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

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 🙂

Go Tiny

Soooo it’s mid-Feb. Have you discovered that you’re not keeping to most, or all of your resolutions? I know I have. My resolutions to leave work by 6.30pm and sleep 7 hours a day have fallen flat on their faces. (It’s sad, but despite all my posts on productivity I inevitably get a couple of days/weeks where the work just surges unbearably.) Yet, there are others, like exercising, personal finance and sending compliments, that I’ve managed to keep surprisingly well so far because of systems I’ve stuck to. I’ll tell you more about one in a bit.

If you’re like 90% of the people in the world, you’re probably not keeping to your resolutions like you said you would, or you’ve given up on making resolutions altogether because they’re impossible to keep. The thing is, if we really want our lives to improve, we’ve got to create something that sticks, that becomes so ingrained in the fabric of our lives that we do it without any effort or without thinking. Sort of like brushing your teeth. (I blogged previously on how personal finance can be exactly like that) There’s no point in making a resolution like “I’m gonna get a six-pack this year” if you’re not going to stick to it and look like a beached whale again once Christmas comes around. (Speaking from personal experience here.. pat pat)

So recently, I’ve been following BJ Fogg’s work on creating habits and sticking to them. He’s a Stanford professor and created quite a following with his program 3 Tiny Habits. He tells you to “forget about motivation. Forget about 21 days. Forget ‘one habit at a time.’ None of that matters as much as going tiny. When you succeed in tiny ways, you unlock power to do more. For this and other reasons, tiny is the key to new habits.”

Essentially, to create a new habit, follow these three steps:

1. Make it tiny: When Fogg was trying to create a habit of flossing, he started by flossing one tooth a day. That’s it. Make the habit tiny, even if it’s ridiculous, and suddenly it’s not so hard to start doing it.

2. Find a spot: just like how brushing your teeth always comes right after you get up and before you go to sleep. Create a spot in your existing routine for it.

3. Train the cycle: Every day, just do your tiny behavior in the spot you’ve chosen. If you’re not committing to it, go back to Step 1 and simplify it. Keep trying, revising and adapting, and trying again until you do something that sticks.

The awesome thing? When you train your body to do certain behaviors at a certain time in your routine, the little victories that come with accomplishing a goal start feeding your mind and your confidence. It then becomes way easier to expand that tiny habit into something a little more ambitious. But don’t be in too much of a hurry to achieve too much. The key is to do small, incremental steps, even if it takes you as long as a couple of months to train it. You’re better off moving slowly and progressively than jumping the gun and not sticking to it.

At a TEDx conference a couple of months back, I listened to my colleague Daniel Wong give an awesome talk about delivering happiness through emails (the summary can be found here). Inspired, I tried to fire off as many happy emails as possible whenever I could, but after a couple of weeks, it just wasn’t sticking as a habit. So I decided to try Fogg’s methods instead. First, I made a goal to send at least one complimentary / positive email per week (okay, I know what you’re thinking – now I sound like a douchey depressing office drone – but first, you’ve gotta make it tiny right?). Next, I found a spot by setting a weekly reminder on my phone to send a compliment at the start of the day every Wednesday, before I got lost in my daily barrage of emails. Finally, I trained the cycle by sticking to it religiously. Wednesday wasn’t just another workday, it became “Compliment Wednesday”. (Yes, you can tell I’m a total genius at coming up with creative names) It was weird at first – you’d be surprised at how hard it is to find someone new to compliment each week – but it started getting easier as time passed. As a result, my Wednesdays and my work week started getting more positive, my mood improved, and it became a lot easier to work with colleagues who were previously impossible to approach.

So give Fogg’s method a shot and go tiny. You’ll be way ahead of the game in creating habits that stick 🙂

The Secret to Keeping Your Resolutions

Zen Habits has a great post today on creating a habit for fitness, but the advice can be applied to any resolution you’re making for the new year:

“But resolutions never last. As you might already know, I’m not a fan of resolutions. Instead of creating a list of resolutions this year, create a new habit. Habits last, and they lead to long-term fitness (and more). They require more patience, but they are worth the wait.”

How many of us spent last year, and the year before, and the year before that, crafting out resolutions that we never stuck to?

“I will have $XYZ amount of money in my bank account by the end of next year”

“I will lose 10kg this year”

“I will go to the gym 3 times a week”

“I will spend more time with my kids”

As the year passes, the demands of work take over our lives, we blow our money on an expensive gift we don’t need, overeat because of the stress, stop going to the gym, and  spend even less time with the kids.

Resolutions are great motivators in the short term, but they simply don’t stick because we’re not used to them. There was an example in the Zen Habits post about how you could go through an intense workout phase and get those washboard abs in 2 months. Then you’re likely to fall back into overeating and get an even bigger belly than before. 500 crunches a day is a painful, tedious activity that simply isn’t sustainable in the long run if you’re not used to it.

It’s obvious that we have to start forming habits rather than resolutions. Habits that don’t really focus on a goal per se, but on a process aimed at being so automatic that you simply do them without thinking. Like brushing your teeth or having coffee in the morning. Is your ultimate goal to get those washboard abs? A good habit would be to start with something small, by setting aside 10 mins, three times a week to do crunches. Once that small practice becomes a habit, you can start to increase the frequency. Does it matter that you don’t get those washboard abs by the end of 2012? Nope, but at least you’ve cultivated a process that’s helping you slowly but surely move towards that ultimate goal – giving you a huge lead over the millions of people who try to reach their goals too fast and end up failing.

Starting a habit isn’t easy though – just ask anyone who’s ever tried to diet. We’re all human, and overcoming that huge inertia within us takes a helluva willpower. I’m not a huge fan of willpower. In fact, I have terrible willpower. Put a beer in front of me and I will drink it, even if I’m trying to cut down. People are terrible when it comes to doing the right thing – our minds and our bodies play tricks on each other and tend to screw each other over. Which is why, in order to create a habit, you need to acknowledge that it’s impossible to overcome those urges by sheer willpower alone, and to use systems to facilitate your habit formation.  I personally use two types of systems:

1. Automatic systems

These are the best kinds of systems because they eliminate the need for you to use any sort of “willpower”. Essentially, you’re automating your habit and outsourcing it to someone else to do it for you. Want to cultivate the habit of saving? Using “willpower” to cut down on spending every month never works because if you have money sitting there, you’re going to find an excuse to spend it. Instead, set up automatic transfers to a separate bank account and voila! You’ve just instantly cultivated a habit of saving.

Other kinds of automatic systems include setting your computer to ban you from certain time-wasting sites during certain times of the day, or setting up automatic bill payment so you’ll never get hit with overdraft fees or hefty interest rates on your credit cards.

2. Accountability systems

These systems essentially hold you accountable for keeping your habits. You could use sites like Fitocracy or Mint.com to track your fitness and expenditure respectively, but you don’t always have to rely on computerized systems. Sometimes an old-fashioned checklist / journal helps as well. Want to start a habit of running at least once a week? Write down the date, time, and distance you ran after every session. Then at the end of the month, look back and see how well you’ve done. At the beginning of every month, decide how you’re going to reward yourself if you stuck to your habits, and then go celebrate and enjoy yourself if you actually do. You deserve it.

One more thing – don’t be too ambitious in trying to form too many habits at one go. It’s better to start by forming 1 habit a month, and by the end of the year you’ll have 12 habits – essentially a major personal overhaul. Good luck!