Monday, June 8, 2015

Linear Assumptions are Bullshit

Linear Assumptions are Bullshit
I have a good buddy from college that I still keep in touch with. We went to the same school, during the same years, and we even had the same major: English. Obviously, we also had the same crap judgment when it comes to our education. We both taught for a while English, too. (Well, I did for a short time, while he foolishly refused to sell out and chase money, instead pursuing "passion" and "meaning".) We both love football, enjoy some of the same hobbies...you get the idea.

Recently, he lost his job. In a climate of shrinking education budgets, this sort of thing can happen regardless of how good of a teacher you are. Even though we graduated over a decade ago, we still talk regularly. And these days we chat about the different directions his career might go in, now that he has this transition moment.

Being self-centered, the next thought I had was about how this sort of thing might affect me.

When I think about early retirement, all my projections are fairly linear. I assume I'll working at the same company until I hang up the cleats in six years. I'll be in the same position, making more or less the same kind of money.

I similarly assume we'll have the same expenses. Energy and food will never be more expensive. If we have kids, we'll find some magical way to raise them without spending any money. (The magic idea might just be "negligence".)

As our spending is definitely going to remain constant, our all-important savings rate will also be the same.

Even more surprising is that our investments will miraculously earn 7% each year, just like my investment calculator says they will. Which is great, since that sort of regularity usually requires a laxative.

In a nutshell, my future life will look a lot like my current one, and nothing truly bad will ever befall me. So I have that going for me, which is nice.

This sort of predicable living allows me to make accurate projections without having to think too hard. I can just enter some numbers into a handy-dandy online calculator, and the computer takes care of the rest.

This is all bullshit, of course. The odds of me going without any major life change in a six year period are lower than a snowball's chance in hell. Change is the only constant in life, and all that.

For example, with the odds of losing a job at 1.5% in any given quarter, there's a puncher's chance that I'll be looking for work at some point before reaching financial independence. There's a roughly equal chance that I might simply voluntarily leave my job. And if a job loss happens, the odds of being rehired are not that great either.

Still, I have to make some predictions about the next six years. Even if I accept that linear assumptions are not the way to go, what's an English major with no familiarity with statistical models to do?

I'll tell you what he does. If he's a board game geek, he creates a game involving two six-sided die, and then writes a blog post about it.

The Game of (Random) Life:
So here's how it works. I roll the die four times. Once for health, once for wealth, once for career, and once for family. Each number corresponds to a different consequence that I'll suffer or enjoy in the coming year.

Certain numbers are more likely to come up (say, a 6, 7, or 8): they have less drastic consequences and benefits. Other numbers are unlikely to be rolled (2, 3, 11 or 12), so they have the most extreme outcomes.

Instead of just assuming things will proceed in a linear manner as they have been, I'll roll the die, and fate will decide how my thirty-fifth year will go.

And as my birthday is in August, I should probably figure that out right quick.

So here are the possible outcomes:

Linear Assumptions are Bullshit

Yes, I have too much time on my hands. Mrs. Done by Forty and I were bored yesterday, so we decided to roll the die and record a video of it, for posterity's sake. So how did I do?



It seems I'll be getting a 15% raise and a 20% bonus this year, which is great. On the downside, I'll be contracting SARS, then getting drunk and betting the Cubs will break their 100 year drought and win the World Series. Oh, and we'll be giving birth to our first child: a future governor.

All in all, it's going to be a good year. If you have some dice, play along and let me know how your next year is going to go in the comments below.


*Photo is from Fabian Bromann at Flickr Creative Commons.

51 comments:

  1. So... you D&D-ed your life? Also, yay fellow August baby. (All the best people were born in that month, don't you agree?)

    As someone who became disabled at 19, I'm always glad to hear when people remember that things can happen. Especially if you insist on gesticulating 90s-style at business meetings.

    It's always good to be on guard for negative life change, though I hope it never comes to pass.

