Comments on: An Introduction to Retirement Investing for Scientists http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/ We're all in this together. Thu, 26 Jan 2012 15:18:06 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Andi K http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-166 Andi K Tue, 02 Mar 2010 19:30:47 +0000 http://amateurearthling.org/?p=1880#comment-166 Haha, well, I haven't met a lot of micro-economists who don't have some degree of this aversion as well. But I can't say where it comes from. Maybe because finance seems more like macro, and macro is completely baffling (and vaguely menacing) to us? Plus my background is a bit misleading. When I was at the Fed I was basically involved with a very micro-oriented economic history project in the research division. So in fact I've had very little academic exposure to macro and almost zero exposure to finance. There is so much noise out there about this, and so many possibly sketchy people giving advice, so the natural (and lazy) thing to do is to just tune out everything indiscriminately. Which might not be super rational, but here at Caltech we're all about relaxing rationality assumptions :) Haha, well, I haven’t met a lot of micro-economists who don’t have some degree of this aversion as well. But I can’t say where it comes from. Maybe because finance seems more like macro, and macro is completely baffling (and vaguely menacing) to us?

Plus my background is a bit misleading. When I was at the Fed I was basically involved with a very micro-oriented economic history project in the research division. So in fact I’ve had very little academic exposure to macro and almost zero exposure to finance. There is so much noise out there about this, and so many possibly sketchy people giving advice, so the natural (and lazy) thing to do is to just tune out everything indiscriminately. Which might not be super rational, but here at Caltech we’re all about relaxing rationality assumptions :)

]]> By: Zane Selvans http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-165 Zane Selvans Tue, 02 Mar 2010 07:52:33 +0000 http://amateurearthling.org/?p=1880#comment-165 Glad you thought it was useful! I hope I didn't inadvertently send anybody off in some weird unexpected direction... I really want to understand where all these aversions to financial things I keep running into with people I talk to about this stuff are coming from. I mean, if someone with a background in quantitative finance, math and stats, doing a PhD in SS and interning at the Fed doesn't want to deal with their retirement accounts... the general public is totally screwed! Glad you thought it was useful! I hope I didn’t inadvertently send anybody off in some weird unexpected direction…

I really want to understand where all these aversions to financial things I keep running into with people I talk to about this stuff are coming from. I mean, if someone with a background in quantitative finance, math and stats, doing a PhD in SS and interning at the Fed doesn’t want to deal with their retirement accounts… the general public is totally screwed!

]]> By: Andi K http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-164 Andi K Tue, 02 Mar 2010 05:10:46 +0000 http://amateurearthling.org/?p=1880#comment-164 Hi Zane. I really appreciated your talk today (/45 minutes ago). I have a pretty severe aversion to all things finance so this approach is basically perfect for me. Many thanks. P.S. That internship at the Fed consisted mostly of napping and eating delicious subsidized cookies ;) Hi Zane.

I really appreciated your talk today (/45 minutes ago). I have a pretty severe aversion to all things finance so this approach is basically perfect for me. Many thanks.

P.S. That internship at the Fed consisted mostly of napping and eating delicious subsidized cookies ;)

]]> By: Zane Selvans http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-163 Zane Selvans Fri, 26 Feb 2010 06:41:23 +0000 http://amateurearthling.org/?p=1880#comment-163 It's a convention <a href="https://secure.wikimedia.org/wikipedia/en/wiki/Alice_and_Bob" rel="nofollow">from cryptography</a>. Alice, Bob and Carol/Carlos are the protagonists. Mallory is a malicious attacker. Trent is a trusted third party, etc. It’s a convention from cryptography. Alice, Bob and Carol/Carlos are the protagonists. Mallory is a malicious attacker. Trent is a trusted third party, etc.

]]> By: Leslie http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-162 Leslie Fri, 26 Feb 2010 03:52:52 +0000 http://amateurearthling.org/?p=1880#comment-162 so why is the alley thug named after your beautiful niece? so why is the alley thug named after your beautiful niece?

]]> By: Soto http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-161 Soto Wed, 24 Feb 2010 16:51:11 +0000 http://amateurearthling.org/?p=1880#comment-161 Nicely done. I like your mutual fund manager analogy. And I did not see the Ukranian bot-herders coming. Of course, now that you have me hooked, I want to see the data and the conclusions! Nicely done. I like your mutual fund manager analogy. And I did not see the Ukranian bot-herders coming.

