Summary
People do some crazy things with money, but no one is crazy
- How we manage money is highly shaped by our first hand experiences (often more than ): if we grew up when inflation was high, we might be more inclined to invest in stocks than a person who experienced long periods of low inflation.
- People should take financial decisions based on their goals and on the list of available investment options available at a given moment. Instead, decisions are anchored to experiences investors had during their own life, especially when adult. Ulrike Malmendier, Stefan Nagel, Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?
- A good example is the lottery tickets: Most of the customers are persons with financial difficulties, and yet they prefer using their savings to buy a lottery ticket instead of moving the same money into an emergency fund. Rationally, it is such a wrong strategy, but if we try to listen to their reasons, we might be tempted to judge less. Most of them will never be able to reach a solid financial independence, buy an home, or send their kids to the best schools in the country. Therefore, the only chance they have to “live the dream” that we might be already living, lies under a lottery ticket: Saving these money into a 2% bank accounts won’t bring much added value to their lives: betting all the savings into a (with negative expected value) lottery ticket with the ideal that it might make “live the dream”, to some extent has it own sense.
My Notes
[! Don’t let emotions take full ownership of your investment strategy] I can relate with the statement that our actions are mainly based on our own experience, rather than our goals or education, and the chapter is a nice call to empathy and relativity (to some extents it reminds me of Shane Parrish’s Mental Model about relativity), but I think that the next step, after having understood why some people behave in a certain way, would be trying to explain why a specific strategy is way off from being a good one. I mean, It’s fine if a person is more conservative than another, but it’s not okay if someone is letting financial investor to manage their money with a 4% annual fee plus egress fees: I can understand the rationale behind this choice, but somehow we shouldn’t let our emotions take ownership of the whole board, and education can help us bring more strategy and efficiency into our emotion-led investing approach: yes, I think in the end that it’s biological and completely okay let the emotions and your past experiences follow a specific strategy, but we should refine and improve it by studying or at least get a minimal financial education.
Bias
I wonder if the fact that our financial decisions are based on our own experiences more than the math and/or our goals shall be considered as a bias (and thus something we should pay attention to, trying to limitate the amount of emotional influx), or as a driver that somehow positively guides us towards our choices. As always, the right lies in the middle. I think that, on the broad picture, it’s fine to be led by our emotions and own experiences. For instance I tend to save huge part of my salary, maybe because as a millennial the future never looked bright, and invest in partially risk-free options. This is an okay strategy, even if mainly led by the social context where I grew up. But, in order to maximise its effects, math and education is necessary, and it shouldn’t be excluded from the equation.
Credits and References
- Morgan Housel, The Psychology of Money, Harriman House, 2020 (9780857197689)