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    1. Yep, we D&D's our life. I thought the video was important, to show we weren't purposefully messing with the outcomes. :)

      I had no idea you had a disability. It's a serious reminder (in the context of a silly game) that you never know what life will throw at you.

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    2. Yes... and I think he rolled pretty high for charisma, don't you?

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    3. Ha! More D&D references here than in all my other posts combined.

      On that theme, have you ever played their board game, Lords of Waterdeep? One of my very favorites: much simpler than it seems, and it takes the pesky role playing out of the equation (so non-geeks can play without worry). :)

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    4. I've never even heard of it, but it sounds like fun. To be honest, I haven't played D&D since junior high school, but the concept of charisma points (and the fact that charisma is an entirely separate quality from things like wisdom, honor or intelligence) stuck with me for life. I think several of my cats must have rolled twice for charisma points! :-)

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    5. Yeah, charisma was always the odd characteristic. At least the way we played, there weren't too many opportunities to win over other characters. :)

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  2. This is how my version of the game went:

    Me- "Honey- read this funny post."
    DH- "Ha. Let's Play"
    Me- "We only have one die, so everything sucks."
    DH- "Let's use cards instead."
    Son walks in, throws the cards on the ground and stomps on them.

    So, I guess that's how my year goes.

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    1. Ha! I love that your kid derailed the game. Perhaps he is saving you from some bad rolls. :)

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  3. As a September baby, I take umbrage to the assumption that ALL the best people were born in August ;)

    I wonder what the board would look like if we all contributed the best / worst things that could happen under each column!

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    1. I suppose, with just a slightly earlier birth, you'd have been an August baby. I'm going to count it: welcome to the best people club.

      And I'd like to make this an annual game, so please throw out any ideas you have for next year. All suggestions are welcome.

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    2. I'm with the others... August is definitely the best month to be born in. Of course, 35 years ago wasn't the magic year, it was 38 but that's a quibble.

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    3. Woot! More August readers can only improve the discussion. Welcome.

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  4. And my Monday just got better, thank you, had me laughing out loud on a few of the choices for your roll of the dice......oh yeah and Go Cubs Go!

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    1. I don't care if you think I'm smart or good looking. I just want you to think I'm funny.

      The Cubs have to win it some year, I'm sure. I just don't think it'll be this year. You know, since the Pirates are going to to hoist the trophy this year.

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  5. OMG that chart was so freaking funny. I was LOL'ing! :) I'm glad to hear that you put that your life going perfectly is bullshit. :) I mean hey, it totally might, but strange shit happens all the time. Thanks for the laugh friend!

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    1. If I can make you laugh, I've done my job.

      A lot of the chart's outcomes are kind of meh...luckily I have a whole year to figure out new ones for my 36th b-day.

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  6. You totally crack me up! On the more "serious" side - while there's no guarantee of this, my expenses went WAY down after I reached FIRE - so there is that.

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    1. That's huge, and probably my biggest concern with pulling the trigger so early. I hear all sorts of things: that costs will go down, that you'll want to spend more with all your free time, that insurance will cost a ton, etc.

      It's invaluable to have some data from a person actually living the plan. Thanks so much!

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    2. Well... it is true that I spend more on toys than I used to - carbon fiber road bike, I'm looking at you! But it's all the little expenses that really went down for me. No more running out to grab a bite for lunch at work, no more need for a work wardrobe, much less spent on gas & car stuff in general, and much less "getting away from it all" expenses. I was never one for elaborate yearly vacations, or expensive nights out on the town, but since I quit working I feel much less need to "treat myself" than I used to because in a very real sense every day is a treat!

      And Obamacare took care of the insurance worries. Even if you have to pay for your own policy with no tax credit offset, it's MUCH easier and more affordable now than it was before when insurance companies would look for any excuse to dump you or jack up your rates. Plus, before Obamacare, most insurance companies had a rule that an individual could never upgrade to a better level of coverage - they said it as cheating or something. So you had to buy much more coverage than you really needed because if you got some sort of long term illness you were stuck with what you had for life. Obamacare changed all that so now I can just get a bronze level high deductible plan, safe in the knowledge that if I need to in the future I can always upgrade to a higher level of coverage.

