In the Money and Happiness newsletter, sent by email on Tuesdays, our journalist Nicolas Bérubé offers thoughts on enrichment. His texts are reproduced here on Sundays.
Several years ago, American investor and author Tren Griffin woke up during the night with severe pain in both biceps.
“I immediately thought, ‘I’m having a heart attack, I need to go to the ER,'” he wrote on his blog1.
In the car driven by his wife, on the way to the hospital, the painful sensations diminished.
“I started thinking it wasn’t a heart attack,” he wrote. Subconsciously, I’m sure I was like, ‘I have a busy week, now is not the time. This pain is probably nothing…I probably hurt myself going to the gym.” »
He suggested to his wife to turn around. But she insisted on continuing to the hospital.
Griffin could have argued. But he remembered the approach to risk employed by investors Charlie Munger and Warren Buffett.
The approach goes as follows: you take the probability of a loss and multiply it by the potential amount of the loss. The result is then compared with the probability of a win, multiplied by the potential amount of the win.
Even assuming that his pain was not severe, Mr. Griffin immediately saw that the risk of loss was unacceptable – it literally meant the end of his life.
“In this case, rationality (and my wife) took over the psychological denial that interferes with decision making. »
At the hospital, after running tests, doctors ruled he had had a minor heart attack.
“Three days later,” he writes, “I was in the operating room for a triple bypass. »
This story came to mind when Jacques Bourdeau, a reader, wrote to me to tell me about a similar approach that guides his decision-making, and which he calls the principle of least error.
Faced with several financial questions, everyone would like to make the perfect decision and earn the most.
For example, Mr. Bourdeau renewed his mortgage in 2009, 2014 and 2019. Each time the interest rates were very low. Each time, the variable rate was even lower than the fixed rate, and had been for a very long time.
So, fixed rate or variable rate?
“If I choose the fixed rate and get it wrong, I will have lost the effect of 0.25% or 0.5% interest, because the rates couldn’t come down much anymore. On the other hand, if I chose the variable rate and the rates went up, they had room to go up 2%, 3% or more, as they have since last year. »
So Mr. Bourdeau would rather risk being wrong with his fixed rate and lose 0.5% than risk being wrong with a variable rate and lose 3% or more.
This principle can be applied to decision making in many dilemmas.
For example, is it necessary to save if our job is stable and we contribute to a retirement plan?
If we do not save and a recession, an accident or a ruinous unexpected event were to occur, our well-being and that of our family could be at risk.
We can also use it in a host of other circumstances, especially in our career.
I unknowingly applied this formula in my early days at La Presse when I worked as a supernumerary journalist. I had gone to see Philippe Cantin, my boss at the time, to offer him to write background files for the newspaper in addition to the work I did during my normal hours.
I was working on my lyrics on the weekends. I particularly remember a stay in a chalet at Mont Tremblant. While my friends were swimming, I worked on my computer to write my file and be sure to submit an impeccable text the next day.
The loss ? A few weekend days spent working. Gain ? A permanent position that has allowed me to raise a family, to invest, and which has paid for many stays around many lakes since that day.
There’s nothing like a little perspective to help our decision-making.
Speaking of heart issues, I just finished reading a book that has nothing to do with money, but a lot with happiness. This is the new book Cœurs, by Dr. Alain Vadeboncoeur. It struck me how recent treatments for heart disease are: the first heart bypass surgery didn’t take place until the 1960s, and everything in cardiology before the 1950s is practically medieval. American investor and polymath Charlie Munger once said that the bonds of trust that unite medical professionals in an operating room represent the highest form of civilization. This book illustrates that perfectly.