WEBVTT - Ep73 "How do we fool ourselves in the stock market?" 0:00:05.519 --> 0:00:08.960 How do we fool ourselves in the stock market? And 0:00:09.039 --> 0:00:12.840 what does neuroscience have to do with investment? And what 0:00:12.880 --> 0:00:15.400 does any of this have to do with Isaac Newton 0:00:15.920 --> 0:00:19.120 or the Dutch East India Company which ran for two 0:00:19.200 --> 0:00:23.799 hundred years, or Kodak or the way that zebras like 0:00:23.880 --> 0:00:28.920 to herd or instincts or emotions and almost two hundred 0:00:28.920 --> 0:00:36.640 different cognitive biases. Welcome to Innercosmos with me David Eagleman. 0:00:36.840 --> 0:00:39.800 I'm a neuroscientist and an author at Stanford and in 0:00:39.840 --> 0:00:43.879 these episodes we dive deeply into our three pound universe 0:00:44.320 --> 0:00:48.080 to uncover some of the most surprising aspects of our lives. 0:00:48.400 --> 0:00:52.120 Today's episode asks what do brains have to do with 0:00:52.560 --> 0:00:59.720 the stock market? So there's this old joke about a 0:00:59.760 --> 0:01:03.000 man who's looking for enlightenment, and he goes on a 0:01:03.120 --> 0:01:07.240 journey to find the wise man, and he hipes snowy 0:01:07.280 --> 0:01:11.880 mountains and fords rivers, and after many months of toil, 0:01:12.360 --> 0:01:16.559 he summits a peak and he finds the wise man 0:01:17.080 --> 0:01:20.039 sitting there cross legged at the top. And the man 0:01:20.120 --> 0:01:23.199 drops to his knees and he says, Oh, wise one, 0:01:23.319 --> 0:01:26.440 what profound words of wisdom can you share? With me, 0:01:26.840 --> 0:01:29.800 and the wise man looks at him and says, by 0:01:29.920 --> 0:01:33.280 low sell Hi. Now, whether you think that that's the 0:01:33.319 --> 0:01:36.280 world's funniest joke, it doesn't matter, because the fascinating part 0:01:36.360 --> 0:01:39.199 is that the joke is stuck around for generations. 0:01:39.840 --> 0:01:41.000 And this is because the. 0:01:41.000 --> 0:01:44.960 Advice is so simple, and yet most people in the 0:01:45.000 --> 0:01:49.520 stock market find it incredibly difficult for their brains to 0:01:49.720 --> 0:01:54.120 stay on track to follow that advice. Instead, they buy 0:01:54.160 --> 0:01:57.520 a stock once it's shot way up and everyone's talking 0:01:57.520 --> 0:02:01.360 about it, and when the stock starts crashing they do 0:02:01.400 --> 0:02:04.960 a panic cell. But of course that kind of bad 0:02:05.000 --> 0:02:07.320 decision making is just the very start of it. We 0:02:07.480 --> 0:02:10.720 humans do all kinds of bad decision making in the 0:02:10.760 --> 0:02:14.760 stock market, or more generally, when we're thinking about how 0:02:14.800 --> 0:02:19.280 to invest our savings. Why, well, it's because we're not 0:02:19.960 --> 0:02:22.320 like mister Spock and star Trek, who knows how to 0:02:22.360 --> 0:02:28.359 make optimal logical decisions. Instead, we are yoked with psychologies 0:02:28.480 --> 0:02:32.040 that have long evolutionary histories, and as a result, they 0:02:32.120 --> 0:02:35.520 have all sorts of flaws in their reasoning, which we 0:02:35.680 --> 0:02:40.520 generally summarize as cognitive biases, which are these patterns that 0:02:40.560 --> 0:02:45.440 you see where we deviate from rationality in our decision making, 0:02:45.480 --> 0:02:48.560 we do things that are often irrational. 0:02:49.240 --> 0:02:50.160 Why do we do this? 0:02:50.320 --> 0:02:54.640 Well, the world is extremely complicated, but your brain is 0:02:54.639 --> 0:02:57.359 always trying to get a grasp on it and have 0:02:57.440 --> 0:03:01.960 some control over what you can do. And so with time, 0:03:02.600 --> 0:03:05.120 like millions of years or sometimes tens of millions of years, 0:03:05.560 --> 0:03:10.200 you develop these mental shortcuts that work much of the time, 0:03:10.240 --> 0:03:15.280 but they're not actually strictly logical. Now, in my book Incognito, 0:03:15.400 --> 0:03:18.760 I wrote about how much of your brain's activity is 0:03:18.840 --> 0:03:22.760 running under the hood, and my analogy was that the 0:03:23.000 --> 0:03:26.400 conscious mind, which is the part of you that flickers 0:03:26.440 --> 0:03:28.880 to life when you wake up in the morning, that's 0:03:28.960 --> 0:03:32.359 like a broom closet in the mansion of the brain. 