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A large amount of individual debt is wholly optional. What people ignore and therefor schools do not teach to be wary is that marketing is very well developed a

A large amount of individual debt is wholly optional. What people ignore and therefor schools do not teach to be wary is that marketing is very well developed and convince otherwise rational people to make an irrational decision which has them take on more debt. from buying too much house or car to over buying an education that cannot be used where the person is or in a field that cannot withstand the costs. all of these are marketed products. all three have vary optional levels of how much they cost. then add in all the monthly bills and this is where many people miscalculate and it snow balls. from cell to internet to even television. you can quickly end up paying a significant amount of your income that has no tangible return.

thechao 10y ago
My lesson in financial responsibility was to have to live on 8000--10000$/year for three years. Coming from a solidly middle class income, it was a real shock. I am very credit averse, now, since even a modest level of credit sunk as fixed cost with no benefit.
- throwaway5752 10y ago
  Buy everything with credit card. Establish your credit rating in case you need to borrow, and take advantage of whatever reward program fits you best. Always pay of the entirety of your balance every month.
FullMtlAlcoholc 10y ago
> convince otherwise rational people to make an irrational decision This is a myth that economics will not let go of. Almost all human decisions are influenced by emotions. Here's two examples: [A] Would you rather receive $49 or have a 50% of receiving $100? - The rational decision would be to choose the 50% chance since your expected value would be $50. Most people go for the $49, humans are irrationally risk-averse in terms of gains. [B] 1)You have $1,000 and you must pick one of the following choices: Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0. Choice B: You have a 100% chance of gaining $500. 2)You have $2,000 and you must pick one of the following choices: Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0. Choice B: You have a 100% chance of losing $500. Time after time, when presented with this problem, people chose B for question 1 and A for question 2. A rational person would choose either A or B for both questions. The expected value is the same for both questions, but it shows that people are risk averse in gains and risk seeking in mitigating losses. Couple this with the number of people who actually understand the concept of compounded interest rates and yikes. Just nitpicking, but people are not otherwise rational. Study after study has shown that emotions are involved in nearly every,if not all, decisions that we make.
- ericd 10y ago
  Reducing variance is worth real money to people, since the marginal utility of the first dollar is much higher than the 1000th.
  - incongruity 10y ago
    Adding to that - it's the flaw of averages at work in many of those examples. The listed "expected value" in some of those examples could never actually be a real outcome of the examples - it is completely rational to opt to take a 500 loss rather than risk a 1000 loss if you have, say, only 750 to your name and cannot be overdrawn (see debtors prison or whatever incentive one would like to imagine). The expected value of the $500 loss only happens in one option. In the $0 or $1000 loss, if you had repeated draws over time it would indeed trend towards an average of a $500 loss but in a single draw situation, you can never achieve the average so you absolutely must view it as different from the flat $500 loss and compare that to your imagined circumstances in this thought exercise.
  - geomark 10y ago
    Yes. There are many cases where a lower expected value is a rational trade off for reduced variance.
  - FullMtlAlcoholc 10y ago
    I completely agree. A bird in hand is worth 2 in the bush and all that. However, even today economic theories do not take this into account and assume rationality === choosing the highest expected payoff. I.E. we're all statistical savants
    - ericd 10y ago
      Yep, your main point that economics' rational man is a complete fiction is absolutely correct.
      - HarryHirsch 10y ago
        He's a convenient fiction though. Since to homo oeconomicus a certain expense of USD 500 and the 50 % chance of a USD 1000 expense are the same, expect him to be rolled out to sell you high-deductible health insurance and health savings accounts. H. oeconomicus is the model human, consequently he isn't cashflow constrained, and the fact that HSAs double as tax shelters for the wealthy doesn't concern the Ideal Man either. University economics is a religion, not a science, it offers up myths instead of testable predictions on observable reality. High finance is a different deal, but they surely don't build their models on university textbooks.
specialist 10y ago
"A large amount of individual debt is wholly optional." And a lot isn't. Apart from my mortgage, ALL of my debt is accrued when I'm too sick to work, and the medical bills pile up. Some huge fraction (1/3?, 1/2?) of bankruptcies are caused by medical related expenses.
- deleted 10y ago
  [deleted]
- cmdrfred 10y ago
  It may have been that debt that ended up on the books, but what do your monthly expenditures look like in terms of vehicles, eating out, entertainment, etc? If you have cash on hand to pay those expenses you have cash to pay your debit. This may not be your personal case but I have seen this a lot.
  - specialist 10y ago
    Sorry for delayed response. I had to reread your comment to understand. My burn rate is very low. When I'm not working, it's because I'm sick, meaning no income. I'm too stubborn or principled or stupid to take unemployment (unless I'm actually looking for work). And I'm not sick enough for disability. During those times I chew down my savings. This last round, I dipped into my 401k. (I had 6 months savings, expected to be out of work for 2 months, stretched to 10, had some major expenses come up.) Then I get somewhat healthy, pay off my new medical bills, save what I can. Until next time. Rinse, lather, repeat.

