Page 21 - Psychology of Money - Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

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
COBACOBA
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.

In 2006 economists Ulrike Malmendier and Stefan Nagel from the National
Bureau of Economic Research dug through 50 years of the Survey of
Consumer Finances—a detailed look at what Americans do with their

money.⁴

In theory people should make investment decisions based on their goals and
the characteristics of the investment options available to them at the time.

But that’s not what people do.

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.