Going with My Gut

When making my own personal financial decisions---like the doctor who won’t look after his own health—I find it hard to gain the motivation to apply the same thoroughness that I do on tasks for my clients and employers.

Lately I’ve been buying extended warranties and service contracts on new appliances. These decisions have been based more on gut feel than disciplined quantitative analysis. The purchases have turned out to be right, despite popular advice that one should avoid these agreements.

The Best Buy repairman came by earlier today to finish the work on the refrigerator. Last month he fixed our front-loading washer, also under contract. (Regarding the latter, the latch had broken, and the washing machine wouldn’t operate with the door even slightly ajar. However, I installed an elastic strap to over-ride the safety feature until the repairman fixed it on his second visit. Fortunately, the laundry police weren't called.)

When deciding whether to buy service contracts, doing a decent analysis requires us to ascertain the elements going into the decision, including:

length of the standard warranty;

probability that the equipment will need repair one or more times after the warranty expires;

length of time the equipment will be held;

cost of the repair(s);

cost and length of the extended service contract;

replacement cost of the equipment in the period it is likely to break down (note that the current purchase price is irrelevant, although it may give a clue as to what the future replacement cost may be).

We’ve had to perform analyses like this at work. If the project was a big one, we would also need to analyze the cost of other alternatives, such as leasing-in the equipment or using a less-efficient configuration (for example, two smaller machines in place of a large one) in lieu of repair. Then, after gathering the data to fix the range of probabilities and costs for each scenario, we would run multiple iterations, sometimes cranking out hundreds of Monte Carlo simulations. After all the work was done, senior management would often decide on the opposite of the model recommendation (not that there’s anything wrong with that).

Perhaps I don’t do quantitative analysis more frequently in personal situations because I subconsciously (now consciously) know that all that work does not necessarily improve the result. Especially when considering other uses of my time, I can make a decision in a minute, pop a cold one and watch a ballgame.

It's possible that I am getting smarter as I get older.