0:03:33.200 --> 0:03:35.920 Most of what you think and do and act and 0:03:35.960 --> 0:03:40.200 believe you have no access to. As a result, even 0:03:40.240 --> 0:03:43.760 though we typically feel like we are excellent stewards of 0:03:43.800 --> 0:03:48.920 our decision making, there are all kinds of irrationalities that 0:03:49.000 --> 0:03:54.000 humans display. Now. Not being like mister Spock is typically 0:03:54.000 --> 0:03:56.960 not the end of the world, and obviously for our species, 0:03:57.120 --> 0:04:00.720 for all its flaws, we continue to get by. But 0:04:00.920 --> 0:04:04.160 these cognitive biases do show up in a much bigger 0:04:04.200 --> 0:04:08.120 way when we look at how people deal with economics. 0:04:08.800 --> 0:04:09.000 Now. 0:04:09.040 --> 0:04:13.360 Traditionally, economics has been studied in the context of an 0:04:13.480 --> 0:04:20.159 ideal decision maker, often called homoeconomicus and homoeconomicists is perfectly 0:04:20.279 --> 0:04:24.560 rational and not influenced by shiny objects or by what 0:04:24.640 --> 0:04:27.800 his friends are doing. But a new field began to 0:04:27.880 --> 0:04:30.400 blossom a few decades ago, and we now call that 0:04:30.920 --> 0:04:37.080 behavioral economics or neuroeconomics, and the idea is to understand 0:04:37.279 --> 0:04:41.360 how people actually make decisions and what sorts of mistakes 0:04:41.400 --> 0:04:45.160 they actually make. And I spoke about this in episode eight, 0:04:45.279 --> 0:04:48.920 which was about how your brain decides what it's actually 0:04:48.920 --> 0:04:52.360 going to buy, like which car and which restaurant you're 0:04:52.400 --> 0:04:55.279 going to go to, and which ice cream flavor you're 0:04:55.279 --> 0:04:58.160 going to choose. But today I want to hit a 0:04:58.279 --> 0:05:02.120 different facet of this top which is you come home 0:05:02.160 --> 0:05:05.080 from work with your paycheck and you decide I'm going 0:05:05.160 --> 0:05:07.960 to do the smart thing and invest this money, which 0:05:08.000 --> 0:05:11.400 is an important idea, but people often lose tons of 0:05:11.440 --> 0:05:14.200 money in the stock market. I've seen this happen with 0:05:14.279 --> 0:05:18.799 friends of mine, and there's been a proliferation of phone 0:05:18.839 --> 0:05:21.679 apps that let you do trading in a way that's 0:05:21.800 --> 0:05:25.320 like an addictive online gambling game and they lose tons 0:05:25.360 --> 0:05:28.960 of money. But not everyone loses money in the stock market. 0:05:29.320 --> 0:05:33.560 In fact, academics study this and generate whole fields that 0:05:33.680 --> 0:05:38.320 wind Nobel prizes about how to allocate assets. So where's 0:05:38.360 --> 0:05:41.560 the disconnect. Well, it has to do with the brain 0:05:41.960 --> 0:05:46.359 and our psychology and with these cognitive biases. So I 0:05:46.440 --> 0:05:50.000 called up my friend Mark Mattson. Mark is an entrepreneur 0:05:50.080 --> 0:05:53.880 and deeply studies the science of investing. He's been in 0:05:53.920 --> 0:05:57.239 the financial industry his whole life, and more than anyone 0:05:57.279 --> 0:05:59.880 I know, he's seen exactly the way that humans be 0:06:00.000 --> 0:06:03.040 behave and the difference in the way they would behave 0:06:03.120 --> 0:06:03.799 if they were. 0:06:03.600 --> 0:06:05.120 Doing so optimally. 0:06:05.720 --> 0:06:08.839 And he's just written a new book called The American Dream. 