What Chinese New Year Blackjack Taught Me About Money

blackjackOkay, hypothetical scenario.

Imagine you’re on your honeymoon in Las Vegas, chilling in your swanky hotel room while your spouse is taking a shower. While checking out the minibar, you come across a $5 gaming chip in one of the drawers – the previous occupant must have mistakenly left it there.

You take the $5 chip and head downstairs to the roulette tables, where you bet it on your favorite number: 25. To your surprise, the ball lands on 25 and the dealer hands you $175. You decide to let your winnings ride by betting it on 25 again. Once again, the ball lands on 25 and your stash grows to $6,125. Taking this as a good sign, you bet it again and win, netting you $214,375.

You’re on a roll! You’re still in luck in the next round, which gives you $7.5 million dollars, more than what most people will ever earn in a lifetime. You bet it all on 25 again and amazingly, you now have $262 million, which makes you richer than Mitt Romney.

You decide to try your luck one last time. If it works, you’d be worth almost ten BILLION dollars. Sadly, this time the ball plops onto the number “00” with a sickening thud, and you lose all your winnings. You walk back to your hotel room and tell your spouse you were playing roulette downstairs. Your spouse asks how you did.

“Not bad,” you reply, “I only lost $5.”

The Great Chinese New Year Mystery

Sooooo…. What does a botched up roulette game have in common with Chinese New Year?

For most of us here in Singapore, Chinese New Year involves a helluva lot of eating, answering awkward questions about why you’re not married, and… gambling.

This year, I found myself wondering why Chinese New Year was such a popular time for gambling. Most of the time, I scoff at the hordes of people who frequent casinos and throw their hard-earned savings away. But whenever Chinese New Year rolls around, I find myself stumbling to blackjack games like a delirious addict on too much bak kwa.

After pondering over this curious dilemma for a couple of days, I had my conclusion: The culprit was the innocuous little ang bao.

(Side note: For my international friends who don’t know what “ang baos” are, they’re red envelopes filled with cash that your relatives give you during Chinese New Year while you’re still unmarried. #norushhere)

Mentally Accounting for Mental Accounting

Psychologically, receiving an ang bao has exactly the same effect as finding a $5 chip in your Las Vegas hotel room. Namely, they’re both “found” money, which inflicts this interesting psychological effect on you known as mental accounting.

Nope, mental accounting has absolutely nothing to do with your ability to multiply 17 x 32 in your head. Instead, it’s a psychological phenomenon that causes you to treat money differently depending on where it comes from, where it is kept, or how it is spent. So mental accounting posits that you’d treat $100 from an ang bao very differently from $100 you’ve worked hard to earn. Mental accounting causes you to spend $500 in your vacation allowance way more freely than you would for the same $500 in your savings account.

But mental accounting has a dark side too. It causes you to be flippant when you’re dealing with “surprise” or “additional” money, like your bonuses, or your gambling gains. Ever find yourself winning a hand at poker, and then aggressively calling or raising in subsequent rounds? That’s mental accounting at work, and it could easily work against you.

Two Systems to Prevent You From Getting Screwed

The strategy to prevent mental accounting from screwing with you is to set predefined systems, something I practice as much as possible. Go to all gambling games with two predefined rules: 1) a stop-loss and 2) a lock-in percentage.

Most people are familiar with a stop-loss, which is a predefined amount you’d be fine with losing. But few people implement a lock-in percentage, which kicks in once you start winning. For example, if I set a lock-in percentage of 20%, I pocket 20 cents for every dollar I win and don’t touch it for the remainder of the night. These rules have helped me to save hundreds of dollars over the past few years.

But the awesomeness of the lock-in percentage rule goes way beyond Chinese New Year blackjack games – Think about how you can apply it to your bonuses, allowances, inheritances, rewards, rebates, or any sort of “found” money you come across. For example, predefining a rule that states you’ll save 50% of your bonus will help you to save way more effectively than the average cubicle dweller who blows his entire bonus on dumb things to overcompensate for his sad, sad life.

