I was speaking to a portfolio manager one day and he mentioned that after 40 years in the industry, a Chartered Financial Analyst designation, and after having managed hundreds of millions of dollars he was convinced that investing success basically all came down to psychology. I’m slightly less draconian, and cast a larger net, as I’ve always said that personal financial success is 90% psychology and about 8% math.
A few years ago Michael Shermer wrote an op-ed piece titled, “Why people believe strange things about money” and he lead that piece with a citation of research that indicated that more people would prefer to earn $50,000 per year when everyone else earned $25,000 as opposed to earning $100,000 per year when everyone else earned $250,000. We are asked to believe that the general prices of goods are the same in both possible scenarios, although this may be a bit of a stretch. That being said, essentially people would rather be relatively better off as opposed to absolutely better off. The math is simple. $100,000 is more than $50,000. But the psychological drivers at work guide the ultimate decision.
The field of behavioural finance is not new, but it is certainly expanding at a rapid pace. We learn all the math skills we need for our personal finances well before high school, but few of us ever really examine our decision making protocols coupled with the psychological influences we fall victim to. Luckily, we can start now and it won’t cost you a dime if you have an internet connection. Click here to watch all the lectures from “Introduction to Psychology” courtesy of Yale University on Academic Earth. Academic Earth is an aggregator of higher education courses and seminars that are made freely available to anyone who wants to “cyber-audit” them. No cost, but no credit either.
p.s. The missing 2% from the first paragraph is a testament to the relative unimportance of the math.
This content originally appeared in my Globe & Mail column