Hello and welcome back to Mortgage Advisor on FIRE. This week, I discuss some frustrations with the way some people use statistics. Also, a look at whether it’s possible for people to save their way to wealth.
Weekly Update
I have now finished up my time working for my recent employer. It was a good experience in a lot of ways. Even when something hasn’t gone as you would have liked, there is still an opportunity to learn and reflect on the experience.
Following last week’s post, quite a few people reached out to ask what happened and to ask why I quit so suddenly. Well, yes, it was quite sudden, but it was still the right decision.
Contractually, I was still employed until 10th October, but my last day of actual work was the 6th, as they were happy to agree to my request for an earlier release. My former team had some nice things to say, and I wish them all the best moving forward.
Another Rant About Statistics
Along with ripping the piss out of the Tory party or mocking Donald Trump, another topic sure to spike my blood pressure is the absolute butchering of data. So, here we go with another rant about statistics…
The Tyranny of Small Volume
It’s easy to skew data when dealing with low volumes, and it can make some targets meaningless. For example, if you have an 80% completion target for passing in football, but you only have four attempts, what you really have is a 100% completion target. Fail in one of the four instances, and you have a 75% score, i.e. a fail.
Do you remember a documentary by Derren Brown years ago, when he flipped a coin ten times and got ten heads in a row?
Do you understand reversion to the mean?
Ok, so let’s go back to basics. If you flip a coin, you have a fifty-fifty chance of it landing on heads or tails. If you flip the coin a million times, you would expect the results to be almost even in terms of instances of heads or tails. What if you flip the coin 17 times? Well, you can’t have fifty-fifty in that set of data. It’s going to be uneven. You can’t have 8.5 instances of heads and another 8.5 instances of tails.
Think of another example, though, where there’s an even number of attempts. Because one flip has no impact on the next flip, getting heads on the first flip does not alter the fifty-fifty odds on the next attempt. Given a large enough sample size, you would expect an almost fifty-fifty split, but if you take a subset of the data, you could easily cherry-pick a sequence where you get heads eight times and tails twice. This does not mean that there’s always an eighty-twenty chance of heads and tails, respectively.
This is where Derren Brown’s trick comes into play. He didn’t flip the coin just ten times. He flipped the coin hundreds, possibly thousands of times, until he had a run of ten successive “heads”, at which point he ended the test and used the last ten flips.
It’s a similar concept to the Texas Sharpshooter fallacy, where someone shoots holes in the side of a barn and then draws a bullseye around them.
The long and short of it, when analysing data, is to make sure you are looking at a reasonable sample size before concluding anything. Within any data set, there is always a chance of finding spurious patterns or trends, and you need to be very wary of this.
Reversion to the Mean
On a long enough time frame, things revert to the mean. Football players who’ve had an outstanding run of form will fall back to “normal”. Someone might test poorly because of bad sleep, only to bounce back to “normal” for the next exam. This reversion happens all the time, across every aspect of our society.
There is so much in life that would be easier if people just understood statistics a little better.
Measuring the wrong thing, and putting the cart before the horse
Data is a tool, and its value comes from how it is analysed, interpreted, and reported. Too often, businesses will have lots of ideas for things to measure without thinking of the bigger picture. Sometimes, their key metrics can even be conflicting. For example, a company may target their employees on customer satisfaction ratings whilst also targeting their interactions to be as short as possible.
They say that a fictional character can only be as intelligent as the person writing them, and it’s the same sort of concept with data.
Much of this might sound like I’m anti-statistics, but this couldn’t be further from the truth. I just find it almost migraine-inducing when I encounter people twisting and abusing data.
What I’m Doing
Listening: A Closed and Common Orbit: Wayfarers, Book 2 by Becky Chambers.
Watching: The Lost Bus (Apple).
Reading: nothing at the moment.
I finished the first Wayfarers book a few days ago, and I’m about a quarter of the way into the continuation. It’s not exactly a sequel, but more a story set in the same universe. I thought the first book had a lot of great worldbuilding, but some of the writing was clumsy. There were many scenes where characters are talking just for the benefit of the audience, about things they should really already know. This sort of exposition can be very distracting.
