Many people think that saving money and investing it is hard. They feel that saving is on the opposite spectrum of fun and that it involves scrimping, denying yourself, and harsh self-discipline. Saving does involve self-discipline and can be difficult at times (especially for those who are less-inclined to do it and for those who are new to building wealth), but like many difficult things, it can be very rewarding and even very fun.
I love saving money and seeing my accounts grow. When I earn money, I plan to put a portion of that money into a savings account or into my investment portfolio. It might be that I am a natural saver and that I have a general propensity to save (due to early experiences or due to genetics), but I love spending too. I enjoy nice experiences and nice things and my friends and family know me as a very generous and giving person (of course I am able to be very generous because I am a conscientious and diligent saver).
I love everything that has to do with saving money and building wealth. I enjoy picking investments or screening mutual funds or ETFs. I love seeing my balances grow and monitoring my investments. I love the security that comes with seeing my wealth increase and how it allows me to be a better friend, better family member, and better person overall. I love how saving is fun to do on its own and how it allows me to have a much more enjoyable life.
I don’t view saving as self-denial because I understand that some expenses don’t happen every month. I know that some expenses occur every year, every five years, or once in a lifetime. I know that when I save I am allowing my future self to bear those expenses calmly and easily. I know that when I save I am acting as a mature adult and demonstrating an important characteristic that sets humans apart from other animals: planning for the future.
If you don't view saving the way I view it, that's fine. You should still do it anyway because that is what a responsible adult does. However, I believe that if you stick to it long enough and see some success with it, you will feel similar to the way I feel about saving.
The Law of Demand states that, Ceteris Paribus, the higher the price of a good, the lower the quantity demanded of that good.
The Law of Demand is a fundamental concept in all of economics and allows for a rational and predictable analysis of markets and assists in the determination of market equilibria.
Simply stated, the law of demand states that, all else being equal, the higher the price of a good, the less of that good will be demanded. By "demanded" we mean the number of people who are able and willing to purchase that good. This law of demand seems to make intuitive sense because it is very logical that the more something costs the less of it people will be willing and able to buy.
The reason less people are willing and able to buy a good when the price of it goes up is because they either are prohibited from buying it due to financial constraints or because the opportunity cost of that good has now increased - they either can't afford it any longer or they no longer wish to purchase it for a higher price because there are more attractive alternative uses of the money.
P.S. Ceteris Paribus is Latin for "all else equal" - a term used very often in economic theory and economics textbooks in order to assume a simpler and static world that is easier to study
Have you heard the saying "More isn't always better" before? That's not true according to economists. An underlying assumption in economics is that, for goods (as opposed to bads), more is always better.
Why is this true? There are two things we can consider: (1) if something brings you utility, you want more of it and (2) once it stops bringing you utility (likely because of diminishing marginal utility) you can sell it.
Utility = Happiness/Satisfaction Derived from a Good or Service
If one item gives you utility, more will give you more utility. If one pen gives you a certain amount of utility, two pens will give you more (maybe double), and three pens will give you even more (maybe triple). You can use one pen and then use the others in order as each pen runs out.
Let's discuss another example: burgers. If one burger gives you utility, two will give you more (although probably not double like with the pens), and three will give you even more (but maybe not if you are already full). With burgers things are a little different aren't they? One burger may be amazing, two burgers may be great, but by the third or fourth burger, you might be full. That third burger may give you a lot less utility than the first because you are already full. The fourth burger might actually have negative utility as it causes a stomach ache. This is an example of a central principle in economics called diminishing marginal utility.
Diminishing marginal returns can occur with the pen example above also, but it would just occur much more slowly. If you have 10 pens, you are still doing fine. You can put them away for use later on. But what if someone gave you 10,000 pens? Then the 10,000th pen may actually have a negative utility because you no longer have any room to store it. At some point the pens become a burden.
