People like to assume they can think objectively. But you and I are just a product of the experiences we've had in life.
In 2006, Ulrike Malmendier of U.C. Berkeley and Stefan Nagel of
Stanford University looked at how various cohorts of Americans differed in their views about investing.
Controlling for age, wealth, income, and other social factors, how
the economy performed during people's young-adult years had a profound
impact on how they invested later in life.
Those who grew up during the Great Depression were half as likely to
invest in stocks as adults compared with those raised during the roaring
1960s. Those who grew up during the inflationary 1970s were less likely
to invest in bonds later in life than those raised during the stable
1950s. Growing up during the prosperous 1980s made you highly likely to
favor stocks during the 1990s. "Our findings suggest that individual
investors' willingness to bear financial risk depends on personal
history," the authors wrote.
This seems obvious, but there's an important takeaway: One person's
view of risk can be completely different than someone else's. And not
because one person is smarter or has better insight than another, but
simply because they were born in a different year.
Emotional experiences also have a downside: Memories are often
distorted, so much so that some of what we remember never actually
For decades, psychologists have interviewed people who had an
emotional experience, sprinkled in some fake prompts, and watched their
memories fool them on the spot. In one famous example, Lawrence Patihis
of U.C. Irvine discussed 9/11 with a group of research subjects, and
found that, when prompted, many could vividly describe seeing video of
Flight 93 crash into a field in Pennsylvania (this video, of course,
doesn't exist). "It just seemed like something was falling out of the
sky," one participant said. "I was just, you know, kind of stunned by
watching it go down." They weren't lying. This is a common
flaw when recalling emotional experiences, as we try to forget painful
memories and replace them with pleasant thoughts.
If someone's view of risk is influenced by what year they were born,
and people's memories of emotional events may not even be accurate,
there's an obvious lesson: When seeking advice, you should consult a
variety of different people of different ages and backgrounds who have
experienced different things in life.
This isn't a substitute for skill. But if you get all of your
investment advice from 50-year-old white guys, you will get opinions
from people whose worldview is colored by similar experiences. And those
experiences may be incomplete, not relevant to today's world, and
biased in thinking the future will resemble their specific past.
A common trait you'll see among the world's best investors is an open
and flexible mind. They are happy to hear diverse opinions from people
of all different ages and backgrounds. This isn't because they're nice,
but because they understand everyone is biased to their own experiences,
and that no group has a monopoly on wisdom. Think about the last
five years, when lots of angry old men were hyperventilating about
looming hyperinflation and the coming collapse of the dollar, while a
bunch of college kids who were "ignorant of history" were busy building
billion-dollar tech companies. Not being constrained by past experiences
can be incredibly valuable.