The Psychology of Money
No One Crazy
Summary
It might make you feel better about what you do with your money, and less judgmental about what other people do with theirs. People do some crazy things with money. But no one is crazy. Here’s the thing:
People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.
Everyone has their own unique experience with how the world works. And what you’ve experienced is more compelling than what you learn second-hand. So all of us—you, me, everyone— go through life anchored to a set of views about how money works that vary wildly from person to person. What seems crazy to you might make sense to me.
The person who grew up in poverty thinks about risk and reward in ways the child of a wealthy banker cannot fathom if he tried.
The person who grew up when inflation was high experienced something the person who grew up with stable prices never had to.
The stock broker who lost everything during the Great Depression experienced something the tech worker basking in the glory of the late 1990s can’t imagine.
The Australian who hasn’t seen a recession in 30 years has experienced something no American ever has.
You go through life with different beliefs, goals, and forecasts, than I do. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences.
Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on.
The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.
Spreadsheets can model the historic frequency of big stock market declines. But they can’t model the feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives. Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior.
We all think we know how the world works. But we’ve all only experienced a tiny sliver of it. As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth.
The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation—especially experiences early in their adult life.
If you grew up when inflation was high, you invested less of your money in bonds later in life compared to those who grew up when inflation was low. If you happened to grow up when the stock market was strong, you invested more of your money in stocks later in life compared to those who grew up when stocks were weak.
The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history.” Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born.
Relatable
The Psychology of Money-Luck_and_Risk_Summary
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