Of course, now that you have me hooked, I want to see the data and the conclusions!

]]> By: Zane Selvans http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-160 Zane Selvans Mon, 22 Feb 2010 23:38:17 +0000 http://amateurearthling.org/?p=1880#comment-160 Whoops, you're absolutely right, it should be the geometric mean not the arithmetic mean. The point I was trying to get across was that you have several choices available, and those with higher expectation values (average returns) also have much more variability in those returns. A better high risk/reward game would have been +75/-25, which has a geometric mean return of 9.5%, vs. 8.2% for +30/-10 and 3.8% for +10/-2. Part of the point of the talk is that there's always a small chance you're going to be totally screwed. You can try and minimize it, but it's always there, even if you just use a money-market/savings account, which will barely keep up with inflation and require you to save ~50% of your take-home pay if you want to safely retire at 65. The thing to do is to play more than one table at a time. Early in your stay, you put a larger proportion of your stake down on the high-risk table each night, and late in your stay, you put more of it on the low-risk table. And that's about all there is to asset allocation. Whoops, you’re absolutely right, it should be the geometric mean not the arithmetic mean. The point I was trying to get across was that you have several choices available, and those with higher expectation values (average returns) also have much more variability in those returns. A better high risk/reward game would have been +75/-25, which has a geometric mean return of 9.5%, vs. 8.2% for +30/-10 and 3.8% for +10/-2.

Part of the point of the talk is that there’s always a small chance you’re going to be totally screwed. You can try and minimize it, but it’s always there, even if you just use a money-market/savings account, which will barely keep up with inflation and require you to save ~50% of your take-home pay if you want to safely retire at 65.

The thing to do is to play more than one table at a time. Early in your stay, you put a larger proportion of your stake down on the high-risk table each night, and late in your stay, you put more of it on the low-risk table. And that’s about all there is to asset allocation.

]]> By: Fokko van de Bult http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-159 Fokko van de Bult Mon, 22 Feb 2010 20:33:37 +0000 http://amateurearthling.org/?p=1880#comment-159 I'd like to note that your way of calculating average payoffs seems wrong for the purpose at hand. In the limit as you play the game infinitely often, you will almost certainly have more money if you play the game "give me 1.2% regardless" than if you play the +60/-36 game (as Sqrt(1.6*0.64)<1.012). Of course for each finite n there is a very small, yet positive chance of getting awfully disgustingly rich playing the +60/-36 game, which makes the expectation value of the money you win large when playing the high stakes game, but it seems that for retirement investing you'd usually want to disregard this possibility. I'm more interested in the dilemma: "With high probability you'll be better of playing the +30/-10 game instead of +10/-2, but there is a small change you're totally screwed". I’d like to note that your way of calculating average payoffs seems wrong for the purpose at hand. In the limit as you play the game infinitely often, you will almost certainly have more money if you play the game “give me 1.2% regardless” than if you play the +60/-36 game (as Sqrt(1.6*0.64)<1.012).

Of course for each finite n there is a very small, yet positive chance of getting awfully disgustingly rich playing the +60/-36 game, which makes the expectation value of the money you win large when playing the high stakes game, but it seems that for retirement investing you'd usually want to disregard this possibility.

I'm more interested in the dilemma: "With high probability you'll be better of playing the +30/-10 game instead of +10/-2, but there is a small change you're totally screwed".

]]> By: Zane Selvans http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-158 Zane Selvans Sat, 20 Feb 2010 22:38:07 +0000 http://amateurearthling.org/?p=1880#comment-158 Okay, I removed the bad teeth... it was a little bit too horrible. Okay, I removed the bad teeth… it was a little bit too horrible.

]]> By: Andrew http://amateurearthling.org/2010/02/11/an-introduction-to-retirement-investing-for-scientists/#comment-157 Andrew Thu, 18 Feb 2010 23:43:32 +0000 http://amateurearthling.org/?p=1880#comment-157 The teeth picture is disgusting; other than that it sounds great. I can't wait for the next installment! The teeth picture is disgusting; other than that it sounds great. I can’t wait for the next installment!

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