, drawers, corners, garages, and storage areas in your home. Find your treasures and find future treasures for others. You’ll be glad you did it.

“I had more clothes than I had closets, more cars than garage space, but no money.”
Sammy Davis Jr.

## Shopping is NOT a Sport

Everywhere we go the world is set up to part us with our money. It may only be a few dollars, maybe a few more, but it’s okay. You want this gadget, article of clothing, candy, tool, whatever. We put it in our cart, we add it to the till, we pull out our wallet. Next thing we know our bank account is smaller than we were expecting and our wallet is thinner while our credit card statement is thicker.

We have all been bitten by the impulse purchase. All of us. If you think you are immune, let me ask you one question: “If I were to go to your home and open up your closets, your cupboards, go into your garage, your tool shed would I find anything that you spent your hard earned money on that you used once or NEVER?” If you can honestly say no, then my hat is off to you. If you are like the vast majority of people (myself included) you would find an item or two.

So the million dollar question is how do we minimize our useless spending. And yes, I did call it useless spending. The fact is if it really was something we wanted or needed it would have been used more than once or never. The reality of life is that we will have some pointless spending. It isn’t a bad thing as long as we keep it in check, but it is a big problem if it gets out of control.

Conquering the frivolous shopping problem breaks down into a few steps or options. The first step is to stop looking at shopping as a sport. Unfortunately too many people resort to “Retail Therapy” to deal with emotional issues. This works as well as alcohol, drugs, or junk food for a lot of people. It doesn’t fix the problem it makes it worse because the high wears of quickly and now we are out money. If going on a shopping spree is your way if dealing with the stresses of life find another outlet. Preferably a healthy one like exercising, going for a walk with a friend, or meditation just as some examples.

The second step / option is to put yourself on a cash budget and allow yourself some play money. That way you can still enjoy a little frivolous spending without breaking your budget. In fact if you plan for it, it isn’t wasted money, just a part of your overall plan for financial success.

The third, and most important, step is to ask yourself this questions every time before you spend money on anything, “Do I really want this?” By slowing down and asking yourself this very simple, but extremely powerful, question you put into motion your biggest ally, your brain. Most of our spending is unconscious. We are creatures of habit that operate on auto pilot. By taking the moment to ask ourselves this all important question we move from unconscious to conscious. A lot of the time we will look at the item and decide no, this isn’t going to give me what I really want. I’d rather save for my Hawaii vacation, or pay off my credit card faster, or stick with my diet (candy and coffee are regular “wasted” purchases) or whatever may be a bigger want for you. If you can honestly say, “yes, I do want this” then go for it without guilt.

No one is taking away your right to choose how you spend your money. But we all make much better long term and short term decisions when the best part of us is fully engaged in making our decisions. Now go out and wake up when it comes to how you are investing your hard earned dollars and cents.

“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.”
Will Smith

## Kill Them While They’re Small

Math professors love to hand out problem sets.  Many a weekend was consumed resolving these.  One of my friends pointed out that problems are only problems if you don’t know how to solve them.  If you know how to solve them, they are merely questions.  The distinction is true outside the walls of a university too.

We get confused some times. We fix things that are not broken and apply difficult methods to easy questions.  For example, as Harvey MacKay has pointed out, “If you can solve a problem by writing a cheque, you do not have a problem, you have an expense.”  Too bad they are not all that easy.

Problems without known answers, come in two forms.  Big enough that you must deal with them and small enough that you can ignore them.  The trick is to know the difference.  Right?

Probably wrong!  It is the “ignore” part.  A problem you can ignore forever is not a problem to begin with.  I routinely ignore the traffic problems in New Delhi even though it ranks 5th in the world for traffic congestion.  So far no adverse consequences.

Small problems that you ignore, but cannot ignore forever, accumulate.  Eventually you have a large bag full of them and the bag takes on a life of its own.  Jordan Peterson at University of Toronto contends that stress results from the the accumulation of small undone tasks.  A bag of small problems is itself a big problem.

You cure the big bag of small problems issue by using two criteria:

1. Can I ignore this forever?   if yes, ignore it forever.    if no,
2. If it were a hundred times bigger how would I deal with it?

The 100-times bigger problem must be solved.  Understanding how you would relate to it at that size, will give you insight into how to remove the little problem.   For example, warranty claims when you could redesign a part to cure the problem.  Then  you must act on it and empower systems or people to keep it at bay.