So how can we say that more is always better if we have diminishing marginal utility, with some cases more extreme than others? We can say that because we can always sell the item should it no longer provide us with positive utility (or at least we assume we can sell it). For example, we can sell that fourth burger. We can also do something else with it (eg. give it to a friend or a homeless person) that gives us some kind of utility. The same is true with the pens. We can start to sell the pens at the point where utility is no longer possible.
So, the old saying that "More isn't always better" isn't really true in the world of economics. Assuming that more IS always better (non-satiation) is an underlying assumption of economics that allows for further theory creation and model development.
Soccer (or Football in most of the world) has become a great demonstration of perverse incentives. If you haven't watched the video above before reading this, take a moment to watch it now. When economists say that incentives are perverse they mean that they are "off" in some way, not that they are perverted in the sexual sense of the word.
Incentives matter a lot. You may want people to behave a certain way, but what really will affect behavior is incentives. Incentives are incredibly powerful and economists understand this fact much more than most other individuals. Misunderstanding the importance of incentives causes individuals and organizations a lot of headaches and confusion.
One example of perverse incentives is the diving that now occurs in soccer throughout the world. I'm fairly young and I've grown up in an increasingly diving-prone soccer environment, but I still understand that diving is absolutely ridiculous. Few soccer players don't dive today and I deeply respect them, but are the rest of the players who consistently dive just crazy for engaging in such a ridiculous and degrading act?
Obviously most soccer players don't engage in the absolute ridiculousness demonstrated in the above video, but in my opinion, diving is degrading and pathetic if you dive to get a penalty kick. Diving to prevent injury or to minimize the chances of being injured is a completely different story. Still, soccer players often dive at what appears to be a slight touch. Soccer players dive and send their bodies on trajectories that in no way match the ballistic trajectory that would be expected from the initial contact. Most soccer fans can tell that these players are diving and playacting. Then why do these professional athletes engage in such a ridiculous act? The answer is incentives. Incentives align in such a way to make such action profitable despite the costs (which I believe are not insignificant).
The incentives for diving and playacting should be fairly obvious. Diving increases the chances that a foul will be called, benefiting the player’s team. Over time, as more people do this sort of thing, the pull to do it also increases because if everyone is doing it, you are penalized in a way if you don’t do it. It’s the same thing with steroids. If everyone in a sport takes steroids and you are the only one that doesn't do it, you are deeply penalized because you will likely always under-perform. That explains in part why athletes often take steroids despite the fact that taking them is a foolish and dangerous act.
The costs of diving are not insignificant in my opinion, however. Diving is a bit ridiculous and degrading when overdone. A soccer player should epitomize sportsmanship and strength, not be always on the lookout for an opportunity to fool the referee. This is degrading to the soccer player personally and degrading to the sport generally. Another cost is just looking foolish, but that cost has greatly decreased because more and more people are engaging in this behavior.
So, we have a situation in which the benefits of the action seem to outweigh the costs. Over the last few decades this difference has increased greatly due to the fact that more and more players engage in diving. The larger number of players engaged in diving lowers the costs because it seems less ridiculous and degrading. The benefits seem to have remained the same for the most part.
But what did I mean when I said there were perverse incentives? Why are the incentives to dive perverse? Let’s begin with a general definition of perverse incentives.
A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences. (Wikipedia)
Can you think of other perverse incentives? How about the perverse incentives to lend too easily during the last decade. Those perverse incentives brought on the financial crisis and the Great Recession? Easier lending regulations and practices were created to promote a noble cause, increased home ownership. These easier regulations, combined with mortgage securitization (where originators of loans didn't really hold on to their loans but instead sold them off, often packaged with other loans), created a situation with perverse incentives, ultimately leading to a very unpleasant global financial crisis.
We can learn, from both diving in soccer and from other situations where perverse incentives exist, that incentives matter a lot. Noble causes may be espoused and rules may be created, but the wise economist knows that if you really want to predict how people are going to act, looking at the incentive structure that exists is one of the best ways to begin analysis. Perverse incentives and unintended consequences are real things that can lead to sub-optimal outcomes and everyone from parents to teachers to various rule-makers to policy-makers and to law-creators should take care to make sure that incentives line up in the right ways lest unintended consequences and perverse incentives bring on disaster.
