Category Archives: money

The Hazlitt Maneuver Fallacy

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In my last post I shared a lesson from Henry Hazlitt (from his book Economics in One Lesson called “The Broken Window”); in summary:

Some yahoo breaks the window of a bakery. Did he create employment by causing $250 in repairs, thus giving the window repair man more money to go and spend in a kind of economic ‘mini stimulus package’?

Well, no, as many of my readers were quick to point out …

Hazlitt identifies the missing pieces:

What is missing from the thought experiment of the gathered crowd is the fact that the baker was going to buy a suit with that $250 but he can no longer do that since he is $250 poorer. The suit he was going to buy can no longer come into being since the tailor is not going to get that $250 to make the suit. So in this community, the window repair man and all of the merchants he would spend the money with make out but the tailor and all of the people he would spend his money with lose out. So, was there really any net loss or gain? Other than for the baker, no. Instead of having a window and a suit, he just has a window and is now $250 poorer.

Well, d’uh!

But, “the main reason why no one typically considers the tailor and the merchants he would buy from is that, since the suit never came into being and was not readily visible, it never entered into anyone’s thoughts. The window, however, is quite visible and it does not take much to reason through who would benefit from the broken window.”

This issue of visibility is central to the way that most people manage their finances: the money goes where the need is most visible … now!

AJC.

PS Before you point it out, I know that the image, above, isn’t the Hazlitt Maneuver … it’s the Heineken Maneuver, of course 😛

The Hazlitt Maneuver

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Here is a short piece by Henry Hazlitt from his book Economics in One Lesson called “The Broken Window” Maneuver  :

A young hoodlum breaks the window of a bakery and the gathered crowd begins to philosophize about whether the hoodlum really harmed anyone at all since he, after all, created employment.

He created employment by having to force the baker to pay the $250 it costs to fix the window to the window repair man. The window repair man will then have an extra $250 to spend with other merchants and those merchants will have more money to spend elsewhere. This line of thinking can continue on forever.

If it weren’t for the broken window then the window repair man would have less money and employment and so would the merchants he would spend the money with and so on.

So, what do you think? Should we stimulate the US (indeed, world) economy, simply by arming our population with rocks and asking them to all go break windows?

Now, this is a clever post …

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Maybe it’s only because I recently compared personal finance to Vegemite, but I like this guy: he has the gumption [AJC: don’t think this is the right word; any ideas?] to compare soccer to personal finance, then actually make it make sense!

Not to mention, it’s just plain good advice:

Spain is Soccer World Cup 2010 Champion. Analysts say that is because of their mental strength, their wily forwards, a strong defence and the hardworking midfield.

Apart from the mental strength, which is invisible, what’s visible on the field are three important components.
1. Forwards, to score the goals.
2. Midfielders, to control the game.
3. Defenders, to save, not leak goals.

I know you have this idea that I would be comparing soccer with Personal Finance. Here it is.

Personal Finance has three important components too.
1. Investing, to get more bang on your money.
2. Maximizing your income, to control the game of money.
3. Frugality, to save and not leak money.

And yes, you also need to have that mental strength not to be dragged down by “fear and greed”. And keep coming back even after failure.

Now, I haven’t given the whole game away [pun intended!], because Ranjan goes on to talk about the three types of investors … but, you’ll have to read his post to find out 🙂

Money does buy happiness …

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… but, not for long.

I have become obsessed with lotteries!

Not in participating … I don’t: I recently refused to buy a $7 ticket to a $20 million+ lottery; the vendor thought that I was crazy, but he was crazy.

[AJC: Actually, I used to participate in my office lottery syndicate as a form of ‘insurance’: if my staff won, they might leave en masse, at least my lottery winning would help cushion the blow … this is really how I think!]

There are government-sponsored anti-gambling ads running on Australian television right now that show that you have around twenty times the chance of a number one record as you do to win the biggest jackpot on a slot machine … lotteries are worse, much worse.

Yet, I can understand the temptation because the prizes are so large.

My interest actually has to do with my ‘easy come, easy go’ thesis: I believe that in order to keep a large sum of money, you have to make it slowly (so that you can learn the necessary financial lessons along the way) … by slowly, I mean years – say, 7 – not days.