thechao 10y ago

My lesson in financial responsibility was to have to live on 8000--10000$/year for three years. Coming from a solidly middle class income, it was a real shock. I am very credit averse, now, since even a modest level of credit sunk as fixed cost with no benefit.

throwaway5752 10y ago
Buy everything with credit card. Establish your credit rating in case you need to borrow, and take advantage of whatever reward program fits you best. Always pay of the entirety of your balance every month.

FullMtlAlcoholc 10y ago

> convince otherwise rational people to make an irrational decision This is a myth that economics will not let go of. Almost all human decisions are influenced by emotions. Here's two examples: [A] Would you rather receive $49 or have a 50% of receiving $100? - The rational decision would be to choose the 50% chance since your expected value would be $50. Most people go for the $49, humans are irrationally risk-averse in terms of gains. [B] 1)You have $1,000 and you must pick one of the following choices: Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0. Choice B: You have a 100% chance of gaining $500. 2)You have $2,000 and you must pick one of the following choices: Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0. Choice B: You have a 100% chance of losing $500. Time after time, when presented with this problem, people chose B for question 1 and A for question 2. A rational person would choose either A or B for both questions. The expected value is the same for both questions, but it shows that people are risk averse in gains and risk seeking in mitigating losses. Couple this with the number of people who actually understand the concept of compounded interest rates and yikes. Just nitpicking, but people are not otherwise rational. Study after study has shown that emotions are involved in nearly every,if not all, decisions that we make.

ericd 10y ago
Reducing variance is worth real money to people, since the marginal utility of the first dollar is much higher than the 1000th.
- incongruity 10y ago
  Adding to that - it's the flaw of averages at work in many of those examples. The listed "expected value" in some of those examples could never actually be a real outcome of the examples - it is completely rational to opt to take a 500 loss rather than risk a 1000 loss if you have, say, only 750 to your name and cannot be overdrawn (see debtors prison or whatever incentive one would like to imagine). The expected value of the $500 loss only happens in one option. In the $0 or $1000 loss, if you had repeated draws over time it would indeed trend towards an average of a $500 loss but in a single draw situation, you can never achieve the average so you absolutely must view it as different from the flat $500 loss and compare that to your imagined circumstances in this thought exercise.
- geomark 10y ago
  Yes. There are many cases where a lower expected value is a rational trade off for reduced variance.
- FullMtlAlcoholc 10y ago
  I completely agree. A bird in hand is worth 2 in the bush and all that. However, even today economic theories do not take this into account and assume rationality === choosing the highest expected payoff. I.E. we're all statistical savants
  - ericd 10y ago
    Yep, your main point that economics' rational man is a complete fiction is absolutely correct.
    - HarryHirsch 10y ago
      He's a convenient fiction though. Since to homo oeconomicus a certain expense of USD 500 and the 50 % chance of a USD 1000 expense are the same, expect him to be rolled out to sell you high-deductible health insurance and health savings accounts. H. oeconomicus is the model human, consequently he isn't cashflow constrained, and the fact that HSAs double as tax shelters for the wealthy doesn't concern the Ideal Man either. University economics is a religion, not a science, it offers up myths instead of testable predictions on observable reality. High finance is a different deal, but they surely don't build their models on university textbooks.

specialist 10y ago

"A large amount of individual debt is wholly optional." And a lot isn't. Apart from my mortgage, ALL of my debt is accrued when I'm too sick to work, and the medical bills pile up. Some huge fraction (1/3?, 1/2?) of bankruptcies are caused by medical related expenses.

deleted 10y ago
[deleted]
cmdrfred 10y ago
It may have been that debt that ended up on the books, but what do your monthly expenditures look like in terms of vehicles, eating out, entertainment, etc? If you have cash on hand to pay those expenses you have cash to pay your debit. This may not be your personal case but I have seen this a lot.
- specialist 10y ago
  Sorry for delayed response. I had to reread your comment to understand. My burn rate is very low. When I'm not working, it's because I'm sick, meaning no income. I'm too stubborn or principled or stupid to take unemployment (unless I'm actually looking for work). And I'm not sick enough for disability. During those times I chew down my savings. This last round, I dipped into my 401k. (I had 6 months savings, expected to be out of work for 2 months, stretched to 10, had some major expenses come up.) Then I get somewhat healthy, pay off my new medical bills, save what I can. Until next time. Rinse, lather, repeat.