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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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.

Wake Up in the Morning Feelin’ Like P Diddy

Okay, you’re not the only one who has no freakin idea what those lyrics are supposed to mean (This intellectual forum discussion doesn’t really give me any clue). Oh Ke$ha, you have such impenetrable philosophies.

Of course, not many of us get up on a mattress made of cash and surrounded by hot chicks, so I guess it must be really hard to relate. Instead, the alarm clock jolts us out of an uneasy sleep on a Monday morning, we stumble out of bed, hit the shower, and commute to work surrounded by other sleepy, smelly people who are just as depressed as we are.

There’s a better way to live our mornings. Ever had those couple of things you always wanted to do but never had the time? I’m not talking about the billion things in your work to-do list; I’m talking about things that are actually awesome: Reading that book you always wanted to, exercising, watching that TED talk, spending more time with the kids, or if you’re nerdy like me: researching your investments and optimizing your credit cards.

Laura Vanderkam recently wrote an article on what the most successful people do before breakfast. It turns out that mornings are the perfect time for you to get things done – you’re more rested, more alert, have more willpower, and are less likely to be interrupted. She talks through 5 steps to getting the most out of your mornings: 1. Track your time, 2. Picture the perfect morning, 3. Think through the logistics, 4. Build the habit, 5. Tune up as necessary. Essentially, it’s pretty similar to what I’ve blogged about building up effective habits – start tiny, and then tune upwards as you get more successful.

I decided to try it out. My office is literally located in one of the most remote, desolate, and depressing parts of Singapore. Yes, it’s true. Don’t ask me why. However, one of the advantages of working at the end of the world is that I have an 1 to 1.5 hour-long commute every morning. While most people see it as a pain in the ass, I’m using it as a perfect opportunity to read, pray, meditate, or work on other projects. (Here’s a little secret – I’m currently using my mornings to work on a special project on the side, which you’ll hear about in the coming months!) I don’t try to accomplish too much – usually a couple of pages of reading, or baby steps in my special project, or one TED talk. But do them every weekday, and they start to add up. And I get to the office refreshed, inspired, and cheerful that I’m doing something meaningful in my life other than working for the man.

The number one reason why I’m able to accomplish my morning ritual: SLEEP. I try to get at least 7 hours of sleep every day so I don’t end up feeling exhausted during my commute.  (Okay, admittedly, I fail at getting my requite hours of sleep 2 days out of 5, but it’s all good as long as I fix it the following night)

So – try it out. See if it works. You never know – your morning ritual could let you wake up feeling like P Diddy after all 🙂