When I heard that 80% of lottery winners lose their winnings within 5 years, I became very interested to find out more. Unfortunately, stats are hard to find:

Nora Moon, validations supervisor with the Virginia Lottery, has dealt with almost every lottery winner since the lottery began. Estimating how many Lotto winners have gotten into financial trouble is impossible, she said.

Documents submitted to the Supreme Court of Texas by the Attorney General state:

Steve Danish, a Virginia Commonwealth University psychology professor who has counseled Virginia Lottery winners, said one-third of about 40 winners he talked to in a seminar several years ago asked questions indicating they were in financial trouble.

But, I think the most interesting source comes from the lottery itself: Camelot Group Plc, who is the operator of The UK National Lottery. Camelot commissioned Ipsos MORI (a leading UK research house); in a good news / bad news survey, they found:

More than half the Lottery winners are happier now than they were before their win (55%). Most of the other winners claim that winning the Lottery has not affected their level of happiness, largely due to the fact that they were happy before their win. Only 2% of winners were less happy. The happiness of the winner is not affected by the size of his or her win.

Of the winners who are happier (55%) around two thirds claim one of the reasons is improved financial security and fewer worries (65%). A further 23% either stated that they can buy what they want now or that life is generally a lot easier.

The large majority of Lottery winners have not experienced any negative effects on family life or friendships.

That’s the good news … surprisingly (after all, the research was sponsored by the operators of the lottery!), there was some terribly bad news in a one-liner buried in the body of the report; money does buy happiness … but, that money (and, presumably, the happiness) is short-lived:

On average, the winners have so far spent 44% of their winnings …

Whoa!

I forgot to mention that this survey carried out in 1999 by MORI, marked the 5th birthday of The National Lottery and the findings “represent the most complete snapshot of the generation of Lottery winners who have emerged since the first draw on 19 November 1994”.

That’s a 44% depletion of winnings during a 5 year period or, on average, after just 2.5 years!

All of a sudden the ‘80% of lottery winners are broke after 5 years’ myth is not so ‘mythical’ after all; here’s the lottery winner’s life cycle:

Happy => Rich => Happy => Spend => Broke => Happy or Devastated … you decide?

In either case, my ‘easy come, easy go’ thesis is looking better all the time 🙁

Where does the money go?

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If it takes an average of just 2-and-a-half years for UK lottery winners to blow 44% of their winnings, where does the money go?

Well, Camelot (the operators of the UK lottery) commissioned a follow-up report in 2002:

A third of winners (34%) buy a car straightaway, while one in 10 (11%) buy new clothes or new jewelery. For around four in five (77%) the most expensive single purchase is a house, followed by a car (14%). A quarter of winners give up to 10% of their winnings to their family, while nearly a half more (45%) give family eleven to thirty percent. Almost three in five give up to 10% to friends, while two thirds give up to 10% to charity.

Why do these winners figuratively throw their money out the window?

I think I’ve stumbled on a clue; they think that they can just win it all back again:

As to doing the Lotto, four in five jackpot winners (82%) still play every week — and one in five (21%) is very confident of winning again.

And, I think that in here is a very important lesson for those of you lucky enough to become successful with your Making Money 201 (Wealth Acceleration) activities:

Don’t spend your money as though you can just keep on making it all over again … you take on huge (hopefully, calculated) risks to reach your Number by your Date.

But, once you get there, switch to Making Money 301 (Protecting Your Wealth) because you just may not be so lucky the next time around 😉

People came to him for financial advice!

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This video commercial from the New York Lottery shows Louis Eisenberg, the then biggest ever lottery winner with $5 million.

The trouble is he is now broke and living on social security in a trailer park …

… until then, people actually asked him for financial advice:

All of a sudden, people were asking, ‘Lou, what about this?’ ‘What about that?’

All because he – temporarily – won $5 million!

A manifest error?

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Last days for ‘pre-applications’ to become one of my 70 Millionaires … In Training!

I am offering the first 70 – and, 70 only – of qualified readers free lifetime access to all of the Premium Content on the site.

First, though, you’ll complete a short application form, so that I can see whether you will be a contributor to the program, or just a freeloader 😉

Better hurry, free is a pretty good incentive and I reckon you’ll be fighting for your place …

Click here to find out more …

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In an interesting experiment in the ‘dark arts’ of using visualization and other techniques a la The Secret, Steve Pavlina challenged his readers to attempt to ‘manifest’ $1,000,000 each:

This experiment is based on the intention-manifestation model of reality, where the goal is to generate $1 million of additional wealth for each person who chooses to participate.If you wish to participate, all you need to do is to decide to put forth the following intention:

In an easy and relaxed manner, in a healthy and positive way, in its own perfect time, for the highest good of all, I intend $1,000,000 to come into my life and into the lives of everyone who holds this intention.