I went to the orthodontist today to get a fixed retainer removed. It was put in about a decade ago, when I was a teenager, right after I had my braces removed. It was supposed to keep my bottom teeth in place, but after a decade in my mouth it started wearing out. Last week I had to get it repaired and more recently another part of the retainer broke off, making repair impossible and requiring the removal of the entire fixed retainer.
Why am I telling you this? I'm telling you this because I had a really interesting insight during my orthodontist visit, specifically as he was removing the excess adhesive (which bonded the retainer to my teeth) and polishing the back of my teeth after removing the retainer.
I am not afraid of going to the dentist at all, but I do understand that dental work performed with no anesthesia can be excruciatingly painful. My parents, who grew up in the former Soviet Union, tell me how painful such work was as they did not have anesthesia then (or they did not have access to it). Obviously, with no anesthesia, people likely neglected dental work. Additionally, I experienced dental drilling when I was a young child with relatively little anesthesia (I am not quite sure why) and I remember that it was very painful, even though some anesthesia was used. It is a very unique and particular type of pain and it is extremely uncomfortable. So, I knew that drilling teeth with no anesthesia at all is extremely painful from stories and a past experience with relatively little anesthesia. With this knowledge and with this past experience I sat down to get my retainer removed.
The orthodontist told me that he wouldn’t use any anesthesia because he wouldn’t be drilling into the teeth or doing anything that would hurt. He told me he would just be removing glue from the surface of the teeth after he removed the retainer. He removed the retainer and then he began removing all of the excess adhesive with a dental tool that looked very similar to the tools that dentists used on me when I had fillings in the past. I am a layperson when it comes to dentistry, so I assumed it was the same tool and I assumed it was capable of drilling deep into a tooth.
As he began removing the adhesive from the back of my teeth I felt a tiny bit of pain. I wouldn't even call it pain. It was more of an annoyance, but I knew very well that the minor annoyance could turn into excruciating pain should the dentist go deeper into the tooth. I thought to myself, what about when he finishes removing the adhesive? Then the drill will be touching the actual tooth and there will no longer be a layer of adhesive between the drill and the tooth. Will that hurt? It will likely hurt!
I didn't say anything while he was drilling because I trusted the orthodontist, but the annoyance increased and I felt a very slight tinge of pain. Now I was a little nervous, but I still trusted the orthodontist because I knew he worked with children and that he likely had an abundance of anesthesia. He would likely use it if he felt that there was even a chance of pain as medical professionals are overly cautious when it comes to these things today.
When he took a break from the drilling and the adhesive removal, I took the opportunity to ask him about my concern because I was pretty curious. I told him what I thought would happen and he told me that it wasn't possible. He said that what he was using was a rubber drill tip, not a metal drill tip capable of lacerating and drilling into the tooth. He said that even when the tip touches the tooth with no adhesive, which it would do soon once all of the adhesive was removed, it still wouldn't hurt. My outlook on the entire procedure immediately changed in an instant and I was shocked at this.
When he began drilling again the minor pain went away completely. Obviously I still felt the same sensation I felt before, but now I knew that it would never be different than it was now. I knew that the drill was not even capable of causing the pain which I was afraid of and that made the entire thing not just a little bit more tolerable, but turned the whole thing into a completely different experience. I now wanted him to continue with the procedure despite the light discomfort because I wanted the back of my teeth to be as smooth as possible and for all of the adhesive to be removed.
I know this is a simple example, but I cannot ignore what it has taught me. My assumptions played an enormous role in my experience at the orthodontist. I felt the same sensation (maybe even a greater physical discomfort after I found out), but something changed. The sensation in the beginning was combined with a certain fear that it would increase and an assumption that the tool that was being used could also grind deep into my tooth. After I learned about what was going on, my old assumption died and was replaced with a different assumption, this time a more accurate one. That accurate assumption allowed me to understand that the tool had a rubber tip and was incapable of drilling into the tooth. It was not the same tool that dentists use to drill into teeth to fill cavities.
