Thursday, April 18, 2019

Investor psychology

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200 years of human progress (Link)
What we see or read every day skews our perception of the world and makes us believe things are getting worse and worse every day. Threatening negative news passes much more easily through our mental filters then the good news. Another problem is good news or positive progress is gradual and won’t make for good headlines.

The truth is things are unquestionably getting better over time. To help understand the transformation in living conditions here is a visualization from Our World in Data. This chart shows how the lives of 100 people would have changed over the last 200 years if they lived through this transformative period of the modern world.
In 1820, 94% (94 of 100 people) of people in the world lived in extreme poverty. Today, that number is close to 10% (10 of 100 people). Another example – In 1820 only 12% (12 of 100 people) could read. Today that number is over 85% (85 of 100 people). 

You have to live it to believe it (Link)
Seeing the world around you may not be good enough to understand how it works. You have to actually experience it to learn how to operate in it. MIT scientists tested two of cats. The two cats grew up seeing the same thing. But one actually experienced real world conditions while the other merely viewed it. Once the two cats were both brought back to normal conditions the cat who only watched leaped towards the steep ledge and fell straight off. It also failed to blink when an object accelerated towards its face. It couldn’t associate visual objects with what their bodies were supposed to do. The cat that experienced the real world was normal and the other was effectively blind. 

One of the most important topics in business and investing is whether all of us are, in some ways, like these blind cats. Sure, we’ve read about the Great Depression. But most of us didn’t live through it. Can we actually learn lessons from it that make us better when investing? 

In theory, people should make investment decisions based on their goals and the characteristics of the investment options available. But that’s not what people do. Research shows that people’s lifetime investment decisions are heavily anchored to the experiences they had with different investments in their own generation. 

For example, Investor Tren Griffin wrote that he gained a lot of muscle memory that resulted from the Internet bubble. "There is no way you can fully convey in words the experience of being in the lead car as an investor in that roller coaster. Looking at the cycle after the fact is nothing like looking ahead and not knowing what will happen next. The experience still impacts the way I think and act today."

This week we celebrated Kris’s fifth and Teddy’s first anniversary!