The Sum of Our Lives
It’s strange to accept that the lessons learnt from your own life experiences are of little use when it comes to actually making good decisions.
Whatever experiences we have in our lives are a tiny sliver to total amount of experiences that have been had, and solutions that have been pursued. Using a sample size of 1 is a really dumb way to make decisions.
There’s an analogy that Annie Duke gives in her book about why humans are biased towards negative outcome thinking. The reasoning is that for so many thousands of years as hunter-gatherer’s, being afraid and assuming the worst usually worked out pretty good for us. If you’re hunting in the savannah and hear a rustle in the bushes — assuming it’s a lion & running away is probably the best outcome. Even if 9 out of 10 times it’s nothing. The results of false negatives mean nothing compared to the overwhelming risk of being wrong even once.
I thought of this story whilst reading another book, The Psychology of Money — a book which is really nice about why we make such damn stupid decisions with our money.
People are almost completely shaped by the events that they’ve experienced, second-hand knowledge — that is knowledge they got from reading or hearing, has to be consciously used. But ‘experienced’ knowledge and reflexes occur without thought. That’s why Robert Kiyosaki’s book was such a revelation to so many. People’s money decisions are based on their own personal experiences. A very small set of outcomes.
It’s why the children of rich parents think & feel & react about money in completely different ways than the children of poor parents. It’s why a generation that grew up during inflation will think about & use their money in completely different ways than a generation that grew up during soaring stock markets & lots of jobs.
Ulrike Malmendier & Stefan Nagel from the National Bureau of Economic Research wrote a paper titled ‘Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?’ (Read it Here)
Turns out yes, it really does. Because our brains are not wired for complex financial markets. The usual tricks that help us make better decisions, like negative bias, is a really bad way to deal with the complexities of financial decisions.
We deal with complexity through accumulated knowledge. Through the remembrance of things tried & their results, which get codified into general wisdom & common sense. Think of how well we’re adapted to nature, to smells and sounds, the instinctive reactions that are just programmed in.
We’re having to make decisions in a world that is becoming more complex than we can understand & we’re having to do it without the accumulated knowledge we’ve come to rely on.
We’re all new to the game & the majority of us suck at it. Seems like a good place to start.