Rewards Points

•February 9, 2013 • Leave a Comment

How do you use rewards points from credit card purchases? Seems like a simple enough question, but here’s an interesting approach. I use them as a scoring system to track two metrics; my long term spending history and how effectively I spend my money.

Firstly, I should note that I almost exclusively use credit cards to facilitate financial transactions because of all the conveniences. Many people will disagree because much research shows that people spend more money when they work outside the immediate tangible form of M1 money (i.e cash), and that the use of abstractions of money (i.e. tokens, mortgage debt, pieces of plastic representing lines of credit, etc) encourages people to spend because they cannot calculate out the true cost of their spending. I am pretty sure I am a counter example, not because I’m crazy and break the rules of rationality, but because my primary definition of “cash” is “numbers on a screen.” I am better at tracking numbers, adding and subtracting in a mental check book than adding and subtracting how many one dollar, five dollar, ten, twenty, etc bills I have in my possession. Framed in this context, tracking cash is akin to how in traditional societies farmers would gauge their net worth by number of cows, bushels of wheat, count of hard working children, carts, etc that could be protected on their land. My concept of money is likely jaded by the fact that I’ve easily interacted with over a trillion dollars through computer screens through work when I worked in banking.

That background aside, how do I use rewards points to track my money and optimize spending? It’s not a perfect system, but it’s far better than what exists today. Have you noticed how banks hide long term detailed records of your spending and that there is no “lifetime spending” balance. I’ve observed this for a while now, but it really bothered me today when Amex mobile would only show me 1 week of purchasing details. It may be presented under the guise of “convenience and simplicity,” which can be helpful at times, but I believe it is really a way to obscure from my knowledge just how much money I’ve wasted. Quite likely, my detailed spend is being stored and analyzed methodically to promote greater spending. Maybe this is an implicit rule of a consumerism society; lubricate spending by subtle manipulations and omissions of data to influence spending behavior.

Perhaps that is why credit card companies created highly incentivizing rewards points systems. If you know you can get 3 points for every dollar spent, aka 3% rewards, wouldn’t that add up to a free item after every 33 purchases or 3% cash back in your pocket? Yes, those equalities are true, but they also encourage more spending. I don’t usually pay attention to how many points I get, unless it coincides with necessary or planned purchases. I prefer to look at rewards points as a subsidy from cash shoppers. What do I mean by this. Credit card machines, transaction fees, and payment risk are all costs incurred by vendors, but the opportunity cost of not adopting credit is even higher because they will lose a lot of potential customers, however they cannot price discriminate between cash and credit payers (yet), so to cover the cost of credit, companies raise prices. The overall effect is that cash users pay more than they should and credit card users pay less than they should. In addition to that, the rewards points have cash value, so credit card users are in fact paying less than cash users for purchases. You might even throw on some additional convenience value add for using credit.  That’s why I use credit cards almost exclusively.

On a final note, I make sure to hold enough in my bank account to auto pay off my cards in full each month to avoid interest fees and take advantage of inflation during the grace period, but that’s for another post.



Sleep Debt?

•January 26, 2013 • Leave a Comment

Does Sleep Debt exist? I agree there is a sleep deprivation effect if one does not get sufficient sleep. In fact, it is now 3:45AM, I should have went to bed 3 hours ago because I am suppose to get up at 5:30 for a 2 hour drive, and I am concerned for my safety and cognitive abilities later, but I am not convinced by the current sleep research out there.

The strong view on Sleep Debt is that if you miss an hour of sleep, you must make it up or you will be deficient that hour for the rest of your life. We all have different natural dispositions for how many hours of sleep we need each night (I think mine is 6.5hrs, but the average is 8.0hrs), so it may be hard to accurately measure how much sleep debt one has accumulated through the week. Leading researchers advocate the strong view. However I believe they possess an ulterior agenda; these researchers are also professors at leading universities, and it would be in their interest if students slept more in their rooms than in the classroom! I personally think there is a more complex logarithmic relationship between sleep debt and performance, but I have no real way to research or prove it, however I have personal experiences.

Here are some personal counter examples:

My current perspective on sleep is likely biased by this early experience, but in a high school psychology class, I learned that the world record holder for longest time awake was many days. The person went delirious with hallucinations but held fast to claim the record. He then got a long full nights worth of sleep and “fully recovered.” I too have experienced similar sleep deprivation through the Marines and school. I even hallucinated while marching through the dark – all the trees became Ents (the walking trees that talked really really slowly in Lord of the Rings). For a short time I had a rigorous class schedule where I allocated 1 day to study for each class, but that cut too much into my sleep. I was getting 6 hours per night but wanted 7. Perhaps the sleep debt was building up half an hour per night. So I decided to redistribute my sleep from one day to the other 6. This worked great, I got 7 hours for 6 days then didn’t sleep the 7th, but I felt better at no additional cost in hours spent sleeping.

