David R. Henderson  

Kling on Rules for Life

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Former co-blogger Arnold Kling recently posted 4 rules for work life and financial life.

They're excellent.

I'll give each rule and comment on how they relate to my own life. You be the judge of whether they relate to yours.

1. Don't confuse your workplace with your family.

This confusion is easy to make when you're young. One of my 3 favorite bosses was the late Bill Meckling, dean of the Graduate School of Management (now the Simon School) at the University of Rochester. When I got there as an assistant professor, I was 24 years old. Pretty quickly I fell into thinking of him as a parent. I don't remember the ah-hah moment when I figured out he wasn't, but I do remember that it was sometime during the second year of my four years there. I saw things so much more clearly after that, and seeing him as not my parent made it easier for me to leave that job when I figured out that it was in my interest.

2. When you have little left to learn on a job, it is time to move on.

That's true. I've noticed that this is hard for people, especially those in jobs with defined benefit pension plans where the benefit is highly positively correlated with the number of years with the employer. Still, I almost left the Naval Postgraduate School (NPS) in 1999 and I was so sure, in the spring of that year, that I was going to do so that I made a commitment to teach in Europe in the fall of 1999 at a time when I would likely otherwise be teaching a course at NPS. But then I thought, "Rather than say I'm going to quit and see if my chairman will make me a better offer to get me to stay, I should figure out what would get me to stay--it wasn't more money--and ask for that." So I went to him and told him that if he reduced my teaching load and pay proportionately, I would stay." He said that he would go for that but the Provost never would. I asked him if he would OK it if the Provost agreed. He said yes. So I walked over to the Provost's office, explained what Reuben (the chairman) had said, and asked him if he would approve. He immediately said yes. I told him that I was pleased because Reuben had said he wouldn't. I still remember Dick's (the Provost) answer: "Well, you're not exactly Joe s**t the ragman."

What I would add, though, is that if you're not learning on the job, before you decide that there's little left to learn, figure out if there's some way you could alter the situation in that job. This especially applies to those in academia, who are given an enormous amount of discretion about how they spend their time. Maybe you could teach different classes, teach your classes differently, or change what you do your research on. In the fall of 1986, after I had been at NPS for only 2 years and only months after I had gone tenure track, I got a bad case of Potomac fever. I interviewed over the phone for one job and went to D.C. to interview for another. But before that trip to D.C., I realized that if I went to D.C. at age 36, there was a good chance that I would never teach another economics class again in my life. Given that, I asked myself, how would I want to teach the last economics course I would ever teach in my life? So I made some big alterations to my syllabus and the class went really well. The day I got the offer from D.C., the money amount was way below what I expected. The next day (in February 1987), D.C. had a big snowstorm and I took my daughter to the beach because the temperature in Pacific Grove hit 90 degrees. With how well my class had gone and with that reminder of the difference in weather, I decided to stay. Almost 31 years later, I'm still glad about that decision.

3. Take risks with high plausible upside. Avoid risks with high plausible downside.
When Fortune magazine called me in the spring of 1990 to ask me to put together The Fortune Encyclopedia of Economics (now The Concise Encyclopedia of Economics), I was one year away from coming up for tenure and I didn't have a really strong vita, publication-wise. But the potential upside was huge; the downside was not getting tenure, which, admittedly was also a large downside. But I negotiated a 6-figure advance directly with the president of Warner Books and it was one of the best decisions I ever made.

4. Save and invest to get rich slowly.
Absolutely right. I've written about that more extensively here. I've followed this rule and, by my standards, if not that of some others, I am now rich.
I would add three things.
(a) Arnold tries to time the market with respect to P/E ratios and it has worked for him. I'm not saying that he's wrong. I just don't do it. What I do do is rebalance my portfolio every couple of years.
(b) There's a reasonable case for putting even more than 1/4 of your stock portfolio into international stocks. I think mine is about 35 to 40%.
(c) If, like me, you are in a defined benefit plan and if you think Social Security will be around for the first 10 years after you retire, then remember that your defined benefit plan and your Social Security are a big bond. Social Security is also an inflation-indexed bond and your defined benefit plan might be. Keep that in mind in deciding your allocation to stocks.


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COMMENTS (2 to date)
gwern writes:
An example of a real-life lottery ticket is striking up a conversation with a stranger. You can do this while waiting in line in a store or sitting next to someone on an airplane. It has plenty of upside and little downside. Make a habit of doing it and you will turn into a lucky person.

This reminds me of Wiseman's Luck Factor. 'Lucky' people are simply more proactive about exploring (rather than exploiting) and better at noticing anomalies & possibilities.

T.L. Brink writes:

I'll focus on #2. This works only in the beginning of your career. After a time (e.g., when you make tenure, become a partner in the firm) you might not be "learning" much more in your position, but you have acquired a certain amount of freedom and resources to achieve maximum creativity. That is the position at which you should remain.

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