Repeated Choices

Life is a series of choices based on the options we are given. Where we end up depends in part on luck, in part on where we started, and in part on how consciously we play our part. A physical demonstration of this is the Galton Board. It illustrates the idea of the normal distribution. Even though there is a lot of randomness in the world, a step or two back often reveals a pattern. A wide variation for the individual, but a lot more predictability around central points. You get distributions of results. You get extremes. Our news and stories tend to focus on the extremes, and pay less attention to long-term averages and normal people. With a Galton Board, a ball will fall down, and it will go left or right, left or right, left or right. Facing repeated decisions. The situations we are in and the choices we make carry Karma. Choices have consequences. There are sometimes opportunities to correct mistakes but you have to work through historic consequences. What we do matters. History matters. We don’t all have (or want) the same choices, but we can increase the set of tools we have to have a degree of autonomy over what lies in front of us. 

Galton Board

Revert to Mean

Reversion to Mean is the reliable default assumption that you should take “this changes everything” with a pinch of salt. Habits run deep. Normal changes slowly. Normally. The hardest part of a fast is breaking the fast, gradually returning to more sustainable behaviour while maintaining the essence of the changes you took to an extreme. The danger is that big changes lie in the tails. The Fat Tails. Thinking the world can be neatly summarised into Risk and Return numbers that drive your decisions is like learning to drive on a farm, or learning to shoot fish in a barrel. Reversion to Mean works well enough that it is a Hubris factory. It can build track records of success that turn men into demi-gods. Till the day you realise the world is too complicated, ambiguous, and random to control. Till you realise you are not a God, and the best everyone can do is do their best. Till you personally, revert to mean.

Beware the Extremes

Poker Money

“You never count your money when you’re sitting at the table. There’ll be time enough for counting, when the dealing’s done.” One of the challenges with price not being value is the swings. Working for a salary is a little like buying/selling houses. The price changes very infrequently, so you don’t end up panicking about it. Partly because you are not looking. Salaries are relatively smooth, and pretty sticky. They don’t go down often, unless they go away (and you lose the job). When you break from that security to seek autonomy, the numbers can get big (or small), very quickly. They aren’t real. The problem with “Poker Money” is we treat gains and losses differently. Often it is tempting to go out and spend large windfalls to treat yourself in the Booms. But during the Busts, there isn’t the option to top things up. A challenge in Personal Finance is to develop detachment from your income. To stop the hand-to-mouth cycle of boom and bust. To not spend everything in the good times, so that you can build endurance and resilience for the challenging times. “This to shall pass” is comforting when people are down. You sound like a wet blanket saying the same in good times.

Detach