When applied right, predefined rules could potentially save you tens of thousands of dollars throughout your lifetime.

Psychology > Tips

Ask most people how they handle their personal finances, and they’d give you all sorts of tips and tactics like choosing the right credit cards or investing in some obscure growth stock.

However, while we don’t think of it often, it’s interesting how psychology has such a disproportionate influence on our ability to hold on to and grow money. A mastery of a couple of psychological principles could be way more effective than hundreds of money tips and tactics.

So remember this the next time you’re at a roulette table. Don’t say I didn’t do nothin’ for ya. 🙂

Footnote: Definition of mental accounting and casino example taken from “Why Smart People Make Dumb Money Decisions” (aff link) by Gary Belsky and Thomas Gilovich

Image credit: Images_of_Money

Why You Should Never Be Jealous

Credit: http://www.flickr.com/photos/brennuskrux/3356833255/sizes/m/in/photostream/Hola! So sorry for being MIA for the past couple of weeks. It’s the usual November workplace crunch, and I’ve been occupied with a ton of work including, among other things, emceeing my company’s World Marketing Conference – a glitzy 2-day event attended by senior management and hundreds of overseas sales and marketing staff. Here’s what was running through my mind right before the event started:

Emcee-ing W.M.C

I’m standing in the middle of the stage, microphone clasped in my sweaty palms, bright spotlights training on me like police searchlights on a trapped prisoner. In front of me sits a sea of hundreds of business-suited men and women, murmuring in anticipation. My CEO in the front row looks expectantly at me and frowns.

I’m nervous because I’ve never emceed a formal event before, let alone one as huge of a scale as this. Backstage, I silently pray that my scripted jokes wouldn’t be met with stony silence. One screw-up, one waver in my voice, could affect my reputation for years to come. It’s like freakin’ high school all over again.

But then again, no one knows better. Just by looking at me, no one can tell that the only emceeing experience I’ve ever had is hosting my baby cousin’s birthday party. And so I get a stunning revelation:

Just fake it.

I take a deep breath, smile my biggest smile, and start talking. The delivery goes well. My colleagues congratulate me afterwards. No one could tell I was nervous as hell. One of the big bosses slaps me on my shoulder and tells me to get ready for more emceeing gigs. I may not ever be as good as a professional, but I can totally fake a performance that’s good enough.

How Do They Afford All This?

My successful attempt at faking got me thinking about how everyone goes through life wearing masks and faking something.

Whenever I hit the clubs, I can’t help but observe the dudes sitting at the VIP tables. They’d be surrounded by other rich-looking, beautiful people, as if they just stepped out of a Like A G6 music video. Just like me, they’d probably be dressed in a casual shirt and jeans, but their shirts are $400 apiece from Armani and mine are $40 from the sale rack at Uniqlo. They’d be downing champagne by the bottle, while I’d be chilling with my bottle of Tiger Beer. Once the night is over, they’d be driving home in their Porches or Maseratis, while I’d be stumbling to find a cab (or a Night Rider bus if I’m not too tipsy).

For a brief moment, I’d think to myself: “How do they afford all this?” I’d start to wonder what they do for a living, and how awesome it must be to be them.

Wealth – The Easiest Thing To Fake

And then I remind myself that I’m simply jumping to conclusions. What if they’re faking it, just like how I was faking my prowess as an emcee? After all, wealth is the easiest thing to fake. Blow a couple of months’ salary on clothes and drinks, and anyone can look like a superstar.

The truth is, I don’t know anything about them. I don’t know if they’re prudent in their spending, or if they spend every cent they earn. I don’t know if they earn thousands of dollars in passive income, or if they lie awake worrying about how they’ll keep up their lifestyles. I don’t know if they have a rock solid portfolio, or if they’re so deeply in debt that even their enormous paychecks can’t make a dent in their credit card bills.

