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Running the Numbers

John Lim, 1:58 am ET

I RECENTLY LISTENED to a podcast featuring Richard Thaler, the Nobel prize-winning economist. To say I’m a huge fan of his work is an understatement. Thaler has that rare ability to communicate a complex topic—behavioral economics—to a lay audience in a way that’s both accessible and enjoyable. His book Misbehaving offers a fascinating historical account of behavioral economics, a field he played a major role in developing.

But it was a casual comment that Thaler made toward the end of the interview that really caught my attention. Podcast host Meb Faber asked him for some best practices for teaching personal finance to high school students. Thaler suggested replacing subjects like trigonometry—with near zero practical value—with more useful ones, such as teaching students how to use a spreadsheet.

Use a spreadsheet. It suddenly dawned on me just how heavily I’ve relied on spreadsheets throughout my life, particularly when it comes to personal finance. So many financial questions are ripe for analysis through the use of spreadsheets. The following is a list of nine problems for which I’ve depended on them. Some of the resulting spreadsheets were relatively simple, while others devilishly complex.

  • Creating a budget.
  • Seeing how different savings rates would lead to differing levels of wealth accumulation.
  • Estimating my cumulative savings by refinancing or prepaying a mortgage. (This was before online mortgage calculators became ubiquitous.)
  • Determining whether and how much to contribute to my employer’s cash balance plan—a type of defined benefit pension plan. This was a truly complex problem given the myriad factors involved.
  • Helping to choose between health insurance plans, including some that were compatible with health savings accounts and others that weren’t.
  • Setting buying thresholds in 2020’s bear market based on a “worst-case scenario” analysis, as detailed in an article early last year.
  • Analyzing and rebalancing my investment portfolio.
  • Creating a savings rate calculator for a talk I gave on financial independence. The primary input was “years to financial independence”—there were, of course, other inputs as well—and the output was the “required savings rate.”
  • Calculating the yield to maturity on bonds.

Looking for help creating a spreadsheet? Microsoft offers a slew of Excel templates that are available for download.

Many of my HumbleDollar articles—and the financial analyses that underlay them—would never have seen the light of day if it weren’t for spreadsheets. Of the 24 articles and blog posts that I’ve written so far, a full quarter of them relied on spreadsheets in some manner. In particular, this article, this one and this one were essentially spreadsheets disguised as prose. These articles also happen to be among my favorites.

How often have I used trigonometry in my finances? Meet the null set.

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declesepru
declesepru
17 days ago

Many things that are taught are not directly useful “as is” but they’re more about “learning to learn” and using rational method.

It’s like complaining that students in IT don’t learn whatever programming language or technology is the latest trend. The point is to learn enough so that when they need to use a new language, they’ll be able to learn that one by themselves.

About teaching to use spreadsheets, I don’t think it would change much. You presume people would use them if they’d been taught but I think there is no correlation here.

  • people who are really interested (e.g. because they’re interested in personal finance) will use them whether they’ve been taught or not (people can learn by themselves for small things and get more and more competent from there)
  • lots of people, even if they’ve been taught, will simply never use them, just like they’ll never do much about personal finance

I’m not sure if I started using spreadsheets before or after learning trigonometry, but I certainly hadn’t had any “spreadsheet lessons”, and school had already taught me enough that I could discover spreadsheets by myself.

R Quinn
R Quinn
17 days ago

I think getting to basics somehow is most important, like save before spending, be careful about creeping lifestyle, avoid debt to the max possible, live within your means, be disciplined, how to assess the stuff you really need, understanding the power of compounding.

It’s not the absence of a spreadsheet that gets people in trouble, it’s making poor life choices.

Last edited 17 days ago by R Quinn
Jim Wasserman
Jim Wasserman
17 days ago

There is a lot of debate in the education world about working in personal finance. The problem, of course, is that available time in a student’s schedule is scarce and there are so many subjects demanding to be worked in (health, self-defense, media literacy, statistics, rhetoric, civics, volunteerism, etc.). Plus, hitting topics like personal finance (and spreadsheets) has little efficacy if done once in a curriculum. Everyone has something they want to put in, but are stumped when asked what to take out. As an educator, I would like to see Algebra II/Trig removed from high school. As you said, most careers don’t require it and those that do can work it into the college requirements for a degree. My sons (an engineer and an actuary) said they would like to have had more basic education in statistics and data analysis in high school, which could include spreadsheets. BTW, I am also a huge fam of Thaler (I am an author in behavioral economics education), but owing to my “bent,” I think behavioral econ cannot be taught without also teaching about the influences on our behavior, the “nudges” to borrow from Thaler, and thus media literacy.

johntlim
johntlim
17 days ago
Reply to  Jim Wasserman

Thanks for your insightful comments, Jim. As an educator myself, I’ve learned the hard way that having a meaningful impact teaching personal finance is difficult. “Just in time” learning is probably the way to go. In other words, when someone is shopping for a mortgage, teach them about interest rates and compounding. When someone signs up for their company’s 401k, teach them about diversification and investing.

It’s funny. A resident that attended many of my finance talks a few years ago, just started emailing me all sorts of questions once he started working as an attending (full time physician) and had to face real life investing issues.

Behavioral economics & finance rules! 🙂

parkslope
parkslope
17 days ago
Reply to  johntlim

Numeracy and Wealth
Catalina Estrada-Mejia, Marieke de Vries, Marcel Zeelenberg
Journal of Economic Psychology
Volume 54, June 2016, Pages 53-63

Highlights•
We find a robust and significant correlation between numeracy and wealth.


Our results are not explained by differences in preferences, constraints, or beliefs.


Numeracy is a key determinant of the wealth accumulation trajectory (5-year period).


The low numerate (but not the high numerate) participants decumulate wealth.

https://doi.org/10.1016/j.joep.2016.02.011

Rick Connor
Rick Connor
17 days ago

Great article John. As I’ve written, I’m a big spreadsheet fan, and used them extensively at work as well as in my personal life. I’m often surprised how many people lack my enthusiasm, but I guess they are surprised at my love of them!

I’m a little “hurt” by the lack of respect for trig. It was one of my favorite classes in HS. It’s used all the time in engineering and science. Ive been trying to think of an example of using trig in every day finance, but so far come up empty. Maybe some of the more complex algorithms used by quants – maybe Jonathan can ask Jim Simons.

johntlim
johntlim
17 days ago
Reply to  Rick Connor

Thank you Rick. My favorite subject is mathematics, so I didn’t mean to disrespect trigonometry. That was just the example Thaler gave, but I think it’s true. 90% or more of the population is unlikely to use things like trig in real life but at least 90% would benefit from being facile with spreadsheets. That said, the larger problem beyond spreadsheets is the lack of numeracy in the general population. I think I read a study somewhere (if anyone has a link I’d appreciate it) that those with higher numeracy faired better financially than those with lower. That makes total sense to me…

And if Jonathan has Jim Simons ear, could he ask him if we can all invest in Simons’ funds??

Jonathan Clements
Admin
Jonathan Clements
17 days ago
Reply to  johntlim

I hate to disappoint everybody, but I’ve never met or spoken to James Simons — and I rather doubt he’d take my call.

parkslope
parkslope
17 days ago
Reply to  Rick Connor

“If you move on to time series analysis of stock markets or share values or currency conversions or inflation rates, then trigonometric functions come into play for many reasons, one being the periodic nature.”
https://www.quora.com/Quantitative-Finance-Are-the-sin-cos-and-tan-functions-used-in-financial-calculations

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