0:06:09.360 --> 0:06:11.280 And the part I want to zoom in on today 0:06:11.360 --> 0:06:14.840 is the part about how we make decisions in the 0:06:14.880 --> 0:06:23.800 stock market. So here's my conversation with Mark Mattson. Okay, 0:06:23.839 --> 0:06:25.839 So Mark, one thing I talk about a lot on 0:06:25.880 --> 0:06:29.640 this podcast is this idea of the internal model, which 0:06:29.640 --> 0:06:31.320 has been building up since the. 0:06:31.360 --> 0:06:32.159 Day you were born. 0:06:32.720 --> 0:06:35.279 Your brain is locked in silence and darkness and trying 0:06:35.320 --> 0:06:38.440 to model the world and understand what's out there. Now 0:06:38.600 --> 0:06:41.520 you use a term that I believe was introduced by 0:06:41.560 --> 0:06:45.080 the scholar Kenneth Burke originally that I love, which is 0:06:45.120 --> 0:06:49.040 this idea of a screen or many screens tell us 0:06:49.080 --> 0:06:49.520 about that. 0:06:50.240 --> 0:06:54.120 Yeah, so most people think that they have an objective 0:06:54.279 --> 0:06:58.200 view of the world, and their view is the quote 0:06:58.279 --> 0:07:02.600 unquote right view. What he was talking about was you 0:07:02.600 --> 0:07:05.880 don't really see the world. What you actually see is 0:07:06.000 --> 0:07:08.640 what the screens that you have allow you to see. 0:07:09.040 --> 0:07:13.720 And the screens are created linguistically from out of language. 0:07:14.000 --> 0:07:17.080 So some of these screens are created on purpose. So 0:07:17.160 --> 0:07:20.480 if you're a doctor, you spend many, many years creating 0:07:20.520 --> 0:07:24.080 all the linguistic screens around, you know, being a doctor. 0:07:24.440 --> 0:07:27.640 But we have those screens developing all the time, and 0:07:28.040 --> 0:07:29.320 most of them aren't on purpose. 0:07:29.400 --> 0:07:30.640 They're kind of on accident. 0:07:31.560 --> 0:07:35.280 The experiences we had in life, teachers, we had in life, 0:07:36.080 --> 0:07:39.840 and we are unaware that we actually have a screen, 0:07:40.840 --> 0:07:43.560 which then limits us. A lot of people talk about mindsets, 0:07:44.040 --> 0:07:47.320 but I think mindset seems like something that you can 0:07:47.360 --> 0:07:50.560 easily change. Well, I'll just change my mindset. The screen 0:07:50.680 --> 0:07:53.600 doesn't seem like a screen that you can change. It 0:07:53.760 --> 0:07:57.000 actually seems like the truth, and that locks us into 0:07:57.040 --> 0:07:58.760 the same behaviors. 0:07:58.120 --> 0:07:59.720 Over and over and over again. 0:08:00.240 --> 0:08:03.280 You mean, because we believe whatever our screens are telling us. 0:08:03.320 --> 0:08:05.360 We think that is the world out there. I know 0:08:05.440 --> 0:08:09.080 that to be true. Yeah, well, something will happen. We'll 0:08:09.120 --> 0:08:11.200 make up a story about it, a screen about it. 0:08:11.960 --> 0:08:14.480 In the book, I talk about money demons or negative 0:08:14.520 --> 0:08:18.200 beliefs around money and our relationship to money, and once 0:08:18.200 --> 0:08:21.600 they're formed, they take control. It's kind of like the 0:08:21.720 --> 0:08:26.320 movie Aliens where the alien slams onto somebody's face and 0:08:26.360 --> 0:08:28.800 that's all they can really deal with is the alien. 0:08:28.880 --> 0:08:32.600 It takes over, It has complete control, and we don't 0:08:32.600 --> 0:08:33.680 even realize it's happening. 0:08:34.200 --> 0:08:37.120 So give us some examples these money demons. 