      Breathe easy my friend - it will be easier than you think.

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    3. Thanks for the encouragement. As always, things will work out. It's America!

      Obamacare is a really interesting program as it relates to early retirement. Our income certainly will drop, so on paper we might truly seem like good candidates for some assistance.

      I've also heard from other bloggers (Holly at Club Thrifty for example) that Obamacare has drastically increased her insurance costs. My gut says it's location dependent (e.g. - are you in an area where one plan or one hospital dominates coverage in a near-monopoly).

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  7. What an absolutely brilliant way to highlight the fact that there are millions of possible future outcomes at all sorts of extremes, but we never really take the time to consider them. The fact that a majority of our days are just around the average 5/6/7 mark tricks us into thinking that's how it will always be.

    I think you've just increased your chances of rolling a 12 in the career column - this game could be a real hit!

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    1. Like most game board geeks, I have fantasies of creating a game. :)

      I wonder, though, if I really have a one in thirty-six chance of being hunted by a billionaire though.

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  8. This game is really creative. There must be a way to make money off of it. BTW, you do know that it's not the month that matters, it's the astrological sign! haha..

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    1. Leos for the win.

      Thanks for the kind words. If we come up with a fun way to turn this into a real game, I'll be sure to post something up.

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  9. At first I thought your title was extreme, but it makes sense. I try to forecast things out and you have to make some assumptions. But assumptions truly are BS. You can't predict what will happen. Also, this is a good problem (typically) -> "Yes, I have too much time on my hands."

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    1. Yeah, the title was a stretch (it was originally "Linear Assumptions are Wrong"). But whatever -- it's my blog and I'll pottymouth if I want to. :)

      I think there is a more sensible way to introduce random outcomes into your financial projections (e.g. - Monte Carlo analysis). But I have no such tools or knowledge, hence the dice. But, in general, I think we financial bloggers would do well to get away from simply assuming our investments will earn X, our salaries will rise up and to the right...

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    2. I think you're right. Far too often do I think I have everything figured out for the next 5-10 years. Anything can happen and I should take that into consideration when I'm making decisions about my finances.

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    3. You're not alone. We all project the recent past into the future.

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  10. Haha, what a funny post! I loved all the random potential outcomes you thought up. And it serves as a sobering face slap that yes, life can and will throw curve balls at you, although I think you have severely over estimated the probability of being hunted for game it has to be said :)

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    1. You always think it'll be someone else who'll be kidnapped and hunted like a dog in the Arizona desert...

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  11. Yeah, good year, minus the SARS and your losing bet on the Cubs, LOL. Oh well, maybe this truly is their year. :-)

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    1. It will never be the year. The poor Cubs have the stink on them, and no amount of time will get them clean. :)

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  12. So true that we often assume things will stay the same and we forecast based on that. But like you said the only constant is change. I feel like my life more or less is somewhat predictable for the most part. Government job so there's stability and salary increases are based on service time and if I don't retire early the pension makes my retirement income pretty easy to forecast as well. But life is never that predictable. Very creative and imaginative possible outcomes...you really should try and make a game!

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    1. Hey Andrew. I kind of miss the stability of government work. While there was not much incentive to work hard (given that you weren't going to be promoted or get a bigger raise as a result), the stability was unparalleled. With the union there, I rarely worried about losing my job the way I do in the private sector. And the benefits were so sweet: real HMOs, like grandpa used to tell us about.

      I've been kicking around ideas on how to blow this out to a real game (e.g. - cards for each number, so there'd be a lot of possible outcomes) and some sort of game choices between the drawing of numbers (so it's not pure luck determining your outcomes, but involves strategy and/or trading of numbers with other players).

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  13. Very funny stuff! You're absolutely right. One begins to wonder, what's the point of planning, at all, when so much of it can be thrown right back in your face?

    I think that in most scenarios (dice throws) in the game of life, we will tend to revert to the mean. Lose a job, get a similar job. Have another kid, they share clothes. This is why screw-ups tend to stay screw-ups, and excellent people tend to stay excellent.

