.Adding Value
Adding Value
Adam M. Grossman | September 1, 2019
NIKOLA TESLA was a brilliant inventor, with nearly 300 patents to his name. He also had some unique habits. Among them: Every night, before he sat down for dinner, he would ask his waiter for a stack of 18 napkins. He would then use them to carefully wipe down his silverware.
Even at the Waldorf Astoria hotel, where Tesla lived for decades and where the silverware was presumably clean, Tesla insisted on this time-consuming process before every meal.
The first napkin, and perhaps the second, might have ensured a somewhat cleaner set of utensils—and it probably gave Tesla, who had contracted a debilitating infection as a child, additional peace of mind. That’s what economists would call positive marginal utility. It served some use.
But beyond that, it’s hard to imagine that all that additional cleaning and scrubbing contributed much. It just took time. That’s called negative marginal utility. It consumed time without adding any value.
When it comes to managing your finances, I suggest looking at things through this same lens.
The financial world, unlike more scientific fields, is full of uncertainty. In many situations, additional effort won’t get you any closer to a better answer—just as wiping down the silverware for the 18th time won’t make it any cleaner.
This notion strikes many folks as counterintuitive. When we were children, we were taught to work hard—and indeed, in most endeavors, additional effort does yield a better result. But in the world of finance, it’s more nuanced.
Historically, when people talked about personal finance, they focused primarily on investment-related questions—which way the market was going, which stocks were hot and so forth. For years, these kinds of questions received the lion’s share of attention from both experts and everyday Americans.
But research has shown that time spent on these questions often isn’t time well-spent.
Stock picking, market timing and economic analysis rarely yield positive returns. What’s worse, these activities also tend to leave investors with higher investment costs and bigger tax bills.
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