This is a version of my Personal Finance for Engineers talk given for Google's "Financial Fitness Week" on May 4th, 2015 at Google HQ.

1. wealthfront.com
Adam Nash
CEO, Wealthfront
@adamnash
Personal Finance for
GOOGLERS

2. ©2015 Wealthfront, Inc.
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Caveats & Preface
§ I am not a financial planner
§ This presentation is not financial advice
§ You would be extremely foolish to make investment
decisions based on the content of this presentation or
discussion
§ The opinions in this deck are intended to provoke
discussion & further education

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Why Personal Finance?
§ Poorly covered in traditional education, even
top tier universities
§ Not technically difficult, but the signal:noise
ratio is terrible
§ Massive impact on your life
– Money is one of the top 3 reasons
for marital problems

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Why “for Googlers?”
§ Tend to make higher incomes early in life, thus face
questions sooner
§ Tend to have complicated instruments, like stock
options, as part of their compensation
§ Believe they are rational, which is actually a
problem when it comes to money

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Fast Five Finance Basics
1. Behavioral Finance
Basics
2. Liquidity is Undervalued
3. Cash Flow Matters
4. The Magic of
Compounding
5. Good Investing is
Boring

6. (show of hands)
BEHAVIORAL FINANCE BASICS:
How many of you think you are
rational with your money?

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ANCHORING
MENTAL ACCOUNTING
CONFIRMATION &
HINDSIGHT BIAS
GAMBLER'S FALLACY
OVERCONFIDENCE
HERD BEHAVIOR
OVERREACTION &
AVAILABILITY BIAS
LOSS AVERSION
(PROSPECT THEORY)
YOU ARE NOT RATIONAL

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Anchoring
§ People estimate answers to
new / novel problems with a
bias towards reference points
§ Example: 1974 Study
§ Most common examples:
– Price you bought a stock at
– High point for a stock

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Mental Accounting
§ Money is fungible, but people
put it in separate “mental
accounts”
§ Lost movie tickets example
§ “Found Money” problem
§ Vacation fund & credit card debt

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Confirmation &
Hindsight Bias
§ We selectively seek information
that supports pre-existing
theories, and ignore / dispute
information that disproves
them
§ We overestimate our ability to
predict the future based on the
“obviousness” of the past
(example: real estate)

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Gambler's Fallacy
§ We see patterns in independent,
random chains of events
§ We believe that, based on series
of previous events, an outcome is
more likely than odds actually
suggest
§ Coin flip example
§ It's because with human behavior,
there are no “independent” events

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Herd Behavior
§ We have a tendency to mimic the
actions of the larger group
§ Crowd psychology is a major
contributor to bubbles (believed)
§ Easier to be “wrong with
everyone” than “right and alone”
§ No one gets fired for buying IBM?

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Overconfidence
§ In one study, 74% of investment
managers believe they deliver
above average returns
§ Positively correlated with High IQ...
§ Learn humility early

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Overreaction &
Availability Bias
§ Overreact to recent events
§ Overweight recent trends
§ Studies demonstrate that
checking stock prices daily
leads to more trading and
worse results on average
§ Worse in high tech, because
we are immersed in “game
changers”

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You have a 100% chance of gaining $500.
B
You have $1,000 and you must
pick one of the following choices:
You have a 50% chance of gaining $1,000,
and a 50% chance of gaining $0.
A
OR

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You have a 100% chance of losing $500.
B
Now, you have $2,000 and you must
pick one of the following choices:
You have a 50% chance of losing $1,000,
and a 50% chance of losing $0.
A
OR

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Loss Aversion
(aka Prospect Theory)
§ We hate losses more than we
love winning
§ Average loss aversion is 3:1 (!)
§ Affects views on wide range of
situations, including taxes,
holding on to losing stocks,
“sunk cost” mistakes

18. IT'S OK TO NOT BE RATIONAL

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It's OK to Not Be Rational
§ The key is that humans are
predictably irrational
§ Know your own flaws, and you
can set up systems to account
for them
§ Self-awareness is key
(yes, my Mom is a
psychologist...)

