Tony K's Blog

This entry on the Overcoming Bias blog got me thinking. Bosses just want the number . I see a lot of confusion between planning, estimating, goal-setting, and forecasting. Forecasting Forecasting as often used in business is simply giving someone the number that represents business performance. Forecasting accurately is impossible , except maybe in the very short or very long term. Nonetheless, you still at some point need to come up with a number. Forecasting is best done using probabilistic techniques and reporting events as probabilities. Simply predicting a number, even if you are right is of little value in most circumstances. Can you imagine a weather forecaster simply saying, "Rain"? Without a percentage and a timing, it's simply not a real forecast. Estimates Likewise when you estimate business performance, wouldn't it be better to say, given the manpower and marketing budget, there is a 10% chance that we can sell 10,000 units, and a 90% chance that we can se...

I work with portfolios of real assets. One of the basic concepts of portfolio analysis and management is that you must know what you value. Very seldom does an organization have one single goal that it pursues to the exclusion of all others. It is a useful framework for looking at the mortgage problem that I wrote about earlier. If your single goal in life is to minimize the amount of interest you pay in your life, paying off your mortgage early may be a good strategy. For most people their house loan is the biggest loan they will ever get, typically paying hundreds of thousands of dollars in interest over the life of the loan. These are big numbers, exagerrated by the size of the loan and the time period. However, most people have goals besides minimizing the interest paid. If you take it up to a higher level, most people want to maximize their wealth, which in simple terms is simply money in minus money out. Money in that equation can represent any form of value including house appr...

The pay-off-a-little-more-each-month-on-your-mortgage fallacy has been around for a long time. The deal is that the numbers are big, so they are really impressive. Yes. It builds equity faster. (But it's just converting your cash from a flexible form of equity into a less flexible form.) Yes. You pay less interest over time. (But you lose opportunity to invest). Yes, you pay off your house sooner. (How many of us will live in our house for 20+ years though?) There are several ways to look at this prolem though. First, from a strictly financial perspective, the right way to look at this is to consider the alternative uses of the extra money you would be putting into the equity. For example, a 6% loan has an after tax 4% rate. Instead of putting the money into your house, why not put it into a SP500 index fund? It will get you 8% over time (5.33% after taxes). So by putting $1000 into your house, you lose $13.33 each year. Put it into the IRA that you haven't been funding and it ...