I have read Bayes Theorem is the most tattooed theorem in the world. Bayes was a Presbyterian minister and Presbyterianism is nothing if not about determination. Yet Bayes approach is about probability. Every other statistician of his day was about calculating the odds. If you have a box of 20 black and while balls what’s the chance of pulling a black ball? Bayes OTOH asked the question how to you come to know a better level of belief called the Posterior belief.
If you have an old belief (prior) and no new evidence you have an old belief (same odds). If you have new evidence that is reliable evidence then the belief changes and a new belief occurs (posterior odds). The change in belief therefore is contingent on the reliability of new information. Therefore you need a prior and you need evidence and the result is not deterministic but statistical.
Let’s say you’re a FIRE type. You bought MMM’s BS about “simple math”. Let’s look a little deeper at “simple math” based on probability of success. Boggleheads LOVE their 3 fund portfolio there are all kind of stanza written: low cost, you can’t beat passive index, FA’s suck, DIVERSIFY DIVERSIFY DIVERSIFY! Then you pick a “number” out of thin air and apply simple math say 4% x25. Lets say the “number” is 1M for easy calculation and conceptualization. You choose a bogglehead 3 portfolio based on the “internet”. You wouldn’t know a BH3 if it came up and bit you on the ass but that’s what Joe the Plumber uses and after all Joe is a plumber and knows how to braze copper pipe in a way that doesn’t leak, he MUST be a wizard! Here are the survival chances of 1M, with 4% WR standard inflation and SORR for 30 years on a BH3:
Note as early as 15 years this portfolio starts to flunk. You have a 86.87% chance of survival. It means you’re broke 1/8 times. It means 1M is not enough for a 4% WR and you need more or a side gig to reduce the WR, aka you need a job in retirement. Let’s go from a BH3 to a 50/50 VTSMX:VBMFX portfolio. Note this portfolio has the same 50% VTSMX AA as the BH3 but reduces risk by substituting risky, highly correlated VGTSX allocation for a greater % of the non correlated VBMFX. This 50/50 portfolio reduces the risk of the overall portfolio compared to BH3 and lives on the efficient frontier.
Same 1M, same 40K/yr withdrawal, same SORR and inflation, less risky allocation 98.46% success! You’ll be dead well before this portfolio flunks. There isn’t a hint of trouble till year 27. This portfolio is based on the efficient frontier and Bayesian statistical analysis not Joe the Plumber’s dirty thumb nail analysis and MMM’s simple mindedness. This portfolio is “enough”, survives nearly 99/100 times, and needs no side gig to pay for the added risk of stupid assumptions. This is the power of quantitative analysis instead of the unproven narrative of internet fever dreams blasted at full volume into the FIRE echo chamber. Hmmm… maybe Bayes was about probable determinism.
As I think about this, this example is a systematic way to look at Suze O’s freakout and the recalcitrant FIRE response by reciting the “narrative” like it’s the Apostles’ Creed. It turns out both formulations of the problem were wrong, FIRE’s simple minded brain dead narrative and Suze O’s imprecise hand waving risk analysis. You don’t need 10M and your money won’t survive by paying for your leverage with with too much risk.
Bless you Thomas Bayes