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Money Decision Problem 2: Solving the Wrong Problem

You can have the greatest system in the world for analyzing and solving your personal or business money problems, but you would be wasting your time if you were solving the wrong problem. This usually happens if you do not think through a problem before you start to solve it. To understand how to approach a particular problem you should understand at least these things about the problem:

  1. What are the limits to problem at hand?
  2. How do you define a good or a bad outcome to the decision?
  3. How should you measure the outcomes?
  4. What do you bring mentally and psychologically to the decision table?
  5. What are other ways to look at the problem?

A Mutual Fund Example
One example of solving the wrong problem is to pursue a high rate of return from a mutual fund investments without first deciding what kind of comparison or benchmark you should use to determine if the return is high enough. For example, index mutual funds that are designed to mirror the results of the Standard and Poor’s 500 index consistently outperform rough 80% of all mutual funds. The original problem may have been how to choose mutual funds with high returns. A better problem to solve would be how choose mutual funds which consistently perform better than the S&P 500.

Final Thoughts
Remember that most problems involving money usually involve something else besides money or mathematics. If you focus on the parts of the problem that are objective and that can be measured or solved with common with equations and spreadsheets, you may miss the most important part of the problem.

Next Lesson: Not Looking at All Sides of a Problem

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One Response to “Money Decision Problem 2: Solving the Wrong Problem”

  1. Rigoberto Cloepfil says:

    If you’re still on the fence on how to invest, please allow me to supplement this amazing and well-written post with my own experience. I’ve worked in numerous boutique banks and I’ve had my try at investment banking too. It was a long and difficult road to take for a career path but now that I have retired, I often find myself passing along some advice. First! Read as many reputable books and articles as you can in investing . These will help you TREMENDOUSLY in the long run – don’t get greedy! I’d recommend The Intelligent Investor or Random Walk Down Wall Street or its corollary by Delos Chang from NOVA. With all the drug wars and stock crises you never know what’s going to happen. Really build a foundation and of course, don’t go into insider trading or you’ll get arrested! Hope my advice has helped any of you looking for more ways to invest. Don’t always look at the short run return! Keep an eye on the long run too.

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