Psychology of Money

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IlliniDave
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Psychology of Money

Post by IlliniDave » Fri Jun 08, 2018 6:34 am

Here's a blog that was linked over on bogleheagd.org. I found quite interesting, though perhaps because of confirmation bias (most notably with the hierarchy pyramid near the end). Psychology is not an area of expertise for me, but there seems to be some items worth thinking about.

http://www.collaborativefund.com/blog/t ... -of-money/

steelerfan
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Re: Psychology of Money

Post by steelerfan » Fri Jun 08, 2018 8:51 am

That is an excellent article Dave. I sent it to my college rising senior son who is here for the summer. I am going to have him read and discuss with me various sections - section 11 will be one of the first. He is a computer science/math major so no business background but I think he would benefit. Honestly I find it is hard to get anyone to read something "for their own good" especially your kids who would like to tune me out! I love the emotional/behavioral angle of the article. Nothing new and mostly recycled common sense, even a reworked hierarchy of needs triangle but it all fits together well.

wolf
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Re: Psychology of Money

Post by wolf » Fri Jun 08, 2018 8:55 am

Dave, thank you for sharing! That's a great article. It fascinates me because I like psychology and I am interested in money topics.

A quote from the text, which relates to ERE:
"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."
But the examples would be totally different ones ;)

And this is a good one too:
Singer Rihanna nearly went broke after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”

jacob
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Re: Psychology of Money

Post by jacob » Fri Jun 08, 2018 9:25 am

Section 5 explains much about the popularity of simplistic investment strategies in the FIRE community from YMOYL's 100% LT Treasuries to the current 100% VTSAX strats. Similar graphs could be drawn for other starting years and other asset classes and they would all lead to the same conclusion. After a good run in any asset class, people eventually get around to writing books and popularizing how all you gotta do to be an investment genius is to buy that particular investment. Those stories all end the same way.

IlliniDave
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Re: Psychology of Money

Post by IlliniDave » Fri Jun 08, 2018 10:49 am

I sort of disagree with the age band he selects. I think 20s-30s is probably more relevant than teens and 20s. Maybe it's different now but my born-in-the 60s contemporaries didn't think much about investing until after college. I do remember in my teens ('77-'84) it was the high inflation era and buying silver was popular for a while.

But his point is valid, in many ways humans tend to bear the stamp of their formative years for a long time.

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Re: Psychology of Money

Post by jacob » Fri Jun 08, 2018 11:30 am

Yeah, he's committing his own (5)-error, as a finance person, at the meta-level.

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FBeyer
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Re: Psychology of Money

Post by FBeyer » Fri Jun 08, 2018 11:38 am

IlliniDave wrote:
Fri Jun 08, 2018 10:49 am
...But his point is valid, in many ways humans tend to bear the stamp of their formative years for a long time.
From a neurochemicals-as-rewards point of view, that is absolutely true! Our dopamine, oxytocin, serotonin, and endorphin pathways are most strongly built during our teenage years, which is why we continue seeking rewards throughout most of our adult lives that actually have some sort of connection to what made us happy during our teenage years.

Just knowing that for a few months has actually made a difference in my life. :shock:

Campitor
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Re: Psychology of Money

Post by Campitor » Fri Jun 08, 2018 6:58 pm

My favorite quote from the article:

And behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow. Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.

Jason
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Re: Psychology of Money

Post by Jason » Sat Jun 09, 2018 5:10 am

Great article. I always find it beneficial when there are anecdotal examples at the center of the argument/discussion.

On a basic level, it points out that the best investors are the best savers who invest in a basic manner. That's always been inspirational for me. It means I can do it. Also, the lady who ended up 7 million. Many people would say "there is something wrong with her." That's how I used to think. Now, she is a role model.

I'm in therapy and the discussion often revolves around value, specifically maintaining an intrinsic notion of it as opposed to an external or performance based notion of it. You can't get to seven million in such a humble manner without maintaining that.

The money I do have is just money I didn't spend and left it where I couldn't get my idiotic hands on it.

IlliniDave
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Re: Psychology of Money

Post by IlliniDave » Sat Jun 09, 2018 7:11 am

Campitor wrote:
Fri Jun 08, 2018 6:58 pm
My favorite quote from the article:

And behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow. Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.
Yeah, that's one that resonated with me. For a long time my reflex reaction was to go to the numbers/math for the answers--like the old adage of having a hammer and looking at everything as a nail. That's not to disparage math or numbers, they are quite useful if they accompany constructive behavior. Not so much if the underlying behavior works to the contrary.

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Sclass
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Re: Psychology of Money

Post by Sclass » Sat Jun 09, 2018 7:59 am

Thanks for posting. Full of wisdom. I’m going to forward this on to some young people I know. Overall this is good information.

