Save Money - Analyzing Risk-Return with Driving

June 16, 2007

 There is a concept with investments called risk-return trade off.

 From investopedia:

“The principle that potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. In other words, the risk-return trade off says that invested money can render higher profits only if it is subject to the possibility of being lost. ”

“Because of the risk-return trade off, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can’t cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.”

 Basically, the risk varies with the return (the higher the potential return, the higher the risk) and you need to find the risk-return ratio that you’ll be comfortable with.

 This concept extends to pretty much everything in your life.

 Choosing between job offers, deciding whether to relocate for a job opportunity, buying lottery tickets, playing poker, letting your “perverted” best friend organize your bachelor party, etc. You gotta take risks, and whether that risk is worth the return or not, it’s up to you.

 Now let’s apply this concept to driving.  

 First of all, we should all drive responsibly, because… well… it’s the responsible thing to do. However, as an extra motivation, just keep in mind that you could save a ton of money by driving responsibly.

 I’ll go over some basic concepts and then get to the point of this article (analyzing the risk-return trade off).

 Let’s start with regular speeding tickets.

Speeding Ticket

 If you are a first time offender or if your last ticket was more than 5 years ago, then you should be OK. You can always try contesting the ticket (more below), but if it’s your first offense, you should be able to pay the ticket and move on with your life. Some insurance companies won’t raise the premium for first timers. Most likely you’ll be able to take online driving classes and that ticket won’t be reported to insurance companies anyways.

 However, if you are a multiple time offender, then not only you’re going to have to pay the fine, but your insurance will definitely go up.

 From SpeedingTicketCentral.com

 ”A California speeding ticket carries one of the highest traffic ticket fine schedules in the nation. It is not unusual for the fine to be over $300.00. California also has some of the highest auto insurance rates in the nation. Combine these two factors and your California speeding ticket will make quite a dent in your pocketbook. “ 

 In the event you do get a ticket (even if it’s your first), here are some suggestions for what you can do:

• Go to court. There’s a chance that if you go to court, the officer that issued you the ticket might not show up and you might get out of it.
• Try to make a deal with the prosecutor/judge so that you don’t get points for this ticket. You’ll still pay the fine, but your insurance won’t know about it.
• Always check if you can take online traffic school (I’ve done this once, and it is extremely simple) and have the ticket waived. Don’t forget that you can only do this every once in a while (In California, every 18 months).

Hopefully I still have your attention.  Now let’s analyze the risk-return trade off.

Is it worth it? Analyzing risk-tradeoff

 For sake of this argument, I’ll consider that the average American commute is roughly 16 miles (Poll from ABC News).

 The table below represents the time taken for someone at a constant speed (freeway with no traffic) to travel a specific distance.

 The rows represent the speed (from 65mph to 100mph), while the columns represent the distance travelled (10 miles to 45 miles). The highlighted column (16 miles) is the average commuting distance for Americans.

 If you’re a boy scout, and drive at the speed limit (65mph), then it will take you 14.77 minutes to cover those 16 miles. That’s considering no traffic (if the freeway is jammed, then you can just skip this whole section, because you won’t be able to speed anyways).

 I’ll be honest. I don’t drive at that speed myself, but I generally keep it around 75mph. That’s my sweet spot. I’m willing to live with the risk-return at that speed. At that speed, it will take me 12.8 minutes. That’s only an increase of roughly 2 minutes.

 Disclaimer: I’m not advocating that you drive at 75mph. It’s still above the limit and I am still risking an expensive ticket to save merely 2 minutes.

 Now, if you are a Pedal to the Metal kind of guy/girl, and like it exciting at 90mph. You can make 16 miles in 10.67 minutes. Wow! You’ll arrive 5 minutes earlier to your destination! (If you didn’t notice, I was being sarcastic).

 The increased risk of getting a ticket at 90mph for a return of merely 5 minutes doesn’t seem worth it. And that’s comparing to driving at 65mph. If you compare it to 75mph, then you’re really only saving 2 minutes. 

 Even if your commute is fairly long (40 - 45 miles), the difference between you driving at 75 mph and 100 mph is less than 10 minutes. It will simply take 10 minutes longer for you to get at your destination to drive safely.

 The graph below represents the expected risk-return for an investment vs the actual risk-return. Generally we expect the return to increase proportionally to the risk, however, with driving, that ratio isn’t proportional. The faster you drive, the more likely you might be ticketed and the return (time that you’ll save) isn’t proportional.

 If you don’t like to gamble, then I probably already convinced you that it isn’t worth speeding.

 If you do gamble, then think about upside vs downside. The upside is saving 5 - 10 minutes and the downside is possibly a $300 (or more) ticket and possibly a higher insurance. If you make $300 in 10 minutes, then I guess you wouldn’t have a problem taking that risk. But if you make $300 every 10 minutes, then you’re probably not reading this blog.

Other “Strict Liability Offenses” Violations

 You can apply the same analysis above to other common “strict liability offenses”, such as:

• Failure to use turn signals
• Failure to yield
• Turning into the wrong lane
• Driving a car with burned-out headlights

Before doing it, always consider the risk-return ratio.

DUI

 Things are quite different for DUI. From Kandblaw.com:

“In California, conviction for the offense of DUI (Driving Under the Influence) carries stiff penalties & punishments.”

 Penalties vary from state to state, and even from county to county.

 If you get caught in Northern California, for your first DUI, you’re facing:

• 3 to 5 years of court probation
• A fine, including court fees and costs of $1400 to $1800
• 6 month loss of California Driver license
• DUI School
• Mandatory 48hr jail time

 If you’re looking at your second or third DUI (like our “role model”, Paris Hilton), then you’re looking at:

• 3 to 5 years of court or formal probation
• A fine, including court fees and costs of $1800 to $2800
• Up to 3 years loss of California Driver license
• DUI School
• Required 120 days of jail time

 Your Fourth DUI is considered a felony DUI, and punishment include up to 3 years in state prison and permanent loss of your Driver License.

 For more details, check Kandblaw.com.

 On top of that, your insurance will sky rocket for a DUI.

 There’s just no reason for driving under the influence. It’s not worth the risk. I’m not even going boy-scout-mode and mention the danger you would be not only to yourself but to others as well.

Conclusion

 When investing money, you consider the risk-return factor. You also do this when you bet lunch with your colleague, or take the risk of lending money to a friend, or co-signing a loan (which you should never do), letting your wife decide the furniture by herself or allowing your friends to set you up on a blind date.

 Why not extend this analysis to your driving style?

 I’ll leave you from a cheesy quote from a friend: 

“Lose a minute from your life, but don’t lose your life in a minute.”

*Image from iStockPhoto.com

Posted in Finances, Lifestyle