Page 115 - Morgan Housel - The Psychology of Money_ Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

Harry Markowitz won the Nobel Prize for exploring the mathematical
tradeoff between risk and return. He was once asked how he invested his
COBACOBA
own money, and described his portfolio allocation in the 1950s, when his

models were first developed:

I visualized my grief if the stock market went way up and I wasn’t in it—or
if it went way down and I was completely in it. My intention was to

minimize my future regret. So I split my contributions 50/50 between bonds
and equities.

Markowitz eventually changed his investment strategy, diversifying the
mix. But two things here are important.

One is that “minimizing future regret” is hard to rationalize on paper but
easy to justify in real life. A rational investor makes decisions based on
numeric facts. A reasonable investor makes them in a conference room
surrounded by co-workers you want to think highly of you, with a spouse
you don’t want to let down, or judged against the silly but realistic
competitors that are your brother-in-law, your neighbor, and your own

personal doubts. Investing has a social component that’s often ignored when
viewed through a strictly financial lens.

The second is that this is fine. Jason Zweig, who conducted the interview
when Markowitz described how he invested, later reflected:

My own view is that people are neither rational nor irrational. We are
human. We don’t 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 the fact that the pioneer of modern portfolio theory built
his initial portfolio with so little regard for his own research. Nor is it

surprising that he adjusted it later.³⁸