I do have a small issue with this. Grace is not all she’s made out to be in the blog. Her results were a little too good and encouraged me to investigate further.

https://seekingalpha.com/article/404512 ... ace-groner

Reality isn’t simple...oh yeah he did at least say that. :lol:

Jason
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Re: Psychology of Money

Post by Jason » Sat Jun 09, 2018 9:08 am

That backstory only increases my admiration for her. She had the equivalent of 3K of money at the tail end/beginning of recovery of The Great Depression and had the fortitude to buy stock. I don't know at what date she became a millionaire, but she let it accumulate. That is some Benjamin Graham shit right there.

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Sclass
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Re: Psychology of Money

Post by Sclass » Sat Jun 09, 2018 9:47 am

Yes. How many twenty something admins do you know with $3000 in their pocket? Waiting for an investment opportunity? On top of that, not on a big name like AMZN or Netflix...but some yet to be heard of pharma company?

I get it, she’s being used as an example of frugality and discipline. However some of the comments on luck and skill just fall flat when you try to consider her line of thinking as her $180 doubles again and again and she doesn’t cash out. Truly remarkable and rare.

Brokers were also a different animal back then. It wasn’t easy to hold a winner back in the day. She must have faced intense pressure from her brokers to diversify out...unless she held certificated shares in a vault. Even then with splits, dividends and M&A it would be clear to her broker what she was holding. She must have had religious commitment.

There is another admin type with a similar story. This one smells of insider trading.

https://www.nytimes.com/2018/05/06/nyre ... nates.html

Bottom line, both are highly improbable outcomes. Luck?

Jason
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Re: Psychology of Money

Post by Jason » Sat Jun 09, 2018 10:29 am

The question as to "why did she buy Abbott" is interesting but ultimately, as you allude to, the real source of admiration is not so much her stock picking prescience, but her pre-natural forbearance in holding. That being said, you can chalk up the first half of the equation to luck, the second half to discipline.

And I like to think that the fact that she gave it to charity as opposed to people she knew was a double finger salute to either them knowing she had it and telling her to sell or not knowing she had it and her observation that its better off someplace else.

The second story I agree is a bit dubious. She had access to a lot of information.

jacob
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Re: Psychology of Money

Post by jacob » Sat Jun 09, 2018 10:56 am

I'd submit that most people here who are in runaway mode(*) will end up somewhere in the high-millions (AFTER adjusting for inflation) but that's if and only if they live to 95+ (which both of these admins did). The key here is to start early, invest in something with a reasonable level of compound growth, stay invested, and live a very very long life.

(*) And reached FI in their 20s or early 30s.

Staying invested is where most humans fail. They flop around or they pull the money out for consumption. That's the main lesson here.

Living long is crucial for getting high results and this is the main reason we know about these examples. If they had died at 70 instead of 96 and 100 respectively, that's ~3 decades of compound growth which at 6% is almost a factor 6x difference. This would mean not donating 7 million but something closer to 1 million which while still very respectable is probably not news nor wiki worthy.

However, fully investing in the company you work for is a bad strategy and a bad lesson to learn. Plenty of stories of people who did exactly that in companies that eventually went under and consequently they lost not only their savings but also their job. Are we going to see similar stories about admins who worked 40 years for GM?

Jason
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Re: Psychology of Money

Post by Jason » Sat Jun 09, 2018 11:21 am

Granted genetics played an important role and created the wow factor, but it was luck and discipline in their formative years that sowed the seeds. That's why these stories are stories. Many people live to that age, but few die with that bank. I just calculated that if I don't touch my current non-crazy aggressive and modest savings, allow for 6% annual growth and don't contribute one more cent, I'll have 3 million at 85. It's not newsworthy, but just goes to show how doing nothing is the easiest and hardest thing to do. Not to mention my future crotchety self will have no one to blame but his past crotchety self if he's alive, semi-cognizant and realizes he's not a multimillionaire.

IlliniDave
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Re: Psychology of Money

Post by IlliniDave » Sat Jun 09, 2018 11:51 am

I'm probably in low runaway mode (not sure exactly what you mean by that). I've been accumulating since my 20s but only hit FI a couple years ago. Even with my relatively subdued expectations for future returns and infinitesimal chances of making it to 90, getting to a coupla-three mil in today's dollars is not out of the question if I can keep it from burning a hole in my pocket. Someone with a better early start than I had and more conducive overall financial habits...the possible outcomes on the high side are dizzying.

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Sclass
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Re: Psychology of Money

Post by Sclass » Sat Jun 09, 2018 1:32 pm

What is runaway mode?

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BRUTE
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Re: Psychology of Money

Post by BRUTE » Sat Jun 09, 2018 1:49 pm

Grace Groner was an extreme stock picker :D

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Re: Psychology of Money

Post by jacob » Sat Jun 09, 2018 2:39 pm

[Exponential] runaway is when all the Monte Carlo trajectories has an end-point that's higher than the starting-point. It's not well-defined, but good enough for government. Effectively, WR is low enough so that it never materially impacts the compound growth. Historically, WR<~2% have been in runaway mode.

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