0:08:38.000 --> 0:08:42.760 So one money demon kind of like the underlying demon 0:08:42.800 --> 0:08:45.880 of all is I don't have enough. I don't have 0:08:46.000 --> 0:08:48.560 enough to have a successful life. I don't have enough 0:08:48.600 --> 0:08:50.640 to create my business the way I want to. I 0:08:50.679 --> 0:08:54.040 don't have enough to live powerfully. I don't have enough 0:08:54.080 --> 0:08:59.199 to feel fulfilled. So this this kind of a scarcity 0:08:59.320 --> 0:09:03.560 beliefs system them a scarcity screen that money, and it's 0:09:03.640 --> 0:09:07.760 just a screen. Money is hard to make, hard to invest, 0:09:08.200 --> 0:09:11.360 and hard to keep, so it's a screen of suffering 0:09:11.400 --> 0:09:15.800 and struggling. Another's related screen would be a victimhood screen, 0:09:16.720 --> 0:09:18.880 in that I'm a victim and I can't really create 0:09:19.240 --> 0:09:21.160 what I really want to create with my life because 0:09:21.160 --> 0:09:25.280 I'm locked in from some kind of victim mentality, as 0:09:25.360 --> 0:09:28.480 opposed to an American dream screen, which would be through 0:09:28.520 --> 0:09:33.520 hard work, individualism, creativity, focusing on creating value for others. 0:09:34.360 --> 0:09:36.880 And I first became aware of this, you know, with 0:09:36.920 --> 0:09:40.840 a story with my grandfather and my father, and they 0:09:40.880 --> 0:09:43.960 had two In fact, the screens that they had were 0:09:44.040 --> 0:09:46.960 so extreme it was like they weren't even living the 0:09:47.000 --> 0:09:50.440 same world, like it was two different dimensions, and it 0:09:50.520 --> 0:09:52.520 made it very hard for them to communicate and have 0:09:52.559 --> 0:09:53.959 a relationship throughout life. 0:09:54.120 --> 0:09:56.559 Let's double click on that. What were those screens for 0:09:56.600 --> 0:09:57.640 your grandfather and your father? 0:09:57.720 --> 0:09:59.960 Well, so, my grandfather grew up in the coal mines 0:10:00.640 --> 0:10:04.200 and the chemical factories in West Virginia, and he had 0:10:04.240 --> 0:10:09.160 a screen that actually that money was evil and anybody 0:10:09.200 --> 0:10:12.400 that had money actually stole it and took advantage of 0:10:12.400 --> 0:10:16.120 other people, so much so that when he was actually 0:10:16.360 --> 0:10:21.440 offered a raise and to be a foreman at Union Carbide, 0:10:21.440 --> 0:10:24.400 where he worked, he refused to take it because he said, 0:10:24.400 --> 0:10:25.720 I don't want to be the man, and I don't 0:10:25.720 --> 0:10:28.080 want to take advantage of other people. He didn't see 0:10:28.120 --> 0:10:31.680 an opportunity to create wealth for his family, to be 0:10:31.720 --> 0:10:34.440 a foreman and actually create value for the people under him. 0:10:35.600 --> 0:10:38.280 And my dad on the other hand, and he was 0:10:38.360 --> 0:10:42.040 driven by a question that was why am I doomed 0:10:42.040 --> 0:10:44.360 to live in West Virginia and why am I doomed 0:10:44.360 --> 0:10:47.360 to suffer here? And my dad had a different question 0:10:47.400 --> 0:10:50.520 which created a different screen. His question was how can 0:10:50.559 --> 0:10:54.400 I escape this abject poverty and create wealth and prosperity 0:10:54.440 --> 0:10:57.920 for myself and other people? And he saw money as 0:10:57.960 --> 0:11:00.840 a way of creating values for others, and hate believed 0:11:00.840 --> 0:11:04.840 in capitalism, and my grandfather didn't. And those who my 0:11:05.000 --> 0:11:10.200 grandfather died alone of inmphysema from the chemical factory that 0:11:10.280 --> 0:11:13.680 he worked in. People will actually die to keep their screens. 0:11:15.240 --> 0:11:21.000 Now you believe that the investing industry is broken, tell 0:11:21.080 --> 0:11:21.600 us about that. 0:11:22.559 --> 0:11:27.880 Well, the investing industry is seriously broken because it's based 0:11:27.920 --> 0:11:30.679 on a very destructive screen. And that screen is something 0:11:30.720 --> 0:11:34.319 we call investor prediction syndrome. People believe and have been 0:11:34.320 --> 0:11:37.679 fed the idea that you need a forecast, either an 0:11:37.679 --> 0:11:41.320 economic forecast or a political forecast, and then based on 0:11:41.360 --> 0:11:44.640 that forecast, you can foresee the future and then