Investing Psychology Chapter 4: Keeping Up with the Joneses (Part 2)
Picking up from Part 1 of Chapter 4. We know that groups are dangerous. Now let’s look at how the way information is “framed” changes how we spend our money.
You’ve Been Framed
If I tell you a stock has an 80% chance of success, you’ll probably buy it. If I tell you it has a 20% chance of failure, you’ll hesitate. It’s the exact same data, just framed differently.
We also frame things “narrowly” or “widely.” If you look at every stock individually (narrow framing), you’ll panic every time one drops. If you look at your entire portfolio (wide framing), you’ll stay calm. Stop looking at the daily zig-zags of individual stocks.
The Lottery vs. The Insurance
Most people build “behavioral portfolios.” They have one “pot” of money for safety (insurance) and another “pot” for gambling (lottery).
We’ll buy insurance for our car while simultaneously buying lottery tickets. It’s totally inconsistent, but it’s how our brains work. We want to be safe, but we also desperately want to move up the social ladder.
The Brother-in-Law Effect
Nothing makes us more miserable than seeing our neighbor or brother-in-law get rich. This is the “keeping up with the Joneses” effect.
We start taking massive risks not because we need the money, but because we want to maintain our social status. This is how bubbles happen. We’re not buying the stock; we’re buying the “status” we think the gains will bring us.
The Power of Memes
Long before the internet, “memes” were just ideas that jumped from brain to brain. In the 90s, the big meme was “buy on the dips.” It sounded smart, so everyone repeated it.
But “buy the dip” only works in a bull market. When the market stayed down for a decade, that meme cost a lot of people their life savings. Be careful of “obvious” investment advice that everyone is repeating. It’s probably a virus, not a strategy.
Dividends as an Anchor
If you find it hard to value a stock based on its price (which changes every second), look at its dividend. A dividend is a real payment that’s hard to fake.
Investors who focus on dividends are less likely to get caught up in social hype. The share price might be a self-fulfilling prophecy driven by memes, but the dividend is driven by actual cash.
7 Key Takeaways from Chapter 4
- Groups are extreme. Don’t let a group talk you into more risk than you’re comfortable with.
- Beware of the “echo chamber.” If everyone agrees, someone isn’t thinking.
- Use wide framing. Look at your total wealth, not individual stock tickers.
- Ignore the neighbors. Your social status isn’t worth your retirement.
- Watch out for memes. If “everyone knows” something, it’s already priced in.
- Have a mission statement. Use it to filter out the noise.
- Dividends are real. Use them to anchor your valuation.
In Chapter 5, we’ll go “behind the curtain” to see if the professional money managers are any better than we are. (Spoiler: they aren’t.)