If we factor in other sleep practices. One practice that I find appealing is a 2 stage sleep cycle that nicely explains possible ancestorial sleeping patterns. One sleeps for 4 hours, then wakes up around midnight for about an hour or two when temperatures are cool, we’re in a lucid but relaxed state, we can hunt for sleeping game, exercise procreation strategies under the cover of night (because we’re a very complex social species), then go back to sleep another 4 hours. A few other sleep strategies recommend frequent micro and power naps, but I find these ludicrous and in no way suitable to our evolutionary development.

Whatever the case, I hope researchers discover a magical equation that we can all use to find the optimal sleeping strategy that allows us to maximize our productive waking hours to seek greater happiness rather than spend precious hours of our finite time on this earth (needlessly) dreaming about happiness.


Compounding: Investing in Siblings

•January 26, 2013 • Leave a Comment

I was lucky to learn about the power of compounding at a relatively early age – 19 in my case. I wish I had learned about it sooner because I would have acted sooner. Not that I had any money before age 19 because I grew up in the bottom rungs of poverty by American standards, but I would have certainly better prepared myself. I know this to be true because the day after I learned about the power of compounding, I immediately opened a Roth IRA and deposited the leftover financial aid money I had in my bank account from school. This was practical because I had sufficient income through work and the Marine Reserves. Since then, I now invest religiously and my money has grown significantly.

For those who are not familiar with the power of compounding, it is usually associated with the long term benefit of stacking gains on top of gains. The simple example is with an investment of $100 that earns 10% growth. In year one, you will have $110, but in year two, you will have $121 because the $10 earned in year one now earns 10% or $1. The stacking of these additional $10’s and$1’s over time is astronomical. In fact, Albert Einstein, founder of the General Theory of Relativity (E = MC^2), which explains so much about our universe and sorta the father of the atomic bomb, is quoted as saying the most powerful thing in the universe if the power of compounding.

Beyond investing, compounding simply refers to the aggregation of parts to make up something that is greater than the sum of its parts. For example, if you play the guitar, then your friend joins you with a bass, then another friend joins you with voice; you have just compounded 3 musical skills together to create a band.

I apply this thinking in a very nerdy way when I play computer games, especially games where you develop skills such as Role Playing Games, RPG’s. In RPG’s as one progresses through the game, you must allocate skill points to specialize your character and become more powerful. I almost always gravitate to skills that enhance my ability to gain more skills faster or over power a particular ability.

Now, back to the real world for yet a different example, and the purpose of the posts’ title. I apply compounding to “Investing in my siblings”, and it just paid off. My brother is a recent college grad. He just got an amazing job offer out of the blue with zero effort and now earns more than I. As a sign of the times, he was forced to accept a contractor role after graduation, but I insisted that he move away to a high cost of living city to better position himself for opportunities. Against parental wishes, he moved. One day an acquaintance via text messages tells him to await a call from a recruiter. The next day a recruiter calls, exclaims how even though he does not have a resume, lacks work experience, is in no way qualified for the field, and there is a large pool of qualified applicants, he is getting the job. They immediately negotiate a very favorable wage and he is asked to start work the next day! His manager at the contractor position was very supportive, offering to take him back if things did not work out, but life is working out just fine. He is shining at the job and I will emphasize again that he now earns more than I.

How did this happen aside from pure luck? To some degree I believe some luck is self made by positioning oneself for opportunities and keeping a positive outlook to spot them. However, I actually did a lot on the back end by providing financial support to subsidize the higher cost of living, allowing him the chances to socialize without worrying about making ends meet, and retirement investing to take advantage of the financial form of compounding to secure his future and create a sense of financial independence.

I think I am a reasonable example of the Horatio Alger “Rages to Riches” story, but in reality most wealth and success is inherited and is passed from generation to generation. Those with socioeconomic means are able to send their children to the best schools, invest in trust funds, and focus on development instead of scrapping by. It’s a sad reality that the Gini Coefficient, an indicator of income inequality, of America is actually higher (worst) than China(!), but I can’t help but think of the ways this plays out in society. The intern that’s able to work in the metaphorical mail room at Goldman Sachs but can still afford $1K nights out with the Investment Banker friends who eventually help him land a job, or the ability for top universities to raise tuition prices way beyond the rate of inflation year of year because the high price of admission allows the rich but not as capable students to subsidize opportunities for the talented but financially distressed students.

As a take away, I think optimizing compounding effects keeps the wealthy wealthy and even though it may seem insurmountable to build any level of security to rival the ultra rich, there is no need. One can simply look for the opportunities to apply compounding in your own life and be still find great happiness.