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Liquidity is Undervalued
§ Strictly defined: it's the quanti-
fication of how much money you
can get, and how fast
§ Liquidity is the power to take
advantage of great investment
opportunities
§ Liquidity is also, in the end, the
only thing that matters when you
need to pay for something

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Liquidity & Returns
§ In almost all cases,
liquidity is inversely
correlated with returns
§ Examples:
– Cash = very liquid
– Private equity = very illiquid
§ Common mistake: Safety!
= Liquidity

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Practical Outcome:
Emergency Funds
§ Standard recommendation is
that you have 3-6 months of
living expenses in cash / cash-
equivalents
§ That number increases if you
are in highly volatile industry /
career
§ Worth considering length of
time for potential job search

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Cash Flow Matters
§ The ultimate secret to personal
finance is quite simple:
– Spend less than you make
(on an ongoing basis)
§ Very easy to measure, but few
people do. Annual budget is a
great idea.
§ Don't forget to model in annual
expenses & “personal
spending”

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Savings Targets
§ What's the right number?
– There is no question - the more you save, the more
secure you are.
Income comes & goes, but expenses / lifestyle are
sticky!
§ A lot of models assume working 40
years, and producing savings to
generate 80% of working income.
– These models don't actually match anyone's real
world experience.
– There are a lot of models out there, and rules of
thumb, but it's
important to run the numbers yourself.

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The Magic of Compounding
§ Not convinced that Albert
Einstein said it was the greatest
force in the universe.
§ It's the key to almost all long
term financial planning.
§ Exponentials are bad in
algorithmic cost, good in
savings returns.

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Simple Model
§ Rule of 72
§ In Sheets, for each year, just use
=POWER(1+rate, year)
§ 4% over 20 years is 2.19x
§ 8% over 20 years is 4.66x
§ Careful: it works on debt just as well
as savings... in reverse!

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The Benefits of
An Early Start
§ Compounding really takes off
over long time periods
§ In most retirement planning
models, money saved between
ages 25 - 35 produces more
money than all savings
between 35 – 65!
Years
Return at 8%
10
2.16x
20
4.66x
30
10.06x
40
21.72x
50
46.9x

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The Dangers of Debt
§ Bankruptcy is literally when you
can't pay your debts. You can't
go bankrupt if you don't have
debt
§ You will never find an investment
that pays 8% guaranteed, let
alone 20%+
§ You will find *tons* of credit offers
out there that will charge you that
§ “Bad” debt is toxic, your best
return is to pay it off. But
emergency fund takes
precedence

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Good Investing is Boring
§ No one wants to be average,
but with investing, average is
actually well above average.
§ You will beat most mutual
funds, and a large majority of
your peers with simple, low-
cost index funds.
§ Asset allocation explains ~90%
of the variance between fund
performance

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Basic Asset Allocation
§ Different types of assets (cash,
bonds, stocks, etc) have different
volatility & return characteristics
§ Combinations can lower volatility
significantly, with moderate
impact to returns
§ Complication: historical
performance does not predict
future performance

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Simple Operating Model
§ 2 hours of work per year
§ Pick an asset allocation that is
appropriate for your emotional
character & time frame & goals
§ For each asset class, pick cheap
index fund to represent
§ Rebalance every 1-2 years
§ http://blog.adamnash.com/2010/12/31/
personal-finance-how-to-rebalance-your-
portfolio/

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Recommended Books
§ WSJ Guide to Understanding Money & Investing
§ The Millionaire Next Door
§ A Random Walk Down Wall Street
§ The Essays of Warren Buffett
§ Common Stocks & Uncommon Profits
§ The Intelligent Investor
§ Devil Take the Hindmost
§ When Genius Failed
§ Against the Gods: The Remarkable Story of Risk
§ http://blog.adamnash.com/2007/02/14/personal-finance-education-
series-2-recommended-books/

33. ©2015 Wealthfront, Inc.
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Caveats & Preface (last
time!)
§ I am not a financial planner
§ This presentation is not financial advice
§ You would be extremely foolish to make investment
decisions based on the content of this presentation or
discussion
§ The opinions in this deck are intended to provoke
discussion & further education

34. ©2015 Wealthfront, Inc.
go/wealthfront

35. ©2015 Wealthfront, Inc.