Working in the financial industry, I have had the privilege of discussing wealth-related topics with people from diverse walks of life. Billionaires, entrepreneurs, celebrities, family members, friends, or even at cocktail parties. All with very different situations, aspirations and perspectives on money. Regardless of their wealth, one thing always stood out.
We humans are not programmed to invest…
We are good at saving and spending, formulating plans with our money, but not at investing. There are exceptions, of course. We all know a few born investors around us, but for most of us, not investing is the default behaviour. And we have long wondered why. Here’s one potential reason.
By definition, investing means accepting to give away something, our money, in exchange for the promise to get it back later, with a little bit more. I urge you to read that once more. Unless you are an incurable optimist, you might be experiencing a strange feeling of suspicion. And why wouldn’t you? Giving away your money and all the potential benefits that come with it, just for a hypothetical gain? Some questions might already be popping into your head:
- “How big is the gain?”
- “When will I get my money back?”
- “What will you do with it?”
- “What are the risks? Can I lose my money?”
There are too many unknowns in this proposition, too many factors that are out of reach. After all, financial markets offer everyday evidence that investments entail risks. What seems like a hypothetical gain on the paper could turn out to be a loss for the investor in reality! Hence the doubt. In technical terms, investing involves delayed gratification and risk, two notions we always struggle with.
…but we are programmed to listen to stories!
Now let’s say you got an answer for each question asked:
- “The potential gain is 20%”,
- “You will get your money back plus interest in 2 years”,
- “Your money will help finance a company about to launch a new vaccine”.
- “The risks are the following:….”
Interested? You might even start crunching numbers in your head:
- “This gain for this period means a 10% annualized return”.
- “The chances of not getting my money back are only 5%”.
- “With the return earned, we could buy the car we need”.
If the numbers are good and the explanations credible, something magical happens: a story emerges. Suspicion becomes excitement. A long shot seems within reach. And when the “potential” benefits of the proposition seem to outweigh the inconvenience and risk of investing, a door unlocks in our brain, and we begin to imagine new possibilities.
Why are investment stories so powerful?
According to Nobel prize-winning economist, Robert Shiller, stories play an important role at an individual level, and at the scale of economies. As he puts it: “Economic narratives are contagious, they suggest scripts for people to follow, they repeat their messages, and they thrive on human interest”. Every day, new stories emerge and spread, drawing you to invest. Stories around innovation stocks, cryptocurrencies, clean energy etc. act as a powerful catalyst: they mix facts, emotions and interests, and form an impression on your mind. The more stories you hear the more you expand your set of possible actions.
Why should you deconstruct stories?
It is important to understand how stories resonate with us, and the kind of actions they prompt. The role of stories is vital in keeping us motivated and inspired. No stories, no investment.
Examining and dissecting them gives us another powerful tool – the ability to remain objective and build a real investment thesis to make an informed decision. If you apply these principles to the investment stories you hear, what do you find?