"Behavioral
economics is to some extent, the study of differences between how we think we
choose, and how we really choose."
Rory Sutherland
"...most investment models maximize for risk-adjusted returns, but in the real world every investor wants to maximize for sleeping well at night and being proud of themselves in a complicated world."
Morgan Housel
"...most investment models maximize for risk-adjusted returns, but in the real world every investor wants to maximize for sleeping well at night and being proud of themselves in a complicated world."
Morgan Housel
Personal finance is more personal than financial. It's more about feelings than math. Fear and greed drives our behavior more than we think or care to admit. Financial markets are complex adaptive systems within this larger thing we call Life.
This post contains readings on behavioral economics. Read them at your leisure so when terrifying or puzzling things happen in your life or in financial markets, you'll at least be somewhat prepared.
You are Your Own Plunge Protection Team
Conspiracy theories swirl around the presumed doings of
the so-called “Plunge Protection Team” (PPT). Actually, the PPT is a legally
constituted Working Group on Financial Markets, consisting of the Secretary of
the Treasury, and the chairs of the Fed, SEC and CFTC.
Some financial commentators have suggested that the group
intervenes in markets. Aside from being hard to validate, let’s assume for a moment
that it’s true.
When markets plunge – really plunge – the big banks will
be the first to run for cover. Their primary focus will be on their survival;
many of them only got through 2008 with the government’s help.
Global markets are vast, and the world of private
investors-- large and small-- far exceeds that of public institutions. For that reason,
the Secretary of the Treasury and the chairman of the Fed will be as successful
at fending off the next big market crash as the Secretary of the Interior will
be at preventing a rupture of the San Andreas Fault. So, even if a PPT exists, remember
that markets becoming temporarily unhinged is a story as old as history.
If the government really wants to help avoid a plunge, the
best it can do is not provoke one. It can’t keep market participants from
pursuing their self-interest. But it can decide how to carefully navigate trade
disputes and how to manage potentially threatening levels of debt to accumulate.
At the individual investor level, what’s needed is
independent decision-making. No one knows what the market is going to do next. But
we should have a good idea of what we need to protect during periods of market
crises. Our Five-Year Rule exists exactly for that reason.
12-24-18 24 Cognitive Biases Warping Your Reality
Here are a half-dozen to pique your interest:
- You overestimate how much people notice how you look and act.
- You'd rather do the opposite of what someone is trying to make you do.
- You overestimate the likelihood of positive outcomes.
- You overestimate the likelihood of negative outcomes.
- You believe your failures are due to external factors, yet you're personal responsible for your success.
- Your preference for a just world makes you presume it exists.
What If You Bought at the Top in 2007?
is a 50-50 portfolio-- half stocks, half bonds. Patience, moderation, and "doing nothing" pays off.
Posted 12-18-18
Who Benefits from A Market Correction?
Unless you plan to sell within the next five years, we should rejoice at market corrections. They are a prerequisite for future returns.
Posted 10-12-18
What's the Perfect Portfolio?
It's the one you can explain to 12-year old and live with.
Posted 9-7-18
When One Spouse Handles All the Finances
The division of labor among couples extends to household finances. Regrettably, this is a recipe for confusion, errors, and downright abuse when the day inevitably comes when there is a survivor. Read more here: https://www.iris.xyz/advisor/when-your-spouse-handles-all-finances
