## Thursday, June 23, 2011

### The little boy and the dollar notes

A stranger walked towards a small little boy whom he met along the streets. The man told the little boy that it is most fortunate that fate had brought them together, hence he is going to bestow a gift to the little boy. He can have a choice of a \$100 note or a \$10,000 note, with no strings attached. He can just take the money and go, with the knowledge that on this particular day, a kind stranger had chosen to bestow a great gift to an unknown boy. By the time the man told the little boy about his choices, a crowd grew around them, eagerly trying to find out what was causing the commotion in the streets. Some of the people in the crowd began to advise the boy, telling him that it is stupid not to take the \$10,000. It doesn't even require simple maths or quantitative analysis to figure out which choice is the most rational one to take. There's only one solution to this happy problem, and that is, rationally, the boy should take the \$10,000. Such an obvious choice do not even require any thinking at all, some of the people in the crowd thought aloud.

The moment of truth arrived for the boy to pick his choice. The boy took the \$100 note instead of the more rational \$10,000. Those who had advised the boy scolded him profusely. They told him that he is stupid not to take the \$10,000 note. How can anyone be so irrational when it comes to making such decisions, they bemoaned. As the smarter and more rational crowd dispersed in disgust, an old lady walked towards the boy, who was holding the \$100 note and positively beaming with joy.

The old lady asked the boy gently why he had not taken the \$10,000 note, as advised by the other more savvy crowd. The boy smiled brightly and explained that he took the \$100 note because he wasn't sure that the man would really give him such such a great sum of \$10,000. However, he was sure that the man wouldn't mind giving him a smaller sum, hence he took the smaller \$100 note.

The old lady smiled at the little boy's train of thought, surprised by how wise this boy is beyond his years. The boy, among all the crowd that gathered around them, is about the only person who had analysed the problem differently from the rest.

There are often many ways to analyse a problem, and focusing on numbers is just one aspect of the analysis. Why should we be trapped by such quantitative analysis? Is it irrational to place greater emphasis on the psychological aspect of this problem - that is, whether the man is really going to give the \$10,000 to the boy? Likewise, is it rational that we focus solely on numbers to analyse a problem? To place emphasis on numbers as the only way to solve a problem seems unrealistic to me. If I'm extreme in advocating moderation, does that make me an extremist too? Sometimes I wonder...

#### 14 comments :

Createwealth8888 said...

Who is richer?

A) \$500K debts and \$600K in investment

B) Debt free and \$100K in investment

Anonymous said...

Hi cw8888,

A. Clear the 500k debt and begin to own the asset worth 500k. Total investment --> 1.1m

PS. I know debts could entail any kind but since it wasnt predefined.....

Cheers
HK

la papillion said...

Hi bro8888,

You asked an important question that goes to the heart of the whole issue. Both are the same - balance sheet wise. But there's subtle differences, esp in cash flow.

500k debt is seen as 10 yrs of savings for me. I won't sleep well with that. If that amount is reduced to say less than 5 yrs of savings, then I don't mind not being debt free. I have the option to pay off anytime I like, so I'm just using the debts to generate more cash flow. Basically it must be a debt that I'm comfortable with.

Secondly, we have to worry about cashflow. The debts comes with interest payment. Say it's 2k per month. If that's the case, and I'm earning 4k per month, then I won't feel comfortable either. If it's 2k per month but I'm earning 10k,then it's comfortable. There is also the problem of how the 600k is invested. If the invested cash is in yield stocks where it can offset the interest payment per month, it can be different from invested cash that is put into non yielding stocks.

It is certainly not as simple as that particular someone who inspired this post in the cbox today.

Anonymous said...

In making decisions under conditions of uncertainty, the consequences must dominate the probabilities.

I will take the \$10,000.

First question that I ask myself, what is the probability that the old man was just joking?

I don't know!!!!!

The next question are the consequences.

If the old man can't give \$10,000, I forfeit \$100.

If the old man CAN give, I forfeit, \$9,990 if I take the \$100!

Anonymous said...

Who is richer?

A) \$500K debts and \$600K in investment

B) Debt free and \$100K in investment

B lar ;)

How sure that your investment would not fall in value?

Again, in making decisions under conditions of uncertainty, the consequences must dominate the probabilities.

la papillion said...

Hi anonymous,

Well, the point of this article is actually to point out that there are different ways to analyse a problem other than just based on monetary value.

I might do the same as you too :)

Createwealth8888 said...

Technically, the starting point for wealth creation is the same for both A and B; but it is how well you finish the ending point that is more important than the journey itself.

Just like running a marathon, after some time I will overtake some other runners. Then I may be smiling in my heart. Aiyo, why you run so fast when you can't really make it?

Then there will be some other runners running past me too, will they be thinking the same? Why run so fast har?

financialray said...

If my 500k debt and 600k in investments are both in properties I believe will do well over long term, I will go for it.
First, interest you pay to banks will reduce your tax.
Second, you can buy mortgage insurance as a form of term insurance for death and Total permanent disability.
Third, the property investment should ideally give capital appreciation and good rental income.
Fourth, the property investment must tide through both good and bad economic times.
Fifth, returns with 600k definitely better than 100k.
Lastly, consider other factors. Only can invest if not too old and not when property cycle peaking.
Fruits of property investments can be picked after 60 if we start while we are younger.

Anonymous said...

Lp,

I would say, take this as an analogy to the market.

The old man is the stock market.

On the one hand you get a 10K windfall, while you get a \$100 pocket change if you take it now.

The market may or may not want to give 10K, but does not mind giving 100\$.

That is the way i understood it.

Cheers

V

Singapore Man Of Leisure said...

Love the story LP!

Everyone will base their decisions on their own bias and perception of the world and themselves.

I am not thinking which decision I would have made. I am thinking how do I get myself exposed to such opportunities like the little boy!?

Much better than being part of the well-meaning crowd who after all the "sound and fury", walk away only with an opinion ;)

Anonymous said...

Hi Anonymous,
"In making decisions under conditions of uncertainty, the consequences must dominate the probabilities."
What you said is definitely true, but i think almost, most of the time the probabilities are more then you can think. Therefore the consequences is also more than you can think.("In GOD we trust, everyone else brings data").

la papillion said...

Hi bro8888,

You're right of course. It's how we finish the ending that is important. It could be just a case of having 1 banana daily for 1 yr instead of having 365 in one go.

Hi financial ray,

Well argued! Thanks for your comments!

Hi V,

Wow, I didn't see it this way though, haha :) That's the magic of stories, you can actually apply it in a variety of situation and get different meanings out of it :)

la papillion said...

Hi SMOL,

I've never thought about that! You never cease to amaze me by your out-of-box thinking, haha :)

Anonymous said...

HOOT the guy and take his \$10,100 plus whatever else he has in his pockets.