Money and Happiness | The least error rule

In the newsletter money and happiness, sent by email on Tuesday, our journalist Nicolas Bérubé offers thoughts on enrichment. His texts are reproduced here on Sundays.

Several years ago, American investor and author Tren Griffin woke up during the night with severe pain in both biceps.

“I immediately thought, ‘I’m having a heart attack, I have to go to the emergency room,'” he said on his blog.¹.

In the car driven by his wife, on the way to the hospital, the painful sensations diminished.

“I started thinking it wasn’t a heart attack,” he wrote. Subconsciously, I’m sure I was thinking to myself: “I have a busy week, this is not the time. This pain is probably nothing…I probably hurt myself going to the gym.” »

He suggested to his wife to turn around. But she insisted on continuing to the hospital.

Griffin could have argued. But he remembered the approach to risk employed by investors Charlie Munger and Warren Buffett.

The approach goes as follows: you take the probability of a loss and multiply it by the potential amount of the loss. The result is then compared with the probability of a win, multiplied by the potential amount of the win.

Even assuming that his pain was not severe, Mr Griffin immediately saw that the risk of loss was unacceptable – it literally meant the end of his life.

“In this case, rationality (and my wife) took over the psychological denial that interferes with decision-making. »

At the hospital, after running tests, doctors ruled that he had had a minor heart attack.

“Three days later, he writes, I was in the operating room for a triple bypass. »

This story came to mind when Jacques Bourdeau, a reader, wrote to me to tell me about a similar approach that guides his decision-making, and which he calls the principle of least error.

Faced with several financial questions, everyone would like to make the perfect decision and earn the most.

For example, Mr. Bourdeau renewed his mortgage in 2009, 2014 and 2019. Each time, the interest rates were very low. Each time, the variable rate was even lower than the fixed rate, and had been so for a very long time.

So, fixed rate or variable rate?

“If I choose the fixed rate and I am wrong, I will have lost the effect of 0.25% or 0.5% interest, because the rates could not drop much more. On the other hand, if I choose the variable rate and the rates go up, they had room to go up by 2%, 3% or even more, as has been the case since last year. »

So Mr. Bourdeau preferred to risk making a mistake with his fixed rate and losing 0.5% than to risk making a mistake with a variable rate and losing 3% or more.

This principle can be applied to decision making in many dilemmas.

For example, is it necessary to save if our job is stable and we contribute to a retirement plan?

If we don’t save and a recession, an accident or a ruinous unforeseen event were to occur, our well-being and that of our family could be at risk.

But if we save and an unfortunate event does not happen, we will only have reduced our lifestyle a little, without risking our well-being and that of our loved ones. Here, saving is obviously the least mistake.

We can also use it in a host of other circumstances, especially in our career.

I unknowingly applied this formula in my early days at The Press when I worked as a supernumerary journalist. I went to see Philippe Cantin, my boss at the time, to suggest that he write background files for the newspaper in addition to the work I did during my normal hours.

I was working on my lyrics on the weekends. I particularly remember a stay in a chalet at Mont Tremblant. While my friends were swimming, I worked on my computer to write my file and be sure to submit an impeccable text the next day.

The loss ? A few weekend days spent working. Gain ? A permanent position that allowed me to raise a family, to invest, and which has paid for many stays around many lakes since that day.

There’s nothing like a little perspective to help our decision-making.

The heart in question

Speaking of heart issues, I just finished reading a book that has nothing to do with money, but a lot with happiness. This is the new book Heartsfrom D^r Alain Vadeboncoeur. It struck me how recent treatments for heart disease are: the first bypass surgery didn’t happen until the 1960s, and everything in cardiology before the 1950s is practically medieval. American investor and polymath Charlie Munger once said that the bonds of trust that unite medical professionals in an operating room represent the highest form of civilization. This book illustrates it perfectly.