pick 0:11:44.679 --> 0:11:47.240 all the best stocks and get in and out of 0:11:47.280 --> 0:11:50.880 the market at the right time, and or pick the 0:11:50.880 --> 0:11:55.439 best managers. But all the academic research is conclusive that 0:11:56.000 --> 0:11:58.880 all the noble and predictable information about the future is 0:11:58.960 --> 0:12:04.199 already in the price. Therefore, only unknowable, unpredictable events will 0:12:04.280 --> 0:12:08.880 change prices going forward. And so people are gambling and 0:12:08.920 --> 0:12:11.560 speculating with their money and they don't even realize that 0:12:11.600 --> 0:12:15.760 they're doing it. And that screen is so embedded in 0:12:15.800 --> 0:12:20.320 the financial industry that it goes unacknowledged. You turn on 0:12:20.360 --> 0:12:22.120 the TV and they're asking, well, what's going to happen 0:12:22.200 --> 0:12:24.680 with the election, and what's going to happen with inflation? 0:12:24.880 --> 0:12:27.440 And what should I invest in based on this forecast? 0:12:28.040 --> 0:12:32.920 And it doesn't it begs even common sense. I mean, 0:12:33.200 --> 0:12:37.240 obviously no one can predict the future, and if they did, 0:12:37.280 --> 0:12:38.720 they wouldn't tell you on TV. 0:12:40.160 --> 0:12:42.000 So it's crazy, right. 0:12:42.080 --> 0:12:44.360 And one of the things that really struck me in 0:12:44.400 --> 0:12:46.880 your book was you looked at a number of these 0:12:46.920 --> 0:12:50.400 predictions where people said in magazines or on blogs or 0:12:50.520 --> 0:12:53.200 articles or whatever about you know, hey, these are the 0:12:53.200 --> 0:12:56.000 stocks to pick for this year, these are the killer stocks. 0:12:56.000 --> 0:12:57.480 They're going to make you a bunch of money. And 0:12:57.559 --> 0:13:00.680 you went through you analyze what actually became of those 0:13:00.960 --> 0:13:03.800 as compared to let's say the S and P five hundred, 0:13:03.840 --> 0:13:04.680 and what did you find there? 0:13:05.440 --> 0:13:11.440 Well, it's the average investor historically averages trying to do 0:13:11.480 --> 0:13:13.880 asset allocation investor money it earns about two and a 0:13:13.880 --> 0:13:17.640 half three percent and the SMP, for example of clocks 0:13:17.679 --> 0:13:22.240 in around ten percent. So on average, people are throwing 0:13:22.280 --> 0:13:25.480 away three to six percent of their return trying to 0:13:25.520 --> 0:13:27.360 pick the best stocks and trying to get in and 0:13:27.400 --> 0:13:29.640 out of the market. And if you find someone that 0:13:29.679 --> 0:13:33.319 got lucky enough to beat the market, statistics show that 0:13:33.320 --> 0:13:36.480 that was just luck and not skill. So it's it's 0:13:36.520 --> 0:13:39.040 extremely destructive for people that are trying to plan for 0:13:39.080 --> 0:13:42.840 their future and their have their American dream. And it's 0:13:43.280 --> 0:13:48.240 and it's driven by all kinds of biases, mistakes and 0:13:48.320 --> 0:13:53.400 thinking and logic. And for example, one of one of 0:13:53.440 --> 0:13:58.679 the biases that people have is hindsight bias. And they 0:13:59.080 --> 0:14:02.000 maybe they picked twenty or thirty stocks and two or 0:14:02.000 --> 0:14:05.520 three of them do really well, in hindsight, they'll remember 0:14:05.559 --> 0:14:08.760 only the ones that did really well, and they'll forget 0:14:08.800 --> 0:14:11.679 about the ten or twenty that they picked that didn't. 0:14:11.440 --> 0:14:13.480 Do well, and they'll think, I'm pretty good at this, 0:14:14.000 --> 0:14:14.520 and they'll. 0:14:14.360 --> 0:14:17.240 Go, wow, I'm great at picking stocks. 