$1.049 Million...
… and the ultimate walk-to-work house.
At a 4.25% nominal interest rate, figuring 2% average inflation and a 40% combined federal-and-state marginal tax rate, the real interest cost of a $1 million house is $5,500/year…
… plus $15,000/year in property taxes…
… plus $7,000/year in insurance…
… that is a total economic cost of $27,500/year, or $2,300/month--we could not rent anything close for anything approaching that, even factoring in the maintenance that the landlord would do. It's really very cheap…
… plus it is a $55,000/year forced-savings program as you pay down the real and nominal principal--but that isn't a problem but an advantage: we like forced-savings programs…
… plus it is an enormous bet on the Berkeley housing market: a bet of unknown expected value and large variance--say a standard deviation of $200 thousand…
… but I firmly believe that risk aversion comes from declining marginal utility of wealth: that as the trustee of all my possible future selves I am willing to make utility tradeoffs among them, knowing that wealth at the margin produces more utility for those possible future selves that are poor than for those who are rich…
… and I know that in a life-cycle perspective even losing $400 thousand in the Berkeley housing market would not materially move the needle on my lifetime marginal utility of wealth, so I really should be risk-neutral with respect to such bets…
Question: do I have a moral (or a professional) obligation to act as if I were a rational utility-maximizing von Neumann-Morgenstern agent even if doing so makes me anxious?
