Who’s better than you?

Much of the happiness research that I’ve read says we base a good deal of our happiness on our position relative to the others around us rather than on our absolute position.

So it matters more to our happiness for us to know that we have more food than the other guy, than that we have more food than we have ever had before.

The explanation I’ve read for this is that the best way to assure our evolutionary fitness in the past was to just be better than the people around us. The theory goes that if we were better than the people around us, then we would get chosen as a mate more often than they would and our genes would thus get passed down.

Our ancestors would then have that same inborn genetic desire to be better than the people around them thus keeping the cycle going. This I guess is the root cause of the need to “keep up with the Joneses”.

Can logic prevail?

That being said, logically we should realize that our absolute position is more important than our relative one. Logically we would be more satisfied with all the food we could eat, than with only two crusts of bread. But if we let our emotional brains make the decision, we would be more happy with the two crusts of bread, if everyone else only had one crust of bread, than with all the food we could eat, if everyone else had all the food they could eat plus a crust of bread.

So there’s a danger there that we need to watch out for. The danger of our brains tricking us into doing something that we know logically to be the wrong move, but that we can temporarily be emotionally tricked into doing. For example, we might logically know that it would be a bad idea to buy a new car, but when the neighbor comes home with his new car we feel that emotional twinge to go out and get one ourselves.

So what implication does this have for our investing?

One point is that we should try to avoid finding out if someone else is actually better off than we are. In this case ignorance really is bliss. If we don’t know if someone else is better off than us, then we won’t be tempted to make a bad decision to try to catch up with them.

So it is in our interest not to talk about our salaries because we might find out that they are not as high as the person we are talking to. As long as we don’t know the real numbers, we can imagine that we are paid more than the other person. And conversely they can imagine the same thing. But as soon as we both know the reality, then we’re both stuck comparing and then one wins and the other loses.

Don’t talk about investments

Along the same lines, it would also be a good idea not to talk about our specific investments. If we own a stock and we tell someone about that stock, then our egos are now affected by every up or down move of that stock. When we are evaluating whether or not to sell, we now have to decide what the guy we told is going to think. If we sell out now, and the stock jumps 50% he’ll know we were stupid and missed it. And if we hang on, and the stock falls 50% he’ll know we were stupid and lost all that money. So the best idea is to keep the specifics of our investments to us.

The strategies I’m advocating, No Lose Stocks and Long Shot Options, are very prone to this weakness. For most of the time, they are not going to generate returns. True, they won’t generate losses either, but people only want to tell us about the wins they make, not the losses. So we’re likely to hear lots of stories about stocks that went up large amounts, when our own investments have just seemingly languished.

But this is actually the reason these strategies work. The person on the other side of the trades, the one selling the options, is telling someone about how much money he makes each month selling options to some chump. And for most of the months that guy will be correct. Most of the time the options will expire worthless, and the seller will get to keep the money. But eventually the seller will get careless or greedy, and he’ll stretch too far. On that month or in that year, the strategy will pay off for us, and make up for all of the other losses and then some.

So if we’re following these strategies we need to realize that we are susceptible to being tricked into thinking that the strategies are not working, or that there is a better strategy out there. And we need to make sure to stay the course.

The best solution I have found is to avoid discussing specifics.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s