Utility value of money

[Andrew_A]

I have some thoughts on money I would like to share.

The Utility Value of Money:

We have long heard rich people say it. People like Gerry Harvey who state that after you reach a certain point, the extra money really doesn't make much of a difference to your life. Hence someone with 20 million is not going to be twice as happy as someone with 10 million. Though someone who experiences a change of their net worth from 100k to 200k will likely be ecstatic with the change.

The utility curve of money will be different for each individual. You can plot your own utility graph by asking yourself questions about your personal situation.

A few choices:
a) Would you take $1000 guaranteed or a 5% chance of winning 1 million?
b) Would you take $200,000 guaranteed or a 25% chance of winning 1 million?
c) Would you take a 95% chance of 1 million or a 25% chance of 5 million?

Now If you are like me your answers would be a)5% b)200k c)95%; as the top of my utility curve (the point where the gradient gets much flatter) is around the 1 million in assets net worth mark.

From a statistical point of view the optimal answers were: a)5% b)25% c)25%

Now if you offered Gerry Harvey choice (c) does anyone here think he wouldn't take the 25% chance? His utility curve would be much different to mine

A common view of the money/happiness relationship.

The more you get, the happier you are.

A more likely reality of the money/happiness relationship.

Money makes a big difference until you hit the top of your utility curve.

I have sourced these ideas from "Mastering Risk" by Mike Lally. Not everyones cup of tea but I find it fascinating.

WaySolid.

 

[Sunfish]

Is there more to this than just saying "The more money you have, the larger the stakes to keep your interest"? If however you are discussing The Point of Diminishing Returns I agree that it is an inadequately understood phenominum

Nodody has so much money they don't want more, (even Gerry Hervey) and even the super-rich will lie, cheat and scheme for more. The mega-rich will send their neighbours' children to die in wars in their own financial self interest. I just don't know why.

Thommo

 

[Aceyducey]

It's not about the money!

It's about the challenge & enjoyment of doing the business.

Money is simply the scorecard.

I suggest that people revisit these charts when they have a net worth of $20 million. THEN consider if they are prepared to sit back & enjoy it or not. It's a level that very few academics reach - they simply talk about it

Cheers,

Aceyducey

 

[Andrew_A]

Is there more to this than just saying "The more money you have, the larger the stakes to keep your interest"? If however you are discussing The Point of Diminishing Returns I agree that it is an inadequately understood phenominum

Thommo,

I believe there is considerably more to this than the truth of diminishing returns. Firstly the author of the book is raising the idea in the context of helping you evaluate and manage your investing risk. If you have a method of evaluating the utility risk of an investment it can be very helpful, for example if we were both to go into a JV and risk 100k capital, it will have vastly different implications if you have a net worth of 10 million and I have a net worth of 100k. The money is the same, but the risk to our respective well being isn't.

Basically I'm pondering the "how much is enough" question. In the interests of getting to the top of your utility curve, then you might devote a greater % of your time to other areas of your life that bring rewards. For me it's a life balance issue as well. I have a personal target figure in place that is very important to reach, until I reach this figure I believe it's a very high priority for me to do everything I can to increase my net worth.

Hows this for a formula for a perpetual happiness machine:

700k in "set&forget" income producing assets returning a very average sum (say 5% in a CPI linked investment vehicle) = 35k/annum which is a decent retirement income for an individual. I believe this 700k figure would be very close to the top of a lot of Australian's utility curves if they thought about it.

Now this happiness machine won't be all that is required of course, you need to refer back to your own definitions of success for this. But how about that for a great start?

Nodody has so much money they don't want more, (even Gerry Hervey) and even the super-rich will lie, cheat and scheme for more. The mega-rich will send their neighbours' children to die in wars in their own financial self interest. I just don't know why.

Thommo

I disagree with you on the "nobody" part, plenty of examples of people who are selfless with money.

Not every mega-rich person has the morals of the Bush family I hope.

It's not about the money!

It's about the challenge & enjoyment of doing the business.

Money is simply the scorecard.

These seem to me to be the sentiments of someone who is already high on their utility curve. A person struggling to pay the bills on social security benefits might regard the fluctuations in their score with a different attitude.

WaySolid

 

[Sunfish]

I made a beginner's error by saying "nobody" when I really meant 98%.

I'm with you Solid though in believing that $35k/a is adequate for me 'n' mine. I would stay a little more active though because, again, beating the market is a game.

I have just edited out 3/4s of this post because it's a lovely Sat arvo, so why spoil it. Think I'll have a XXXX instead.

 

[Garry K]

700k in "set&forget" income producing assets returning a very average sum (say 5% in a CPI linked investment vehicle) = 35k/annum which is a decent retirement income for an individual. I believe this 700k figure would be very close to the top of a lot of Australian's utility curves if they thought about it.