Redirecting the Moolah

And then I remind myself about just how much I’ve been pouring into my savings and investments, month after month, without fail. No wonder I haven’t bought a new pair of jeans in 4 years – I’ve been too busy shoveling cash into index ETFs and building up a downpayment fund so I don’t have to take on too much mortgage debt.

No wonder I can’t afford to celebrate the end of the year with five bottles of champagne, because I’d much rather set aside a few hundred dollars every month for travel, funding trips like my $3,500 West Coast vacation. It’s not that I can’t afford to spend on nice clothes and drinks, I just choose to put my money towards things that I value much more: freedom and experiences.

Lots of people fake their wealth. But without looking at their audited personal financial statements, there’s really no way to tell if they’re the real deal, or if it’s just a well-polished illusion. We simply can’t make assumptions just by looking at people.

So keep that in mind the next time you watch an emcee on stage, or catch yourself getting jealous of that well-dressed dude at the VIP table. They might just be faking it. 😉

Using Systems to Dominate Learning (And Anything Else)

The MIT Challenge

Recently read a guest post by blogger Scott Young, who stunned the world by doing the impossible. Scott completed MIT’s notoriously difficult Computer Science curriculum, which usually takes bright MIT students four years to finish, in one year. Watch the TED talk on his MIT Challenge here:

To do this, Scott adopted a carefully constructed learning system that let him compress the concepts of a 4-year education into a short span of time. This wasn’t simply a matter of cramming for exams. Scott not only passed all the exams but also completed all the programming projects, which require a deep understanding of the material. How did he do it?

First, he watched all the lectures online to get a birds-eye view of the material. By watching the video lectures at 1.5x-2x the normal speed, he managed to go through a semester’s worth of lectures in a couple of days.

Next, he spent a lot more time developing insight and drawing connections. He’d first take a piece of paper and write the concept that he was trying to understand at the top. He then wrote out his own explanation, as if he was teaching it to someone else. When he came to a gap in his knowledge, he’d go back to the textbook or find it online. In this way, he systematically filled in all the knowledge gaps until he had a deep, complete, understanding of the material.

Third, he went through practice problems with the solution key in hand. He’d check his work question-by-question, getting immediate feedback for every question he did. Compared to other students who might have to wait weeks before they got back their graded assignments, Scott’s system gave him a tight feedback loop which dramatically improved his effectiveness.

As Scott wrote in a guest post describing his journey: “…the method you use to learn matters a lot. Deeper levels of processing and spaced repetition can, in some cases, double your efficiency (emphasis mine). Indeed, the research in deliberate practice shows us that without the right method, learning can plateau forever.”

In short, Scott wasn’t studying harder; he was using a system to study smarter.

The Power Of Systems

Scott’s MIT Challenge forms the premise of the book I’m currently working on: That adopting the right systems can help you to achieve much, much more than the average individual.

You can use systems to create a desirable habit, deliver happiness to people, get fitter, be more productive, negotiate better.. pretty much anything you want to achieve in life.

Most people don’t know how to improve their own lives because they rely solely on “trying harder”. How many of us make New Years resolutions to go to the gym more often, only to fail miserably before February comes around? How many of us resolve to be more productive at work, but end up online shopping and Facebook stalking before lunchtime? And how many of us resolve to saving and investing more this year, only to have all our extra cash wiped out by a year-end vacation?

Instead of trying harder, applying systems is infinitely more effective. Here’s why:

1. Systems remove the need for “willpower”

The trouble with willpower is that it’s easy to lose steam. We burn out. John Tierney, coauthor of Willpower: Rediscovering the Greatest Human Strength, describes willpower as a finite resource that runs out just as easily as a fuel in your car tank. Systems, on the other hand, take control away from you. They force you onto a certain path so that you don’t have to use willpower. It sounds counterintuitive, but we’re more likely to be successful at something when we are willing to hand over control to a system.

