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

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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?

The Absolute Moron’s Guide to the Euro Crisis

Came across this yesterday, and thought that it was way too awesome not to share! Presenting:

The Absolute Moron’s Guide to the Euro Crisis Part I and Part II   (Hat tip Barry Ritholtz)

Totally awesome for those of you who’ve been trying to wrap your heads around this Euro crisis thing, so you have something smart to say at that awkward moment when it’s just you and your boss in the elevator. (I didn’t do so well – today, I got stuck in the elevator with my boss and I stammered at how awesome it was that our company has an annual fire drill. Smooth, Lionel, smooth.)

My favorite parts (SPOILER ALERT):

“Also, there are still a lot of question marks surrounding the bailout — where the $125 billion will come from, what the terms of the bailout will mean for existing Spanish bondholders, and whether the troika will require Spain’s government to enforce any spending cuts.

THE TROIKA. Sorry, it just sounds like a badass weapon from Game of Thrones.”

And also:

“Anyway, after months of speculation and hand-wringing, Spain agreed to take a bailout — which some people are calling “Spailout” because it’s fun to combine words — that will help it recapitalize its banks. 

Recapitalize? Is that like when you’re texting on an iPhone and you want to type “mark” but it keeps changing it to “Mark” because it thinks you’re talking about your friend Mark and then you scream at Siri, “I’m not talking about Mark, Siri!!!”

How to To Save Free Money

Happy Chinese New Year! It’s that time of the year when the malls play annoying “dong-dong-dong-dong-chiaaanngggg” music, when Singapore gets a 2-day holiday (and China gets like 14), and we get to stuff our faces with pineapple tarts and abalone and those awesome prawn rolls. Oh, and single people get to receive some FREE cash money, handed to us in red packets (Singaporeans call those ‘ang pao’) by nice relatives, accompanied with the inevitable question “So… when are you getting married?” Oh, Asian relatives. Gotta love ’em. That awkward question aside, it’s helluva awesome to be getting free cash just for not being married.

Funny thing about free money – there’s been research in behavioral economics showing that people have a tendency to do something called “mental accounting” – meaning we tend to be less cautious with our winnings than we would with our earnings. That’s also the reason why lottery winners tend to end up bankrupt. Couple that with the tradition of 2 to 3 days of partying and informal gambling (Some explanation here – Chinese New Year turns the most frugal Singaporeans into hardcore highrollers, yelling ‘HUAT AH!!!’ while playing blackjack with their ang pao cash) and it’s no wonder that your newfound wealth disappears faster than a delicious plate of bak kwa. In fact, there was one year I found myself poorer than what I’d started out with, even though I’d been sitting on my ass receiving money all day. How the hell did that happen?

It’s simple – easily accessible money is easily spent. Transfer cash from your red packets to your wallet, and it’s gone. Think about another similar scenario: You’re out with your friends at dinner and it’s time to split the bill. You realize you don’t have any cash on you, so you card it and have everyone else pay you back in cash. You leave the restaurant with $200 bucks in your pocket… and promptly spend it all within the next 3 days. Sound familiar?

Easily accessible money is easily spent. Which is why I always advocate transferring your savings into a separate bank account so you can’t touch them. This year, don’t take the money out of your red packets. In fact, shove all your red packets into some deep dark corner (just make sure you can find them later). Keep ’em in there till the end of Chinese New Year, and chances are you’ll be helluva surprised at how much you managed to accumulate. Then take your newfound wealth to the bank and deposit it that same day. Think about it – it’s the perfect chance to boost your savings or use it as an initial investment into your stock portfolio (more on that later).

If you’re going to gamble, decide beforehand how much you’d be comfortable losing, draw it from an ATM, and go wild with it – but no more than that amount. Just like what you would do in a regular casino. That practice also gives you an unintended psychological advantage – Drawing your gambling funds from your bank account forces you to acknowledge that every bet affects your net worth, thereby making you less reckless, and more strategic (definitely a good thing for poker). Conversely, gambling with the ang pao money that literally fell into your lap makes you value it less, and hence more likely to lose it. (Again, notice that I’m not saying you should NEVER gamble. Part of being rich means that you can kick back, have fun, and blow some cash if you want to. Just be smart about it :)).

Sound like common sense? Of course. Everyone knows what they should be doing, but surprisingly few people actually go and do it. If you want to achieve anything great, like building up your hugeass bank account, start with the baby steps first. Once you get the small habits down, it becomes way easier to manage the larger sums of money that’ll be coming your way. Here’s wishing you an awesome (and wealthy) Year of the Dragon. HUAT AHHHH!!