0:14:17.679 --> 0:14:21.720 But they never really calculated their total return and it 0:14:21.760 --> 0:14:26.400 gives them which leads into another bias, which is over 0:14:26.440 --> 0:14:27.360 confidence bias. 0:14:28.360 --> 0:14:29.960 They feel way. 0:14:29.720 --> 0:14:34.840 More confident in their abilities than they actually are. And 0:14:34.880 --> 0:14:37.200 we do a little we do a little game in 0:14:37.320 --> 0:14:41.800 class where we'll have people stand up. You know, what 0:14:41.920 --> 0:14:45.120 de style do you fall in for your driving abilities? 0:14:45.520 --> 0:14:47.320 You know, are you in the bottom. 0:14:46.960 --> 0:14:49.040 Ten percent the top ten percent? 0:14:49.600 --> 0:14:52.640 And if you ask them, ninety five percent of the 0:14:52.640 --> 0:14:56.200 people think they're above average in their driving skills, So 0:14:56.640 --> 0:15:03.440 about forty five percent are seriously delusional. But we make 0:15:03.480 --> 0:15:06.040 the same thing with investing our investing ability. 0:15:06.520 --> 0:15:09.280 Yeah, and in fact, there are many many cognitive biases, 0:15:09.440 --> 0:15:13.280 and psychologists and neuroscience have gone through and named and 0:15:13.320 --> 0:15:16.800 identified us so many of these almost two hundred probably, 0:15:16.840 --> 0:15:22.120 but you point out several besides hindsight and over confidence, 0:15:22.200 --> 0:15:24.760 what are others that affect the way that people invest 0:15:24.800 --> 0:15:25.880 their money? 0:15:26.440 --> 0:15:30.360 One of the worst most destructive is hurting. 0:15:30.080 --> 0:15:32.680 Bias, as in h er D. 0:15:33.880 --> 0:15:39.080 Yeah, yeah, hurting, So, you know, great for Zebra, really 0:15:39.160 --> 0:15:45.160 bad for investors. And the psychology behind is that if 0:15:45.240 --> 0:15:50.440 everybody's doing it, it must be right and it must 0:15:50.440 --> 0:15:51.720 be safe. 0:15:51.920 --> 0:15:53.640 And that's how bubbles happen. 0:15:54.400 --> 0:15:57.360 If you look from like ninety five to two thousand, 0:15:57.400 --> 0:15:59.360 s and P five stocks made twenty two percent for 0:15:59.440 --> 0:16:04.680 five years in a row. Tech stocks made forty five. 0:16:03.640 --> 0:16:04.320 Years in a row. 0:16:04.840 --> 0:16:07.680 So everybody loaded up on tech stocks, loaded up on 0:16:08.240 --> 0:16:11.600 you know, based on this hurting bias if their friends 0:16:11.640 --> 0:16:14.960 are doing it. It's it's almost kind of immature, remember 0:16:15.000 --> 0:16:18.600 like high school, you know, where peer pressure. Everybody's doing 0:16:18.640 --> 0:16:20.960 it, it must be the right thing to do. And then 0:16:21.200 --> 0:16:25.200 people are left, you know, stunned when they lose textlocks 0:16:25.200 --> 0:16:28.600 lost seventy five percent of all their value. These these 0:16:28.600 --> 0:16:33.160 are these are not inconsequential results from these biases. 0:16:33.200 --> 0:16:34.120 They can be severe. 0:16:34.960 --> 0:16:49.920 Yeah, And one of the things that you mentioned that 0:16:50.080 --> 0:16:54.000 really struck me was this issue that no company is 0:16:54.040 --> 0:16:55.200 too big to fail. 0:16:55.480 --> 0:16:55.760 Yeah. 0:16:55.800 --> 0:17:01.200 So another bias that people have is familiarity bias. We 0:17:01.280 --> 0:17:05.440 mistakenly think that the things that we're familiar with are 0:17:05.480 --> 0:17:11.359 safe and our good investments. So every when I go 0:17:11.400 --> 0:17:14.480 around and do different speaking engagements, every town seems like 0:17:14.520 --> 0:17:19.040 it has its own, you know, familiar familiarity bias. In Cincinnati, 0:17:19.040 --> 0:17:20.919 where I used to live, it was Procter and Gamble. 0:17:20.960 --> 0:17:21.640 That was their home. 0:17:22.520 --> 0:17:25.320 And I had, you know, an investor some years ago. 0:17:25.359 --> 0:17:28.280 They were only six months from retirement and there I said, 0:17:28.320 --> 0:17:30.080 you know, you really should just put this in cash, 0:17:30.119 --> 0:17:32.119 wait till you retire and diversify it, because you have 0:17:32.160 --> 0:17:35.719 it all in one once thought, And the answer was, 0:17:35.840 --> 0:17:38.960 oh no, it's I worked there for thirty five years. 