My recent experience with "average" retirees (age 65) is that $35K is about the mark.
However, that usually means having about $300K, so they use up their capital.

Cuuently, ABS say that 62% of Australians get their primary source of income from government benfits ie Age Pension. Additionally, close to 90% or retired Australians will recieve at least some level of govt assistance in retirement.

I like the concept of the curve, it demostrates how everything is "relative" to your current situation.
Humans are strange, we like to have dreams (goals), and when we achieve one, we say, well what's next, and push it out a bit further.

GarryK

 

[Peter Parker]

I like the concept of the curve, it demostrates how everything is "relative" to your current situation.
Humans are strange, we like to have dreams (goals), and when we achieve one, we say, well what's next, and push it out a bit further.

Some people seem to hold the same position for a long time, progressing along a specific linear path, just piling on the dollars and getting wealthier and wealthier. Examples could be Rupert Murdoch or Kerry Packer.

Others start up a venture, do it for 5-15 years, make their pile, sell up and then do something else. Dick Smith would be a prime example - Electronics - Australian Geographic - Foods, supplemented by adventuring and aviation.

The former probably accumulates more money, but the latter seems more interesting, and makes for a more varied life : )

Regards, Peter

 

[nutsa.1]

Hi waysolid,
not sure how to copy your text but in reference to how much is enough and $700k.

Interesting to note that our (my wife & I) annual budget is $35,348.00. There are contingencies in this figure and holiday $ that we don't spend every year.

I used to use a figure (before my Somersoft education began) before tax that we would need to say goodbye to the boss. (this was a 8 year plan with head down)

Now we would certainly be happy with half that figure. (so this reduces the 8 year plan)

The problem (for us) is when is that figure going to be a sure thing. We'd be using CG against equity to provide the bulk of this income and in fact we wouldn't necessarily use all of those funds in a year. EG take only what we need. There were some pretty interesting threads recently about this way and I gathered it's not everyones cup of tea though.

I'd also like to think that when we (wifey and I) reach the flatline of the curve that it would take off up again at some point of time (could take a while though to adjust to surfing/swimming in the morning, snooze after lunch and then deciding what to do about dinner, yeah I know sounds boring).

I'm not necessarily lazy though. Like Acey kinda says, its the thrill and challenge, and if it's there for the taking, why not. So I would like to be freed up time wise, not to make zillions, but certainly build on it plus devote time to things that are fulfilling to us.

From all this I've noted the name and author of the book your reading and I think I'll check it out. I need as much education I can get!

Cheers

 

[Bill.L]

Hi all,

I think this is going to be a really good thread as it concentrates on "why".

Just in the responses so far shows the psychology of investing at work. When you perceive you have enough, then it becomes a game as in Aceys post(and probably case).

Yet someone looking for nirvana, is concentrating on building wealth for the "retirement".

Others, probably none of whom would be on this forum, think that it is not possible and just live for today. They usually rent houses from us.

One of the books I have is called "The Best of Talking Money" by George Cochrane. It is about retirement/investment/superannuation and was written in 1989. The overwhelming aspect throughout the book is the small amount of money people are talking about. Some of the best investments at the time were of course the high interest bearing accounts.
The advice often came across along the lines of buying annuities with the $150,000 that would give a good retirement income of around $200 per week, or putting the money in a term deposit at 15.5% etc.
The people who didn't have that amount, strived to get it. Those who did have that amount thought they were set up for life.
Remember we have been in a low inflation environment since then.

My point is that the curve that we are looking at will have shifted in another 10-15 years time, and what looks a sensible, easy to obtain goal, could be just a mirage.

bye

 

[The Fence]

..............and therein lies the secret.

The top of the curve must be income producing assets that keep pace/outstrip inflation so that in 10-15yrs from now does not matter, the top of the curve will be much the same in real terms. Nirvana forever ?

I sure would love to be mega rich and share the excess (Gerry Harvey) with charity as many mega rich in fact do.

Thorpey.

 

[Andrew_A]

Forgive the nudge of this thread, was thinking perhaps I had written something about utility and money after reading another thread on Affluenza.

Wow... 2004, how time flies.

 

[Rolf Latham]

Hiya

Well, I reckon if you need 10 and make 20 After tax ........you can give 10 away.

if you make 100 you can give 90 away.

ta
rolf

 

[BayView]

Hiya

Well, I reckon if you need 10 and make 20 After tax ........you can give 10 away.

if you make 100 you can give 90 away.

ta
rolf

I think this is what most of the mega rich do.

Looking forward to doing it one day.