Emerging Adulthood

•January 26, 2013 • Leave a Comment

I read a New York Times article last year about life stages. I was surprised by the inclusion of an “Emerging Adulthood” phase, demarcated as the first half of young adulthood, around ages 18-30, and characterized by self discovery. This gave new meaning to another concept I heard of around the same time that “30 is the new 20” and “40 is the new 30”. Personally, my initial reaction was disbelief at the arbitrary re-categorization and redefinition of the human experience because “emerging adulthood” seems to be a very modern concept only available to those with sufficient social, economic support structures to allow such freedom.

Yes, most of the modern and modernizing world is seeing longer lifespans, near doubling in some areas, and so perhaps we need to create twice as many life stages or refine our understanding of the human condition, but that’s not what I’m trying to address. I think the idea is valid, but I contend that the idea comes with pros and cons.

I was lucky to have grown up in an environment where I could observe, and to some degree experience the freedoms of Emerging Adulthood. For example, I attended a good American university that emphasized the liberal arts education where students try different fields of study to discover their interests. In fact I triple majored and double minored in very different fields. Also, western societies don’t shun the idea of taking a year off to travel the world before starting a career. I did not do this, but I did serve in the Marines which provided travel opportunities. Additionally, some people switch jobs frequently in search of the “perfect job.”

Today I have the knowledge, means and freedom to choose Emerging Adulthood experiences. I am able to question the purpose of life and work, pursue long term goals, continue education and perpetually grow – perhaps even prolonging this stage to my mid 30’s, but I can’t help thinking how easy it is for all those around me in Silicon Valley to read such an article and so easily find “truth” in the words to rationalize their current lifestyle – not that there’s anything wrong at all about it, nor am I making any judgements against any particular lifestyles.

Without getting into much detail arguing for the other side because I mainly wanted to point out how quixotic I found the idea of Emerging Adulthood and how we shouldn’t be so quick to accept it, I will point out less American perspectives. We should consider other approaches and uses of this age range. European and now Asian countries emphasis specialization once one enters university. Travel is emphasized by some, but may be linked to career (I’m thinking of the Netherlands where medical students are given a year stipend to work around the world). Is instituting a sense of purpose and adulthood sooner in life better (for individuals or society)? On the other end of this spectrum are developing countries that can’t afford any of these luxuries, but they are driving greater development in their local societies.


The Marriage Premium

•January 26, 2013 • Leave a Comment

Significant data and market research shows that married men make more money on average than never married men. Although clear correlations have not been unanimous, some hypothesis attribute the marriage premium to increased productivity, role specialization, and greater happiness. I understand this is a complex issue, but econometrics has not identified any clear answers. I believe in a different variable – marriage teaches the generally more self centric men skills and knowledge to be more socially flexible.Today, at work, we had a team building workshop whereby we discussed the Enneagram, a 9-dimensional personality and motivation assessment similar to the Meyers-Briggs. The facilitator emphasized the value of the Enneagram for understanding work preferences and using this knowledge to improve work relations and reduce conflicts.

The workshop also introduced the concept of the “Platinum Rule”. Much like the “Golden Rule”, treat others as you would like to be treated, the “Platinum Rule” recommends treating others as they would like to be treated. Conceptually, empathy and adaptability seem to be advantageous business (and general life) skills and would be a plausible candidate for the marriage premium.

A few anecdotal examples:

Imagine a Sales person who can rapidly understand more than just a clients’ technical and business needs; he would achieve greater sales. Perhaps a manager has a very detailed orientated task, he might assign it to the Enneagram type One which is better suited to do a superior job, which ultimately elevates the manager’s results and effectiveness.

Perhaps economists and personality psychologist can combine and statistically analyze data sets, matching Enneagram (or other personality models) types to wages and marital status. I have yet to discover any such meta analysis, but it would be interesting.


Hello world!

•December 6, 2012 • Leave a Comment

Hello world!

I wonder how many new bloggers search for a profound first impression; an opportunity to be reborn in our ideal self image, an anonymous alter ego, a secret dream, a voice for justice, and endless other possibilities – I am not sure what to choose, but I have a nebulous idea.

My passions are broad, encompassing technology, finance, economics, psychology, and politics. I’m an avid learner filled with a sense of wonder at the worlds’ possibilities. Expect that I will share new found and innate knowledge here as I grow. I am young with numerous years of exciting experiences ahead of me as I develop intellectually, professionally, and genuinely into a civic citizen contributing to and building greater good in this world.

Fuzzypractical represents the intersection of the social sciences and pragmatism. I’m fascinated by human nature – rational yet emotional beings – and the existential questions that accompany our life journeys. Please join me on mine.