Thursday, October 04, 2018

River Crossing

The Holy Grail of business is 'discriminatory pricing'. The ability to charge different prices (for the basically the same thing) to different people. Normally this is done by creating 'classes' or groups, and slightly different offerings. The heart of the offer can stay the same, as long as the higher paying groups perceive themselves to be relatively better off. Often the thing you are selling is relative status. Sometimes the product may simply be the higher price tag. It is a way of someone displaying their financial power.

If you have to charge one price, you are charging some people too much (they won't buy), and some people too little (they will think they have received a really good deal). The price is an average. Beware of averages. 

"Never forget the 6-foot-tall man who drowned 
crossing the stream that was 5 feet deep on average" 
Howard Marks

As the person buying, this means you have to have an internal understanding of value. Price is not value. From the bucket list of things you want, you have to compare that gap in value and price, and make the best decisions you can.

The problem is you can't always 'just not buy' some of the things that cost way more than you think they are worth. There are some things you have to buy. I think of Housing, Health and Law as 'the three guns'... there are situations where you just have to pay the price that is given. You are a price taker.

The first two rules of good financial decision making are 'Never be a forced Buyer' and 'Never be a forced Seller'. Unfortunately, life has a habit of forcing us to make decisions. The more space you can create to avoid these situations, the more control you will be able to have.

Our wants and impulses also end up pushing our financial decisions. Something that seems like a good idea on a Friday night, is not the same thing that seems like a good idea on a Monday morning. Good financial decision making is about developing habits and 'rules of thumb' for your intuition. Deep soaked Intuitions based on what you really want. What trade-offs genuinely match the kind of life you want.

The rules aren't really rules. They are self-imposed. So a better word for them is 'choices'. To make good choices, you need to be able to step back, decide what you want (in general), and develop your own rules. Rules, choices, and habits are basically the same thing.

If you don't develop your own rules, the world will impose its averages on you.


No comments: