This is the version of my talk, Personal Finance for Engineers, that I gave at Segment.io in San Francisco on August 25, 2016.

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

2. ©2014 Wealthfront, Inc.
2
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

3. ©2014 Wealthfront, Inc.
3
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

4. ©2014 Wealthfront, Inc.
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
4

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

6. ©2014 Wealthfront, Inc.
ANCHORING MENTAL ACCOUNTING CONFIRMATION &
HINDSIGHT BIAS
GAMBLER'S FALLACY
OVERCONFIDENCEHERD BEHAVIOR OVERREACTION &
AVAILABILITY BIAS
LOSS AVERSION
(PROSPECT THEORY)
YOU ARE NOT RATIONAL

7. ©2014 Wealthfront, Inc.
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
7

8. ©2014 Wealthfront, Inc.
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
8

9. ©2014 Wealthfront, Inc.
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)
9

10. ©2014 Wealthfront, Inc.
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
10

11. ©2014 Wealthfront, Inc.
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?
11

12. ©2014 Wealthfront, Inc.
Overconfidence
▪ In one study, 74% of investment
managers believe they deliver above
average returns
▪ Positively correlated with High IQ...
▪ Learn humility early
12

13. ©2014 Wealthfront, Inc.
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”
13

14. ©2014 Wealthfront, Inc.
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

15. ©2014 Wealthfront, Inc.
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

16. ©2014 Wealthfront, Inc.
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
16

17. IT'S OK TO NOT BE RATIONAL

18. ©2014 Wealthfront, Inc.
18
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...)

19. ©2014 Wealthfront, Inc.
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
19

20. ©2014 Wealthfront, Inc.
20
Liquidity & Returns
▪ In almost all cases,
liquidity is inversely
correlated with returns
▪ Examples:
– Cash = very liquid
– Private equity = very illiquid
▪ Common mistake: Safety!
= Liquidity

21. ©2014 Wealthfront, Inc.
21
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

22. ©2014 Wealthfront, Inc.
22
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”

23. ©2014 Wealthfront, Inc.
23
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.

24. ©2014 Wealthfront, Inc.
24
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.

25. ©2014 Wealthfront, Inc.
25
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!

26. ©2014 Wealthfront, Inc.
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!
26
Years Return at 8%
10 2.16x
20 4.66x
30 10.06x
40 21.72x
50 46.9x

27. ©2014 Wealthfront, Inc.
27
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

28. ©2014 Wealthfront, Inc.
28
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

29. ©2014 Wealthfront, Inc.
29
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

30. ©2014 Wealthfront, Inc.
30
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/

31. ©2014 Wealthfront, Inc.
31
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/

32. ©2014 Wealthfront, Inc.
32
Disclosure
Nothing in this presentation should be construed as a solicitation
or offer, or recommendation, to buy or sell any security. Financial
advisory services are only provided to investors who become
Wealthfront clients pursuant to a written agreement, which
investors are urged to read and carefully consider in determining
whether such agreement is suitable for their individual facts and
circumstances. Past performance is no guarantee of future
results, and any hypothetical returns, expected returns, or
probability projections may not reflect actual future performance.
Investors should review Wealthfront’s website for additional
information about advisory services.

33. ©2014 Wealthfront, Inc.