0:17:39.000 --> 0:17:39.880 I know the CEO. 0:17:40.040 --> 0:17:45.359 We're internationally diversified, and they knew the academics, which says diverse, 0:17:45.440 --> 0:17:49.080 five diversified, diversify. And six months later they had lost. 0:17:49.280 --> 0:17:51.439 They had a five million dollar portfolio. They lost two 0:17:51.480 --> 0:17:55.560 and a half million dollars. And just because they were familiar. 0:17:55.640 --> 0:17:58.240 I met a man recently in one of our classes 0:17:58.280 --> 0:18:02.480 with well tens of millions in Boeing, and he said, no, 0:18:02.560 --> 0:18:03.639 I'm not going to diversify. 0:18:03.680 --> 0:18:06.199 I know Boeing. I worked there for thirty years. I 0:18:06.240 --> 0:18:08.040 have all my money there, you know. 0:18:08.119 --> 0:18:11.639 And Boeing literally made an airplane that wrecked itself on 0:18:11.760 --> 0:18:15.399 the autopilot came on, and then they had doors flying 0:18:15.400 --> 0:18:16.320 off of their airplanes. 0:18:16.359 --> 0:18:18.280 And then they had violations. 0:18:18.280 --> 0:18:23.480 They had twenty billion dollars of contracts canceled. So what 0:18:23.520 --> 0:18:26.480 I what I tried to coach investors is no matter 0:18:26.520 --> 0:18:31.240 how safe you think that company is, no company is safe. 0:18:31.760 --> 0:18:36.000 No company by itself is impregnable, and. 0:18:35.280 --> 0:18:36.840 And any of them can go bankrupt. 0:18:36.880 --> 0:18:39.640 I know it sounds ludicrous to think Apple could go bankrupt, 0:18:39.680 --> 0:18:41.600 but eventually somebody will take Apple out. 0:18:42.920 --> 0:18:46.080 Yeah. What was the Dutch East India Company? 0:18:46.359 --> 0:18:48.439 Yeah, so it was the Dutch East India Company. 0:18:48.480 --> 0:18:52.719 They had they paid an eighteen percent, dived in for 0:18:52.800 --> 0:18:59.120 two hundred years, and they had their own army. 0:18:58.280 --> 0:19:02.200 They had their own warships, they had their own navy. Uh. 0:19:02.280 --> 0:19:04.800 And then in the seventeen hundreds they just went belly 0:19:04.880 --> 0:19:06.480 up and everybody lost all their money. 0:19:06.920 --> 0:19:07.160 Uh. 0:19:07.640 --> 0:19:11.240 It was bigger than Apple, bigger than Google, bigger than Tesla. 0:19:12.040 --> 0:19:14.480 Uh Uh it was. It was, for its. 0:19:14.320 --> 0:19:17.080 Time and for all age, the the largest company that 0:19:17.119 --> 0:19:17.800 ever existed. 0:19:18.040 --> 0:19:20.960 Right, And people felt at the time there's no possibility 0:19:21.080 --> 0:19:23.960 they were worth than modern dollars over a trillion, right, 0:19:24.040 --> 0:19:24.560 something like seven. 0:19:26.000 --> 0:19:29.480 Yeah, I mean just an incredible amount of value. Uh. 0:19:29.520 --> 0:19:31.000 And then they got they got killed. 0:19:31.320 --> 0:19:33.119 Right, so if they can go out of business, Apple 0:19:33.160 --> 0:19:36.160 could go out of business Google, any of these right 0:19:37.040 --> 0:19:38.160 when I when I grew. 0:19:38.040 --> 0:19:43.360 Up, the big one was, uh was Kodak and they 0:19:43.400 --> 0:19:47.320 had they had remember the drive up you know Kodak, 0:19:47.480 --> 0:19:50.600 you know thing where you get your pictures developed. 0:19:50.600 --> 0:19:53.959 And in one day and they even theyd they even 0:19:54.000 --> 0:19:58.280 invented the digital camera and the CEO said, no, we're 0:19:58.280 --> 0:20:00.919 not going to do that U because we're a paper 0:20:00.960 --> 0:20:03.919 and chemical company. They had ninety five percent of all 0:20:03.960 --> 0:20:07.359 the photo development, they had eighty five percent of all 0:20:07.400 --> 0:20:09.680 the cameras sold, and they went. 0:20:09.560 --> 0:20:10.520 And they went bankrupt. 0:20:11.359 --> 0:20:16.040 Same thing with Blockbuster Netflix Netflix for forty million dollars. 