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    1. That's an interesting take on it. I'm not entirely sure I entirely agree that people tend to be static (staying screw ups or staying excellent). That seems to fit a (long term) linear view. But I hear what you're saying.

      Will have to head over to your blog and read some of your stuff. Thanks for stopping by, Retire29!

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  14. Kids these days will refuse any game that doesn't have a spectacular figurine to move around the board - so maybe you can somehow incorporate Life and Monopoly in there... and a little Chutes and Ladders :)

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    1. Yes, a meeple is necessary. It's a key part of any good board game.

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  15. This post is so true. All financial planning is based upon a linear assumption. After 50 years if we look back on our financial progress in chart form it would look more like a series of waves. Definitely best to maintain a healthy emergency savings to help whether the storm and adjust your assumptions periodically as you plan for the future.

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    1. True! Some cash definitely evens out those bad rolls.

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  16. haha, what an interesting experiment to say the least. Life is definitely a game of chance. So much of what happens in life is uncontrollable, but even so I still want to take control of the things I can by paying off debt and building savings to prepare for life's unknowns.

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    1. Good point, Kayla. I probably come off as someone who leaves a lot up to chance in this post. The truth is that I'm a control freak.

      Unfortunately, I realize over and over that there are a lot of limits to what I can control.

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  17. Yes! All of life should be a 6 sided dice board game!! Everything about this made me happy.

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    1. Hi there, BrokeGirlRich. Honored to have one of the heavy hitters visit the blog, and glad it could put a smile on your face.

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  18. Um, this is awesome. I have a totally dorky date night now. Thank you! Our minds would explode if we truly accepted how unpredictable life is. Being adaptable is one of the most important skills we can have in life in my humble opinion. Being emotionally adaptable and financially adaptable are two different things, though.

    I'm sorry to hear about your friend. Was he working in PA? We've had some major tumult here in the last few years with massive budget cuts, minor increases to pretend like the ex governor bolstered education spending, and now potential pension reform. It used to be a stable and great state to work in. My heart goes out to him.

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    1. Board game nights are the best date nights. Unless you're like me and take them way too seriously.

      Great point on being adaptable. I remember some quote by Darwin saying that it wasn't the smartest or strongest who survived, but those who most easily adapted...or something like that.

      My friend was working in CA, though I'm sure their issues are similar. I used to work for the state of CA and, back in 09 when I left, the writing was on the wall with mandatory furloughs.

      Thanks for the kind words. I know he's reading the comments, and I know they'll help.

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    2. I think he did, and it's interesting to think about what adaptable will mean for our species looking forawrd. Will adaption to technology be important, or will it all collapse and only those who actually culturally still live off the land with minimum technological interaction have a hand up?

      Man, CA. From what I understand they're quite a few years ahead of us as far as the financial demise of public education. I know their pension system has taken quite the hit, at least, and those working and still funding it have taken the brunt of it. If you are reading, know you're not alone! Don't lose confidence over something outside your control. And if you're into risk settings at all, I hear Wyoming invests a ridiculous percentage of their budget into education.

      Of course I take board games too seriously. Because winning is awesome

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    3. *rural not risk. Darn phone.

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    4. Wyoming...go figure. I never would have guessed.

      He's one of those guys who grew up in Southern CA so, tragically, everywhere else in the country seems impossible to move to. :)

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  19. I'm glad you wrote this! So many of us (especially in academia) make assumptions that, if you stop to think about them for even a few seconds, are absolutely silly!

    That's why it's wise to make a plan with some built-in flexibility. [That's also why it's wise to build up a significant nest egg as quickly as you can! :) ]

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    1. Hi there, Froogal Stoodent. Nice blog background choice. :)

      I think we're all fairly bad at projecting future outcomes. It's one of those blind spots we have as humans: we think the very recent past is going to represent the future.

      But as you note, the best thing we can do is plan in some flexibility, and save while the getting's good.

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