As you do this, you will find that it takes less time than the ignoring method.  Remember that the ignoring method keeps issues coming at you while the solving method is done once, done forever.  (Well almost that good)

Once in a while, certainly not every time, facing down the little problem, gives you insight into what could have become a big problem in the future.  Even more rarely it gives you the insight into an opportunity.  The rare occurrence of these will pay you for all the effort elsewhere.

Killing big problems while they are small is a competitive advantage.  Use it.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

## Teaching Kids How to Make Healthy Financial Choices

Every parent wants their children to grow up to be financially responsible. They want them to be able to look after themselves, achieve the Canadian dream of homeownership and financial security. The big question that the parent’s have is not what, but HOW? Unfortunately financial responsibility and literacy is not something that is taught in school. It is a task that falls under the area of parenting.

Children and adults learn best when they actually get to deal with things themselves. The same is true for learning about money. I am a huge supporter of giving children an allowance and teaching them to divide it into five categories: Financial Freedom, Education, Long Term Savings for Spending, Charity, Gifts, and Play. If a child is not given parameters to work within they will spend everything, have very little if anything to show for it, and learn nothing in the process.

My nine year old daughter gets an allowance of \$12 a week. To make it simple for her to understand we give her six twoonies. I have used paying her her allowance as an opportunity to teach her about money and fractions for years. Now she is in Grade Four and has a very good grasp the concepts that are now being taught to her in math.

Princess likes to ask me about the jars and we spend time discussing their different purposes. Investing is a bit above her nine year old comprehension right now, but she is curious about the concept. I have explained to her that each dollar is a money seed and her job is to plant the money seed in such a way that it can grow and produce lots of fruit. The education jar is used to buy books of her choosing from the Scholastic Flyer she gets at school, but Mommy does make suggestions. The charity jar is for things like putting money in the Christmas kettle manned by the Salvation Army at Christmas, putting it in the plate at church, or giving to the fundraising drives they have at her school. For Long Term Savings for Spending she is saving to buy a game for her Nintendo DS. The Gift jar is used to buy birthday and Christmas presents for her friends and family. The last jar is her play jar and every month she gets to take her money out, put it in her very own purse, and go shopping with Mommy. Her last purchase was a flowering plant for her room. If she wants to buy candy or trinkets at the dollar store I do not interfere. It is her money to do with however she chooses.

Whenever she is deciding to spend the money in any of her jars, I make her physically count out the money and hand it over. I ask her questions like, “Do you want to spend all of this money on this one thing or in this one place?” Kids can be impulsive, so we need to help them slow down a bit and think through their actions. We are not giving them the answers, but helping them figure out what questions they need to ask themselves.

Children are much smarter than we sometimes give them credit for. By providing them with the opportunity to make decisions, ask questions, and deal with financial consequences they learn to make better decisions. The earlier you start teaching them the better, but whatever age they are take the opportunity to help them grow into financially responsible adults.

“The more your kids feel the allowance is fair, the more likely they’ll think before they spend. Giving your child the experience of spending his own money is empowering.”
Jim Gallo

How do you feel about money? Is it something that makes you happy? Does it bring you joy? Does it make you worry, stress, and fret? Does it make you feel guilty? How you feel about money determines the impact in has on and in your life.

Money is a tool. It is totally and completely neutral. Although money does have the ability to magnify what you already are. Money does not make you greedy or selfish, but it makes it much more obvious. Money does not make you generous or prosperous, but it makes the evidence of it much more prominent.

The problem most people have with money is that they have conflicting feelings in regards to money. Most people want more money for the positive things it can do in their lives, but have negative beliefs that sabotage them. Thoughts of: There’s not enough money to go around; money is the root of all evil; you can’t buy happiness; people with money are evil, bad, and unethical; only greedy people have money; rich people only care about money; money doesn’t grow on trees; to be rich I have to be a workaholic; etc, etc, etc.

In order to start bringing more money into your world you have to welcome it. You need to learn to let go of the false, negative beliefs you hold about money. Identify what financial thoughts are holding you back, and start to change them into positive, moving forward beliefs.

I choose to view money as a wonderful, positive, life changing tool. Money allows me to keep a comfortable home for my family. Money allows me luxuries like travel, entertainment, and toys. Money gives me the ability to financially support my favourite charities like World Vision, Free the Children, and Kiva. Money allows me to have positive hope for the future.

So I challenge you to identify what fears you have towards money. By finding out what has been limiting your progress, counter acting your efforts, and maybe even dragging you down you can start taking the right steps to take you to the positive places you want to go.

“There is a secret psychology to money. Most people don’t know about it. That’s why most people never become financially successful. A lack of money is not the problem; it is merely a symptom of what’s going on inside you.”
T Harv Eker