The experiment claims $5.5 million that participants would not have received in ordinary earnings, and Steve Pavlina achieved over $100k in 18 months all on his own.

But – and, this is a big BUT – Steve did set the bar at $1 million dollar each, but NONE of the participants achieved that target.

More importantly, as the graph shows, our readers (most of whom, presumably, did not use creative visualization, chants, or the suchlike) actually achieved a much greater average result!

In fact, as I pointed out in my last post:

In that 18 month period, nearly 1,600 participants [in Steve Pavlina’s Million Dollar Experiment] reported ‘manifesting’ anywhere from $504,873.56 (in just one day; if you choose to believe him) down to just one cent.

The average was closer to $3,500 in less than a year, with the median being just $180.

Our response to this challenge ‘produced’ more than an average of $18.5k for each $7m7y participant (!) …

… I don’t know how the Universe really works – or whether there is any Power in Intention – but, can I at least claim the Power of Reading the $7 Million in 7 Years blog as the key to manifesting your own millions? 😉

The fundamental rule of money?

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Here’s the difference between conventional personal financial advice and 7m7y thinking in one slide; according to Brian Taylor the fundamental rule of money is to:

Either earn more than you spend or spend less than you earn.

Simple … and, much better than the alternative (spending more than you earn) …

… but, wrong!

There is only one fundamental rule of money:

Earn more than you spend

Can you see why? Your financial future depends upon it 🙂

Reader Poll: Manifesting Millions?

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IMPORTANT: Please read this post in full, THEN choose the FIRST answer that applies.

How much money have you manifested in the last 18 months?

View Results

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There are two groups of people in this world:

– those who believe that there are two groups of people in this world, and

– those who don’t 😛

At the risk of parodying myself, I think there are two groups of people in this world:

– those who believe in The Secret, and

– those who don’t.

I want to conduct an experiment, right here / right now, to see if The Secret works …

First though, in case you’ve been living in a cave for these past few years (in which case, you have probably already developed powers far beyond those of The Secret), you will already know that The Secret is the most recent in a long series of books, blogs, and banter about the ‘power’ of creative visualization …

… see it in your mind and you will manifest it into reality.

Believe it, and it will be so.

I don’t know how The Universe works, so I can’t tell you whether I manifested my millions (perhaps by concentrating on my Life’s Purpose and the Number required to get me there) or was merely driven to make it at all costs … you could certainly mount an argument either way.

Also, I am an experiment of one …

Fortunately, we have Steve Pavlina who is an expert in these matters, and  is also the creator of a very interesting project, aptly called the Million Dollar Experiment:

The goal of this experiment is to attempt to use the power of intention to manifest $1 million for each person who chooses to participate.

From what I can see, the experiment ran from November 2005 until July 2007 … just over 18 months. Here’s what happened:

In that 18 month period, nearly 1,600 participants reported ‘manifesting’ anywhere from $504,873.56 (in just one day; if you choose to believe him) down to just one cent.

The average was closer to $3,500 in less than a year, with the median being just $180.

I’m not sure what you would count as a worthy ‘manifestation’ amount (I mean, would you dream of anything less than $10k in a year?), but 120 people – just 7.5% of those participating – ‘manifested’ $10k or more in that period.

Cast your mind back 18 months: how much have you manifested in that timeframe? I guess by ‘manifested’, I mean by following Steve Pavlina’s instructions to his own readers:

Only count the new money you feel has come into your life as a result of your participation in this experiment (i.e. the manifestation of this intention), not your regular income. Obviously your interpretation of that will be subjective, but this is a subjective experiment. Just do your best, and trust your intuition.

Just pretend that you signed up to Steve’s experiment 18 months ago … what money (if any) that came into your life since then would you have reported on Steve’s blog?

Oh, and feel free to tell me what you think about the power of The Secret, Steve’s Million Dollar Experiment, and/or this post … but, don’t forget to scroll back up to the top and make your poll choice first 🙂