First things, first. I’m a podcast junkie and I don’t care who knows it. For the past few years, I’ve worn out successive pairs of these sleeping headphones because I love falling asleep to ideas and voices. I also love Venn diagrams, and in my mind, there is one depicting the overlap of content I listen to (for the record, personal finance, true crime and a third category I can only describe as “word nerd”). Last night lying in bed, I found myself knitting together two disparate threads that I am writing about today.
In the first season of Revisionist History, Malcom Gladwell devotes an episode of his podcast to question why smart people do dumb things. You gotta listen to it, it’s called The Big Man Can’t Shoot. Gladwell leverages a useful concept – threshold – to explain why human beings are not always rational actors. The concept set forth by Nobel Prize winner in economics, Richard H. Thaler, in his book, Misbehaving.
So, what is a threshold? To explain, Gladwell draws our attention to Wilt Chamberlain, arguably the best NBA center of all time. On the court, he was almost unstoppable. But his free throw sucked, and for a basketball player, that’s bad news. Even when he was at the top of his game otherwise, he was making a lousy 40% of his free throws. But then he changed up his technique. Instead of doing what everyone else did, he did what was proven. He started throwing underhand, a technique also referred to as the granny shot. (Sidebar: Gladwell goes into a tonne of analysis on why the underhand shot is so much more effective than freehand throwing. It’s fascinating stuff!) Anyway, Chamberlain’s success rate shot up to more than 60% when he started throwing underhand. Everything was going decent, if not great. In fact, one of his coaches was so enthusiastic, he told Chamberlain that if he ever became a 90% shooter, they might never lose. Fantastic, right? Well, that’s where things get weird. Chamberlain did a strange thing. He suddenly gave up the underhand technique and went back to throwing freehand, and his success rate went back to suckitty suck.
Why? Why would an athlete whose success is measured by such black-and-white terms as a scoreboardsuddenly forego a technique he knew was better? The answer is telling. Because he thought it looked weird. He went on record saying that throwing underhand made him look like a sissy.
He had what Thaler would call (and what Gladwell does call), a high threshold, meaning he needs a lot people to be doing a certain thing in order for him to feel comfortable doing it himself. In other words, he doesn’t like being on the vanguard.
This is where I got excited, because it occurred to me that most of us in the FI community have a relatively low threshold. We are able to adopt behaviour that many would consider weird – avoiding debt, living well beneath our means and investing high percentages of our income. Straying from the safety of the herd, with its predilection for overconsumption and consumer debt, doesn’t bother us. Granny Shooters, every one of us.
The great mortgage debate
But within our little sect, not all of us are the same. Take one of our polarizing debates – the question of whether or not to use excess capital to pay down our mortgages or invest in equities. Now, to set the stage a bit, home ownership, especially outright ownership, has been an almost maniacal middle-class pursuit in the developed world for generations. When people pay off their mortgages, they pop Champagne, enjoy a steak dinner, heck someone is going to Facebook live-stream themselves going into the bank with one of those giant cheques one of these days. I get it. It’s a financial and emotional milestone to be celebrated, as it should be.
Recently, an episode of the podcast Fire Drill was devoted to The Great Mortgage Payoff Debate, and callers gave passionate arguments on both sides of the mortgage-vs-investing question. These days, the math says investing is more efficient because stock market performance outpaces today’s hilariously low mortgage rates. Nevertheless, in the face of this cold, hard fact, many FIers will make the arguably emotional decision to pay down their mortgages rather than invest. Taking the granny shot of investing instead of paying down one’s mortgage is tougher for some than others.
Neat! Why should I care?
New term for an old thing? Probably. But I still find the concept of threshold useful when applied to FI. How come?
- Self-awareness. I’m sure my own threshold has stopped me from doing smart things. In fact, I’m positive that I’ve unconsciously done stuff that was inefficient, expensive or otherwise dumb because it was just what everyone else was doing. Armed with a term and a concept, I can better observe and intervene when my own biases crop up.
- Our collective actions can serve our community. There is an alternate herd forming, which is normalizing the radical… Or perhaps normalizing the logical, depending on where you sit on the continuum. All the better for those of us who feel added security offered by the pack.
To wrap up, If you’re a hard-core Granny Shooter, be gentle with the Free Handers, okay? Lead with your actions, because those are going to resonate much more than words. At the end of the day, emotion is what makes us human.