0:20:16.080 --> 0:20:19.520 Tried to get Blockbuster to buy them out, and Blockbuster said, no, 0:20:19.560 --> 0:20:21.320 we're not going to buy you out. You know we 0:20:21.760 --> 0:20:25.280 have we have fifteen hundred brick and mortar buildings and 0:20:25.400 --> 0:20:26.600 that's our business model. 0:20:26.680 --> 0:20:30.520 And of course they went under. Who got it? Okay? 0:20:30.560 --> 0:20:34.679 So foreign investor the idea that hey, everybody's investing in 0:20:34.720 --> 0:20:37.200 this company and it's safe, I should put my money 0:20:37.200 --> 0:20:40.240 in the Dutch East India company or whatever that can't 0:20:41.240 --> 0:20:43.840 that's not a good strategy. And in fact, by the way, 0:20:44.560 --> 0:20:49.359 even very smart people can go wrong here. So Isaac Newton, 0:20:50.080 --> 0:20:51.320 what did he invest in? 0:20:51.920 --> 0:20:56.080 So he he invested in the south Sea bubble, So 0:20:56.119 --> 0:21:03.119 you got Newton massive IQ obviously created discovered gravity, calculated 0:21:03.119 --> 0:21:07.639 the celestial movements through the dynamic laws of motion. But 0:21:07.800 --> 0:21:10.440 he got sucked in because all of his buddies were 0:21:10.480 --> 0:21:14.400 in it. Everybody was investing in the south Sea company. 0:21:15.280 --> 0:21:18.760 And he lost the equivalent of three million dollars in 0:21:18.840 --> 0:21:23.439 today's dollars. And it's not just the money, it's the 0:21:23.520 --> 0:21:28.160 emotional toll that it takes on people. And he too, 0:21:28.240 --> 0:21:32.200 his dying day regretted and had remorse and sadness over 0:21:32.240 --> 0:21:34.800 the fact that he had squandered so much of his wealth. 0:21:35.920 --> 0:21:37.880 And I call this attribution error. 0:21:39.119 --> 0:21:41.440 We think that because we're really good in one thing, 0:21:42.560 --> 0:21:47.679 that skill must transfer to another thing, and especially in investing, 0:21:47.720 --> 0:21:51.000 people think, well, I'm a brain surgeon or I'm a 0:21:50.280 --> 0:21:54.600 neuroscientist or whatever, so you know, I'm going to automatically 0:21:54.600 --> 0:21:55.640 be good at this other thing. 0:21:55.680 --> 0:22:00.520 But I give him the example. No one would if 0:22:00.560 --> 0:22:00.800 you had. 0:22:01.000 --> 0:22:04.840 You know, those movies where the pilots of the plane 0:22:05.000 --> 0:22:07.639 get some kind of stomach problem or whatever, and they 0:22:07.680 --> 0:22:10.960 get this, you know, incapacitated, and they ask for someone 0:22:11.000 --> 0:22:13.840 to come and fly the plane, and then a passenger 0:22:14.040 --> 0:22:17.480 lands the plane. I looked up to statistics. That has 0:22:17.840 --> 0:22:24.440 never happened, not one single time. And if you ask 0:22:24.520 --> 0:22:27.560 pilots what are the odds of that happening, they are zero. 0:22:28.000 --> 0:22:30.960 There is no chance of a person that's not trained 0:22:31.000 --> 0:22:34.360 to land it. But if you ask men could they 0:22:34.400 --> 0:22:37.120 do it? Fifty percent of all men say they could 0:22:37.200 --> 0:22:44.600 land that plane. Yeah, overconfidence and attribution error. 0:22:46.000 --> 0:22:48.360 And what about the necessary lie bias? 0:22:49.040 --> 0:22:53.359 Oh my gosh, this one has massive application, not only 0:22:53.400 --> 0:22:58.640 to investing. So it's the thing that you do, uh, 0:22:59.600 --> 0:23:03.480 before you do something that's imprudent. It's a lie that 0:23:03.520 --> 0:23:05.960 you tell yourself to allow you to do it even 0:23:06.000 --> 0:23:10.800 though you know you shouldn't. So it's like okay, for 0:23:10.920 --> 0:23:14.399 an alcoholic, well just won't one won't hurt, you know, 0:23:15.200 --> 0:23:18.320 one drink won't hurt. Or for a gambler and they're 0:23:18.359 --> 0:23:20.960 in Vegas, well they're down twenty thousand dollars, but I'll 0:23:21.000 --> 0:23:24.400