What can we learn from my experience? We learn that assumptions matter a lot. I've always felt this before, but my experience at my orthodontist really brought this home for me. It was an almost profound experience in terms of how quickly I learned and internalized something pretty important. We won't always be able to change our assumptions and when we get more educated and our assumptions do change, we might realize that our original assumptions gave us more peace of mind. However, whenever we're suffering in one of endless ways we can suffer, we should take a minute to think about whether or not our suffering is caused in part by an assumption that we have. We should then seek to understand why we have that assumption and really do our best to understand whether or not it is rational, correct, and true or whether it is only based on ignorance and our own limited past experiences. An assumption can act like a pair of glasses that color everything else we see in the world. Change the glasses and you can change your view of the world.
We all know (or should know) that buying a lottery ticket is truly a waste of money in the formal sense of the concept. Your chances of winning are likely less than your chances of getting struck by lighting. Even with an enormous jackpot, the expected value of the bet is almost always, if not always, less than what you pay to play. Therefore, it's not an investment or even a good gamble. You're better off playing something with far better odds. Even still, you're better off keeping your money in your pocket. If that's the case, why do so many people still play?
There are various theories as to why the lottery is so popular even though it's such a bad bet (e.g. tax on those not good at math, tax on the poor, tax on the uneducated, irrational individuals, overly optimistic individuals, etc.). I have my own theory on the matter. I don't have proof that it's right, but it seems interesting and probable to me.
The lottery is a cheap form of entertainment and that is why lower-income individuals seem to represent the largest portion of lottery players.
Numerous studies have shown that the vast majority of lottery players are low-income individuals. I believe that this is fairly important in trying to understand why so many people play a game with such horrible odds and low expected value relative to the cost to play. I don't think that these low-income individuals are deluded or all bad at math. I believe you will find a broad spectrum of people in this low-income group, some of which might be math geniuses. However, all low-income people have at least one thing in common: they don't have a lot of money. I believe low-income people are the largest represented group when it comes to lottery players by far because the lottery is a form of entertainment and one of the cheapest forms of entertainment around.
To believe my theory you have to believe that gambling is entertainment. I enjoy blackjack and I definitely believe there is a lot of entertainment value in blackjack and various forms of gambling. Among various other things, you get an adrenaline rush in anticipating the potential reward and fearing the potential loss. Low-income people might not be able to spring for a $5-a-hand (if you can find a table that cheap) blackjack table or make a trip to Las Vegas to play the penny slots. Even the poorest people, however, can likely afford to spend a dollar or two on a lottery ticket. Lottery tickets might just be a form of entertainment.
If lottery tickets are a form of entrainment, then people buying lottery tickets aren't as irrational as some would have you believe. They are paying a dollar or a few dollars for a similar type thrill to the one I get at a blackjack table. I am great at math and I understand statistics so I understand that blackjack is a losing proposition. I don't care, however, and I believe many lottery players don't care either. Because I know, and I believe many lottery players know, that we're not in it to win, just to have a good time. We don't come with more than we are comfortable losing and we're fine when we lose because we received entertainment value for the money we spent. If I lose $100 at a table and I got four hours of adrenaline-filled fun and a bunch of free drinks out of it, I am happy.
For a few dollars you get to buy the lottery ticket, fill it out and think about the numbers you want to choose, and then wait and anticipate, hoping that you win and getting a bit of an adrenaline rush in the process. I wouldn't play, but it just might be a good value proposition to some people. Maybe it's not a waste of money after all.
Note: When I discussed gambling and entertainment I was only talking about individuals who are healthy gamblers and see gambling for what it really is. If we are discussing individuals who are addicted to gambling for the various reasons one can get addicted to such an activity, that is a different matter entirely and that is beyond the scope of this article.
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledge technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).