The Lost Bus was a decent enough film, based on the California wildfires of 2018 and telling the true story of a school bus driver who tries to get some kids out of danger. It was a tense movie without being out of this world. There was nothing game-changing about this, but it was entertaining enough. The biggest issue I had with it was all the scenes with characters talking and not doing. The scenes of the emergency services discussing strategy and the progress of the fires add nothing to the experience; the scenes could have been replaced with on-screen captions without losing anything. There was no character development or progress; again, it was pure exposition. In some ways, the film could have been improved by leaving this out and focusing just on the bus, with the audience being as in the dark as the characters about what was going on.
I can enjoy mindless action as much as anyone, it’s just when a film tries to be something more and fails, I find it frustrating.
Revolting
It’s time for the annual Off The Shelf festival in Sheffield, and this time we attended a talk with Terry Deary, the author of the Horrible Histories and other history books. I knew of the books before this talk, but I couldn’t tell you anything about the man or his writing. He was promoting his new book, Revolting, which is an exploration of how and why people revolt and rebel against power. It’s an interesting concept, but the talk didn’t really go into much detail except to point out some historical atrocities. It was only an hour out of our day, but it was one of the weaker talks we’ve attended from Off The Shelf over the years.
Financial Update
Assets
Premium Bonds: £23,000.00.
Stocks and Shares ISA: £122,844.12.
Fuck It Fund: £0.00.
Pensions: £107,204.98.
Residential Property Value: £239,368.00.
Total Assets: £492,417.10.
Debts
Residential Mortgage: £175,838.74.
Total Debts: £175,838.74.
Total Wealth: £316,578.36.
Just when it looked like we would be able to start hammering our investments, with Oana enjoying her new job, I have left mine. Once more, investing will take a back seat whilst I find something else. The good news is that we shouldn’t have to dip too far into our investments to get by month to month.
Between my pensions and ISA, I have roughly £230k in the market, which, based on 6% growth, should see those investments increase by over £1,000 each month. If I need to draw a grand a month from my Premium Bonds, I’ll be treading water rather than actually spending my savings.
In reality, I don’t think I’ll need to draw down even a grand a month. Half of that should be sufficient. Except for Lego, we don’t have a high cost of living. We will need to cut back again on eating out, but we’ve done that before and can do it again easily.
Wealth by Saving Impossible?
I stumbled across a Sky News report via Reddit, stating that it’s almost impossible for people to save their way to riches. It’s an emotive headline, but I think the reality is more nuanced.
I’m going to use some average figures to illustrate a point. The most common household in the UK is a couple with no children, with a little over £3,000 take-home per month.
If this average couple has two cars, a quick reference to Google suggests the total monthly cost of finance, fuel, insurance, and so on could come to at least £600pm (£300 per car). That’s 20% of that take-home figure. A quick bit of Google-fu suggests the average rental and mortgage payments are broadly similar at approximately £1,200 per month. Between housing and car costs, we’ve used up 60% of the take-home pay.
This leaves £1,200 each month to cover groceries, utility bills, council tax, general spending money, and unexpected expenses. That’s not a lot of money to go around. On the face of it, the headline would seem to be accurate. Regular readers will know what I’m going to say, though.
Do you really need a car?
Some people absolutely need a car. I would argue that many people who say they need a car, actually mean they like having a car. This is the crux of most financial difficulty I see: people thinking that because they want something, they need it.
Would you rather…
I would love to know how young couples would answer this question. Would you rather own and run a car each for £300pm, or still spend £600 per month and in ten years have £100k?
If you invest £600pm for ten years and achieve 6% growth, you’ll be within touching distance of £100k. If you invest for twenty years, you’ll have over a quarter of a million.
For some people, wealth is a dream. I get that. It’s the luck of the draw in terms of how and when you are born and raised. For other people, it’s a choice between spending money on stuff you don’t need or investing that money so it works for you.
That’s all for this week. Thanks for reading.
DISCLAIMER
The views and opinions in this blog are my own, and do not represent the views or opinions of my former, current, or future employers, nor should they be considered advice.
If you want personalised financial advice, seek an appropriate professional. If you are in financial difficulty, seek advice via the resources below:
Biolink
You can now find all my social media pages by checking out my Biolink:
bio.link/davidscothern.