The Greedy Algorithm could be ruining your morning commute (or your life!)
Why do we get stuck? The eight causes of plateaus.
Today, I discuss the second reason people get stuck in life. Skip ahead to buy the book or the online course.
Here's how the Greedy Algorithm can ruin your morning
All our concepts are borrowed from math and science, and the greedy algorithm is lifted right from higher math textbooks. Formally, it means that systems (and people) will always opt for the locally optimal solution over the globally optimal solution. Practically, it means people pick short term gains over long term gains all the time. If you’ve ever grown impatient waiting for a bus and instead started walking to your destination only to have a bus pass you 10 minutes late, you have fallen prey to the Greedy Algorithm. Sure, it feels good to start walking, but long-term, you’ll be both exhausted and late when you arrive at your destination.
In fact, sometimes it’s better to walk backwards, away from your final destination. That’s called retrograde progress. How can that be true? If the subway is two blocks behind you, and it’s rush hour in New York City.
Here's another example: Here’s how the Greedy algorithm works in your financial life. Maybe you’ve heard that debt is the devil, and you should pay off all your debts as quickly as possible. That’s wrong. That’s picking a short-term gain over a long-term gain, and I’ll show you why in a moment, but first, let me explain one of the overriding principles of The Plateau Effect:
Everything works, until it stops working. Whatever you try to do in life – learning piano, speaking a foreign language, starting a business – will hit a plateau. Whatever you did to succeed will eventually fail. The only thing constant about life is change, and that’s why plateaus are so vexing. People succeed and then they start succeeding less and less, while working more and more. And they tell themselves: “But this worked before! It has to work!” So they try even harder, and that fails, too. Anyone who has ever tried to lose weight knows this principle: every diet/exercise plan works at first, and then seems to stop working. Hopefully, I proves this concept to you when I wrote about immunity. But if you can set aside your skepticism for just a moment, you’ll see why this is important in any discussion. Let’s take the ever-popular concept of debt.
Paying down debt is a very good idea, until it isn’t any more. Life is full of such plateau-born paradoxes, and they can only be solved with appreciation for balance and subtlety you learn while studying The Plateau Effect. Now, to the numbers (Hugh and I are mathematicians after all)
Money is a zero sum game. Spend it, and you no longer have it. So every dollar you spend paying down debt is a dollar you don’t save. BOTH saving and paying down debt are important. They should be done simultaneously, in a carefully-considered balance. Don’t get greedy and go for the short-term payoff. Think long-term. Surprise: The younger you are, the more important it is to save, even at the expense of paying down debt. Here’s an example:
Say you are 25 years old and you have are carrying a $1,000 balance on a credit card at 15 percent interest, and you get a $1,000 bonus at work. Which is better, paying off the credit card or saving the money and paying off the debt slowly during the next year? The instant payoff of paying down a 15 percent interest credit card balance is obvious (it would save you roughly $100 in interest payments, assuming you paid the card down throughout the year). But in the long run, $1,000 saved in an IRA for 30 years will be worth $10,935 (assuming an 8 percent return). The one extra year of savings at age 25 is worth $830 by age 55. So, which is greater $100 or $830? When you are thinking about money, tell the Greedy Algorithm to shove it.
Of course, there are more obvious ways that people pick short-term over long-term gains. They invest in risky stocks instead of steady index mutual funds. They buy real estate hoping for a quick buck rather than carefully saving cash. But the Greedy Algorithm shows that even too much of a good thing – even paying down debt – can be a bad thing.