2. Systems are much simpler to follow 

If you’re trying to lose weight, think about the barrage of information out there on weight management. Hundreds of articles and blogs give handy “tips” and nuggets of advice, but they’re often conflicting and confusing. A system, on the other hand, is based on rules. Step 1, 2, 3. Go to a personal trainer and he’ll tell you exactly what you need to eat, how to exercise, and all that jazz. You don’t have to think – all you need to do is stick to the system, and you’ll succeed.

3. Systems are smarter

Think about Scott Young’s system for accelerated learning. It’s a simple formula, but it’ll save you a lot of time and effort when it comes to studying. Think about how much easier it is to set up a GIRO standing instruction that automatically helps you to save every month, instead of putting in time and effort to “save harder”. Finding the right system can help you to do things a lot more efficiently and effectively than most people.

Viewing the world from a systems perspective

Systems are effective, more so than many of us realize. That’s the premise of this blog, as well as the upcoming book. So far, I’ve showed you how to use systems to improve your savings and investments, find the right types of insurance, and spend more efficiently on the things you love. The book will delve a little more deeply into the psychology of saving, spending and investing, and will describe more detail on the systems that will help you tackle your personal finances.

You start to see things differently once you look at life from a systems perspective. Large challenges suddenly don’t seem so daunting anymore, and possibilities start to open up.  Are there any problems that you’re currently stumped by, but could possibly be solved by applying a system? I’d love to hear from you, even if you haven’t found a solution yet. Leave a comment, or send me an email at cheerfulegg@gmail.com.

Cheers 🙂

21 Ways Rich People Think Differently

I usually hate Yahoo! Finance, but occasionally they’ll post an article with a grain of truth (or in this case, 21 grains of truth).

It’s titled 21 Ways Rich People Think Differently. I love articles that focus on the psychology of being rich, because hatching a rich life is more about mindset than a bunch of “33 tips to save money” or some scammy investment strategy. You should check out the article for the full details, but here are the 21 ways in summary (with my comments thrown in whenever I couldn’t resist):

1. Average people think MONEY is the root of all evil. Rich people believe POVERTY is the root of all evil.

2. Average people think selfishness is a vice. Rich people think selfishness is a virtue.

3. Average people have a lottery mentality. Rich people have an action mentality.

4. Average people think the road to riches is paved with formal education. Rich people believe in acquiring specific knowledge.

5. Average people long for the good old days. Rich people dream of the future.

6. Average people see money through the eyes of emotion. Rich people think about money logically.

7. Average people earn money doing things they don’t love. Rich people follow their passion. <;;– I don't quite agree with this one. Check out Cal Newport's article on Fast Company, as well as his new book So Good They Can’t Ignore You

8. Average people set low expectations so they’re never disappointed. Rich people are up for the challenge.

9. Average people believe you have to DO something to get rich. Rich people believe you have to BE something to get rich. <;;– Again, the whole idea of psychology trumping a bunch of tips

10. Average people believe you need money to make money. Rich people use other people’s money. <;;– Also don't fully agree with this statement. Most investment advisors will advocate the whole "Good Debt, Bad Debt" argument, but I've seen how leverage can destroy a person.

11. Average people believe the markets are driven by logic and strategy. Rich people know they’re driven by emotion and greed.

12. Average people live beyond their means. Rich people live below theirs.

13. Average people teach their children how to survive. Rich people teach their kids to get rich.

14. Average people let money stress them out. Rich people find peace of mind in wealth.

15. Average people would rather be entertained than educated. Rich people would rather be educated than entertained. <;;– Yeah, you should be reading as much as you can. But more on books like I Will Teach You To Be Rich rather than Twilight.

16. Average people think rich people are snobs. Rich people just want to surround themselves with like-minded people. <;;– I'd also hesitate to jump to this conclusion. I've been reading The Millionaire Next Door, where the author Thomas Stanley shows that the average millionaire is a 54 year-old blue-collar business owner living in a modest neighborhood. He doesn’t look like a millionaire, and he certainly doesn’t hang out with Paris Hilton.

