Happiness with Friends
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Mr. Micawber, in Charles Dickens' David Copperfield
Rumor has it, you don't like your neighbor. You know, the one who voted for the other guy last time around? Rumor has it, she probably doesn't like you either.
We all enjoy being with people we like. In fact, we get our news from folks we agree with and we talk to people who share the same beliefs. But deepening political biases are a manifestation of a psychological phenomenon that also may be worsening and has real-life financial costs.
Kahneman (author of Thinking, Fast and Slow) and the white coats call it "confirmation bias": the tendency to search for, interpret, favor, and recall information in a way that confirms one's beliefs or hypotheses while giving disproportionately less attention to information that contradicts it.
We don't check our emotions at the door when we pick up our investment hats. We carry with us all the ideas that our friends give us and we make things worse (or better) based off our biases. Think about the biases you may have about several types of investments, like stocks and real estate.
Example #1: stocks are risky. We avoid stocks over the long haul at our peril. With inflation, our fixed income investments gradually struggle to keep up with our spending. For comfort, we hang out with others who feel the same way. Instead of finding balance, we make a mistake and miss out on the best-performing class of assets over long periods of time, compared to all the others. As we grow older, our confirmation bias strengthens, as we feel emotions more strongly (naturally), the stress worsens our plight.
Example #2: owning real estate is hard work. We avoid owning real estate at our own peril and we enter retirement in a rental, or with too large a mortgage, and we risk losing control over our own financial futures. As we grow older, real estate does become harder to manage, and our confirmation bias strengthens, perhaps not to our advantage.
As David Copperfield learns, money permeates happiness like fruit on a vine. We find what we look for. If we feel poor, we find it. We effortlessly attract people who share our opinions, and our confirmation bias grows in strength as our pocketbook grows thin.
Within your investment portfolios, choose investment managers who have different opinions. At our firm, we make a conscious decision to test our biases. From this effort, our clients benefit. We make it that much easier for our clients to find balance. As Mr. Miyagi counsels young Daniel-san in The Karate Kid, "Lesson not just karate only. Lesson for whole life. Whole life have a balance. Everything be better. Understand?"