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Russil Wvong
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Bob Smith: "Essentially an RRSP is a leveraged investment. You're investing the government's money (i.e., the $10k in taxes that you otherwise would have paid to have $10k in after-tax money), but you get to keep 50% of their share of the profit. Good deal - you won't find many other silent partners willing to give you that kind of sweet deal." Excellent point -- that's a big advantage of RRSPs that I hadn't been thinking about. (Of course, you still need to be able to predict what your future marginal tax rate will be.) The usual advice I've seen is that if you want to hold both fixed-income and equity investments (say, a 50/50 allocation), don't use a 50/50 allocation inside your RRSP and a 50/50 allocation outside your RRSP. It's better to hold the fixed-income investments inside the RRSP, and the equity investments outside the RRSP. Now I'm thinking that the RRSP investments should probably be given lower weight in your portfolio allocation, since you'll still need to pay tax on them when they're withdrawn.
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confused: My standard recommendation is to start by reading Andrew Tobias's The Only Investment Guide You'll Ever Need. I read it back in high school, and it's been invaluable. For Canadian content, Gordon Pape's books are good. My view of RRSPs and TFSAs is that as a general rule, TFSAs are better. They share the most important advantage of RRSPs, which is that your money compounds tax-free. They're easier to understand, which is a big plus when it comes to investing. And you don't need to predict what your future marginal tax rate is going to be. In specific circumstances (you know that your future marginal tax rate is going to be lower than your current marginal tax rate, and you know that you're not going to need the money between now and retirement), RRSPs may be better. But in general, I'd invest in TFSAs first.
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I'm puzzled. What's the difference between Landsburg's "Grandfather Fallacy" and Burkean conservatism? Burke argued that it's dangerous to make radical changes to social institutions which we've inherited from our, er, grandfathers, on the basis of currently fashionable theories. (In this case, the theory which Roger Martin points to is Jensen and Meckling's 1976 paper on the principal-agent problem, which advocated tying CEO compensation to the stock price.) Why would CEO compensation in 1981 have been one-eighth of its fair level? Is there some reason that CEOs at that time would not have been able to negotiate up to a fair level? -- My theory about rising CEO compensation is that nearly all CEOs will think that they're above average, so they'll feel that they deserve above-average compensation. It's like the fact that 80% of drivers think they're better than average. (It's a cognitive bias with its own Wikipedia article, "Illusory superiority"; Roger Martin calls it the "Lake Wobegon effect.") Daniel Kahneman notes in passing in "Thinking, Fast and Slow" that the correlation between CEO quality and corporate success is not that high: there's a lot of factors outside the CEO's control. "A very generous estimate of the correlation between the success of the firm and the quality of its CEO [based on research into CEO performance] might be as high as 0.30, indicating 30% overlap. To appreciate the significance of this number, consider the following question: "Suppose you consider many pairs of firms. The two firms in each pair are generally similar, but the CEO of one of them is better than the other. How often will you find that the firm with the stronger CEO is the more successful of the two? "In a well-ordered and predictable world, the correlation would be perfect (1), and the stronger CEO would be found to lead the more successful firm in 100% of the pairs. If the relative success of similar firms was determined entirely by factors that the CEO does not control (call them luck, if you wish), you would find the more successful firm led by the weaker CEO 50% of the time. A correlation of .30 implies that you would find the stronger CEO leading the stronger firm in about 60% of the pairs--an improvement of a mere 10 percentage point over random guessing."
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Jane Jacobs describes the difference between the ethical systems of "traders" and "raiders" in her book "Systems of Survival." In business, for example, you need to be honest and trustworthy, while in a military conflict, you often need to employ deception. I suspect that nearly all narratives aimed at children and adolescents will tend to be founded on some kind of conflict, and this will emphasize the "raider" way of thinking. The Lord of the Rings, Harry Potter, and the Hunger Games are all explicitly about war. The protagonists all demonstrate great physical courage, but not the ability to cooperate with potential rivals. Games seem like a more promising avenue. We've been playing Settlers of Catan with our kids (9 and 8), and they like it a lot. It's a bit like Monopoly, but it's much more carefully designed for playability: even when it's someone else's turn, you can still collect resources and make trades, instead of having to just wait for your turn again. And unlike Monopoly, trading is an integral part of the game. There's five different commodities (grain, wool, wood, etc.). You need all of them, and you typically only have access to three of them, so you always need to trade with the other players. You quickly learn about supply and demand: if grain is scarce, for example, and wool is plentiful, you might expect to have to trade two or three wool resources for one grain resource. One final thought: In learning physics, one of the things we need to do is override the naive or folk physics that seems to be hard-wired into our brains. For example, our intuition tells us that a heavy object falls faster than a light object; and has a hard time understanding that a bullet fired horizontally from a gun will hit the ground at exactly the same time as a bullet dropped from your hand. Similarly, I think that children probably have naive economic principles which are wrong. Our intuition is that income is proportional to hard work (think of the story of the Little Red Hen). It's not intuitive that labor is a commodity, subject to supply and demand. A garbageman may receive a high wage if there's not many people who want to collect garbage, while someone who spent years studying to obtain a doctorate in theology may receive a low wage if there's not many employers who need a theologian. It's supply and demand, not fairness, which determines wages.
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May 18, 2011