17. Average people focus on saving. Rich people focus on earning.

18. Average people play it safe with money. Rich people know when to take risks.

19. Average people love to be comfortable. Rich people find comfort in uncertainty.

20. Average people never make the connection between money and health. Rich people know money can save your life.

21. Average people believe they must choose between a great family and being rich. Rich people know you can have it all.

The New Psychology of Spending Money

So last weekend, I met up with a friend who’s kind of a huge foodie, like she wouldn’t think twice about dropping 200 bucks for a meal at a restaurant. She’s really fussy about her food, which I can never understand because I pretty much eat anything. Except papayas, they’re gross.

Anyways, this friend was thinking about checking out this flashy new Michelin Star restaurant that just opened. She was excitedly telling me about her plans, but abruptly stopped herself and said, “But you probably wouldn’t approve.”

I was a little taken aback. Why wouldn’t I approve? “Because you’re all about saving money and personal finance,” she retorted.

And then it struck me: Most people believe that “personal finance” and “spending money” are polar opposites. This couldn’t be further from the truth – I’ll tell you exactly why following a personal finance system means you can spend on what you love (and no, you don’t have to wait till you’re all white-haired and wrinkly).

The Toilet Paper Thief vs The Guy Who Spends On What He Loves

Let’s compare 2 friends – we’ll call them Mike and Paul. Mike is your typical frugal saver. He doesn’t have a personal finance system but he tries his best to save more. He cooks ramen at home to save money. He takes the bus instead of the subway so he can cut 10 cents per day on his trip to the office. He wears the same pair of jeans every time he goes out. When he goes travelling, he steals the toilet paper and soap from the hostels. He picks up 5-cent coins from the ground.

Paul doesn’t scrimp as much as Mike does. In fact, he spends on what he loves. Paul manages to do this because he has a kickass personal finance system: He’s automatically saving and investing pre-determined amounts every month. He’s automated his credit card and phone bills so he never has to worry about missing a payment. He’s set aside “Big Play” money for parties and vacations.

Once all that is done, Paul has a few hundred dollars left over each month which he can spend on the things he loves, no matter how much they cost: Clothes, meals, drinks, massages – in short, everything that makes it awesome to be young.

Paul doesn’t break a sweat if his cash runs out before the end of the month. He simply stays home, cooks, and reads a free book to pass the weekend. In a couple of days, he’ll receive his next monthly salary, automatically save/invest/pay off his bills, and with the amount of money left over, continue spending on the things he loves.

Who do you think leads a richer life?

Old Psychology vs New Psychology

Most people assume that just because I write about saving and investing, I’m one of those crotchey old personal finance dudes, hobbling around with a gin and tonic in one hand, nagging people to stop spending money. That’s the old psychology of spending money, the one that most clueless people mistakenly follow.

There’s a new psychology of spending money: If you’re faithfully following a personal finance system, you’re allowed to spend on anything you want with the money left over.

In the past 2 months, I’ve had a $325 dinner, went on a $3,505 vacation, bought a new Amazon Kindle, and last night, I paid as much as $14 for a beer (that last one was totally not worth it). I did all of the above absolutely guilt-free, because I’ve built, and followed, a personal finance system that takes care of my saving, investing and payments.

There’s a key difference between the following two statements:

Crotchy Personal Finance Dudes (like Mike): “I will never ever spend on a $200 dinner”

People who read Cheerfulegg.com (like Paul): “I’ll totally spend on a $200 dinner, as long as I can afford it after I’ve saved and invested.”

Which person would you rather be?

PS: Leave a comment or send me an email (cheerfulegg@gmail.com) on how you feel about spending money. What do you spend on and why? What is the one biggest thing you struggle with when it comes to spending? What would you like to learn from my blog to help you overcome it?

Taking A Break

In case you’re wondering, I haven’t disappeared off the face of this earth yet – I’m just on vacation on the West Coast of USA, and I didn’t have time to blog this before I left.

