Being Reasonable
Behavior is hard to teach,
even to really smart people.
Especially to really smart people.
References :
https://determinedinvest.wordpress.com/2020/12/31/the-psychology-of-money-p1/
Credits :
The Psychology of Money, by Morgan Housel (if you like what you see in these pages, do consider buying the book – you will not be disappointed)
Academic Finance is devoted to finding mathematically optimal investment strategies. Yet the fundamental opinion of this book and author is, in the real world, that is not what people want. They want an investment approach that determines how well they sleep at night.
Harry Markowitz won the Nobel Prize for exploring the mathematical tradeoffs between risk and return (the modern portfolio theory).
He was once asked how he invested in his own money, and he described it as such…
“I visualized my grief if the stock market went way up, and I wasnt invested in it. Or if it went way down and I was completely invested in it. My intention was to minimize my future regret. So I split my contributions 50-50 between the stock market and bonds.”
It was that simple. Two things are important here.
One is that ‘minimizing future regret’ is hard to rationalize on paper but easy to understand in real life. A rational investor makes decisions based on numeric facts alone. But investing has a social component thats often ignored. A reasonable investor makes decisions with co-workers who you wish to think highly of you, with a spouse you do not wish to let down, and judged against realistic competitors such as your friends and neighbours.
The second is that this is fine. Jason Zweig, who conducted the interview with Markowitz, later reflected…
“My own view is that people are neither rational nor irrational. Rather we are human. We dont like to think harder than we need to, and we have unceasing demands on our attention. Seen in that light, there’s nothing surprising about how the pioneer of modern portfolio theory (Markowitz) built his portfolio (with little regard for his own research !).”
Markowitz was neither rational nor irrational – he was just being very reasonable with his money and investments.
That, is the Psychology of Money.
Determined investments 