Quiz: predict your success at money management..

[ladelfina]

Came across this in the April Smart Money:

1.) A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?

2.) If it takes five machines five minutes to make five widgets, how long would it take 100  machines to make 100 widgets?

3.) In a lake, there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days to cover the entire lake, how long would it take for the patch to cover half of the lake?

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This is supposed to test a certain kind of intelligence called "cognitive reflection". It is "more predictive of people's ability to parse time value and risk.. than standardized tests such as the SAT."

Of 3400 college students tested, the average score was 1.24.

Students at the University of Toledo managed an average score of 0.57 ... Even at MIT, most students got at least one wrong.

I'll post the answers tomorrow! (though I'm sure everyone here will get 3/3  )

 

[rapoole]

Ball 5 cents.

Widgets 5 minutes.

Lily pads 47 days.

How did I do?

 

[justin]

Ball 5 cents.

Widgets 5 minutes.

Lily pads 47 days.

Ditto

 

[unclemick]

Yeah you Rite!

Don't know much about Lilly Pads but used to keep a graph of compound interest curves(8,10,12%) as a morale booster to keep saving - way back when.

Don't own any stock where my dividend stream exceeds my original investment - yet but I'm working on it.

 

[yakers]

Dang, got em all. how come I'm not rich?



(maybe I am by world standards, even on a govt income)

 

[peggy]

1.) A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?

---> The ball costs $.05; the bat costs $1.05.

2.) If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?

---> Five minutes. Each machine produces one widget in five minutes.

3.) In a lake, there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days to cover the entire lake, how long would it take for the patch to cover half of the lake?

---> 47 days. It doubles on the 48th day to cover the entire lake.

Do I get a gold star?

 

[ladelfina]

Gold starzz for everyone!

Once you see the answers it's wildly obvious, so the Platinum Star goes to rapoole. Wish there were more questions.. it's kinda fun!

The people doing the study found a correlation between test scores and accuracy in judging financial risk/reward. For instance, when offered the choice between $3400 now or $3800 next month, 60% of those with a perfect score of 3 chose to wait, while of those scoring zero, only 35% chose to wait. (Not sure what's going on in the heads of the perfect-scoring 40%, but there you are...)

 

[justin]

(Not sure what's going on in the heads of the perfect-scoring 40%, but there you are...)

I'd probably take the $3400 now. Too much risk in waiting to get the $3800 in a month for an additional $400 return. Bird in hand = 2*bird in bush.

 

[ladelfina]

Since the (admittedly not entirely realistic) offer is guaranteed, in turning down the extra $400 you're giving up almost 12%. The respondent brings his/her own perceived risk into the situation.

The 3-question test is supposed to be a snapshot of whether you intuitively grasp the underlying math principles inherent in personal finance decisions.

So, what can we make out of the fact that the correlation, while high, isn't 100%?

...that when you put a dollar sign in front of a number, a person's brain changes gears?

...lily pads are one thing, but I don't want to risk screwing around with real $$ (and thinking thus, risk screwing around with real $$)?

...your instincts short-circuit your logic and tell you 'get it now' in spite of the better deal if you are able to delay gratification?

 

[cute fuzzy bunny]

By the way, as a point of interest. When you read a 3 question quiz and the answers are obvious to you, and you see that college kids do poorly on it, DO NOT turn to the wife and say "here, look at these easy questions that college kids cant figure out".

Her score is probably about equal to the amount of sex I'll be having for the next couple of months...

 

[justin]

Here's how I considered the $3400 today versus $3800 in one month issue.

Let's say I bought a car from Joe Blow Cars, Inc. who's motto is "Selling Graet Cars since 2006". I could take the $3400 instant cash back option, or have them submit the $3800 rebate for me, which they promise to send me in one month. I'm taking the $3400 instant cash back. $400 isn't worth the potential risk, hassle and legal fees that would be involved to get the money later.

Now, if the $3800 was going into an escrow account at my attorney's office for safekeeping, and it will be disbursed to me in 1 month, I'd take the $3800 in a month. But not knowing anything else from the hypothetical than what was given, I'm not willing to risk it.

A successful outcome results in a 12% gain, an unsuccessful outcome results in a 100% loss.

 

[cute fuzzy bunny]

I think you illustrated the point. There was no implied risk in waiting to receive the higher amount and the period and difference were too great for one to arb the lower amount to the higher. Any perceived risk was therefore completely created by the receiver of the money, causing them to make a poor decision.

Ties in nicely with my last post on the "lost money". Sometimes self created perceptions of risk make for bad decisions.

 

[justin]

Any perceived risk was therefore completely created by the receiver of the money, causing them to make a poor decision.

Ex post facto, it was a poor decision. Ex ante, the same can't be said.

 

[Nords]

Ties in nicely with my last post on the "lost money".  Sometimes self created perceptions of risk make for bad decisions.

Man, now I'm gonna have to reconsider the very generous e-mail offer from that Nigerian bank auditor that I so hastily deleted. The reward was far greater than the puny risk of a few thousand $$...

 

[cute fuzzy bunny]

Thats a little more than a self-created perception of risk.

If the stock market worked like nigerian spam schemes, I most certainly wouldnt own any...