In the past 9 days, I’ve covered LA, Vegas, the Grand Canyon and Monterey; and I’m now on the final leg of my trip in San Francisco. Pretty much loving the Californian weather, the long drives, and the FOOD right now.

Will be back to my usual blogging routine in early September – In the meantime, here are a couple of interesting reads I’ve come across in the past couple of weeks:

1. The Big Lie About Engagement Rings – anyone thinking about proposing / getting proposed to should read this.

2. The Disciplined Pursuit of Less from the Harvard Business Review. Great article describing how we should be decluttering our lives – not just in the usual time-wasters, but also saying no to some terrific opportunities if we don’t absolutely want/need them. Kind of ties into my recent Revenge of the Ping post too.

3. How To Do Presentations That Don’t Induce Suicide – awesome presentation about… how to do a presentation

Till next week! 🙂

How To Never Have Monday Blues Again

The Mondays after a long weekend or a vacation are the worst. You get into the office, and it’s like walking into the set of Night of the Living Dead. Everyone is a freakin’ zombie: blank eyes, slack mouth, and shuffling (not the LMFAO kind). This week started with one such Monday – we had a public holiday on Thursday, so most people took time off on Friday to enjoy an awesome 4-day weekend. The Monday hangover was especially severe.

I was feeling a little out of it myself on my way to work (totally losing control here – 2 glasses of wine is enough to destroy me… and I’m only 27). My Kindle had mysteriously stopped working which only served to annoy the hell out of me. So out of boredom, I turned to YouTube and scrolled to SNL’s classic Can I Have Yo Numba? video. Okay it’s not like the funniest video in the world, but it made all the difference:

It made me smile.

Everything changed after that. I got off the bus feeling considerably lighter than when I got on. That brought on another smile because I thought about the awesome things coming up in life: a stable salary, an upcoming holiday, and great-tasting coffee in the morning for 65 cents. Grinning, I stepped into the coffee line and breezed a cheerful “good morning!” to a colleague. She looked at me like I was crazy and exclaimed that she’d never seen anyone so cheerful on a Monday morning.

Behavior –> Motivation

It sounds clichéd, but smiling really does work, even if it’s forced. In 2002, researchers led by Robert Soussignan performed an experiment where participants were asked to grip a pencil horizontally between their teeth, naturally activating the muscles used for smiling. The participants had no idea that the experiment was about happiness, but reported considerably more positive reactions to several videos they were shown.

Say you attempt a fake smile. Just try it. Right now. Go ahead, I’ll wait.

Does your brain know that you’re faking it? Of course it does. But that action tricks your body into producing chemicals that make you feel happy anyway. It’s a textbook case of how your actions can trigger internal motivations – not the other way round.

By the way, this applies to saving and investing too. Most people wait for years to get the “motivation” to save and invest, and end up never starting because “willpower” never works. The truth is, all they had to do was get started – to save and invest as little as $50 a month. Once you get started, your body adapts itself to towards the action you’re performing, developing an “investor mindset” that triggers further investing behavior.

A System To Destroy Monday Blues

So – back to Mondays. I know, it sucks to go to work on a Monday after you’ve partied all weekend (Or in my case, had TWO WHOLE GLASSES of wine. Yeah, you know party rock is in tha hoouuusseee toniiiiight). But if you’ve gotta be at work for the next 5 days anyway, you might as well try to enjoy it, right? So SMILE. You’ll feel happier. And it’s been proven that happier people do better work, are more effective, and are more likely to succeed.

One tip: Set up a system to remind yourself to smile. Yes, it’s corny, but it works. Simply set a daily reminder to SMILE on your phone’s calendar to go off at the same time every day – I set mine to coincide with the lowest point of motivation in the day: walking from the bus to the office. My phone buzzes, I let out a huge grin, and the day automatically becomes awesome after that.

Try it out 🙂