The Psychology of Money Chapter 18: When You'll Believe Anything

In a 2009 documentary How to Live Forever, interviewers asked a centenarian what the happiest day of her life was. Her answer? “Armistice Day [...] We knew there would be no more wars ever again.” Of course, having lived over 100 years, she was aware at the time of the interview that the 1918 agreement ending World War I was anything but the end of war. It was the happiest day for her because, after the devastation she had just seen in WWI, she hoped with every fiber of her being that the story of “The War to End All Wars” was true.

Housel recounts this to tell how powerful stories are. Even after tens of millions of deaths, many were at their happiest not because of the state of the world, but because of a deep hope for a better future—and one that was fully believable. This power of story is the same in finance. Housel argues, “Stories are, by far, the most powerful force in the economy.” At a macro level, if people (and the companies and governments they compose) are under the impression that opportunities are increasing, things are getting better, innovation in technology is saving lives, they are holding onto a story of hope that affects what decisions they make. They are willing to put their capital at risk to participate in and aid the progress humanity is making.

The problem is, sometimes these stories are appealing fiction—despite how much we want to believe them, they are not true. Think of a family being delightedly surprised by the growth of their home value in 2006, taking out home equity loans to pay for a more enjoyable life, or those who bought at that height wanting to not miss out on the story of forever increasing real estate values. It was hard at the time to see that this story being told about US real estate was a facade.

With investments there are often stories of promise, unending growth, every-increasing stock prices, spurring euphoria and sometimes poor decisions. “Investing is one of the only fields that offers daily opportunities for extreme rewards.” Sometimes we think “If this stock just keeps doing what it’s done, I’ll be rich!” That’s a story we tell ourselves. It might be true, but Housel warns there are two things to keep in mind about a story-driven world:

1. The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.

2. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

Success in our personal finances comes down to how we behave. So how should we behave?

• As Carl Richards has shared, actively look for disconfirming evidence. Try to disprove the stories you believe and want to be true, and invite others to help (for example, your financial advisor).

• If your financial plan relies on a story being true/coming to pass, build safeguards in the chance that the story is not true. Have an answer for questions like, “What will I do if markets decline 30% or more? What if I don’t get the inheritance I am planning on? What if I don’t make it to 80?”

Let us know

• What was the happiest day of your life?

• What story do you believe regarding the global economy?

Until next time, happy reading!