Be Rational When Everyone Else Is Not

TruePoint Capital

Despite what we want to believe, humans are impulsive and irrational beings. We want to think we are of sound, rational decision-making, but this is far from the truth.

The truth is humans are hard-wired by a variety of influences, including genetic, environmental, and social, that inform our decision-making that often has nothing to do with logic. We are prone to make decisions based on emotions or biases that are either nature or nurture. This “irrationality” is what gets many of us in trouble in many areas of our lives.

In his book, The Laws of Human Nature (2018), New York Times best-selling author Robert Greene takes an in-depth look at our irrational decision-making.

He explains that we are all a bit narcissistic, irrational, short-sighted, and prone to compulsive and aggressive behavior. However, if we can recognize and understand this irrational and compulsive side of our nature, we can begin to overcome them and thrive.

Very few people accept our propensity for irrationality and the influence of emotions on our everyday lives. We think we’re rational, but we’re not. When something bad happens, we blame outside forces, not ourselves. This is because we did everything right and were rational and reasoned in our decision-making. We blame other people or groups or pin it on bad luck when something bad happens. Most of the time, however, we have nobody to blame but ourselves and our inherent irrationality.

Greene cites an example of mass delusion and denial in the form of the 2008 Financial Crisis. There were numerous explanations for the 2008 economic crash, ranging from greedy lenders to inappropriate government oversight.

The real cause was the irrational decisions that individuals made. Even though people were aware of warnings about a bubble and had seen plenty of historical examples of bubbles bursting, they decided to invest because of their emotions (greed and impatience). They saw other people making money and the opportunity to make money themselves, so they took it. As a result, many experienced financial ruin because they refused to recognize that humans are irrational and prone to making mistakes – in this case, a big one.

It’s true that humans are irrational but don’t despair. There’s hope. Greene cites the example of Pericles, a well-respected Greek statesman in Athens around the fifth century BC.

When Athens was under threat of attack by the Spartans, Pericles was able to convince leaders to show restraint and not engage in all-out war. Unfortunately, his wisdom didn’t prevail when the plague struck Athens, and Pericles died. Instead, emotions took over, resulting in a costly and drawn-out war that brought Athens to its knees.

The secret to Pericles’s wisdom was patience, and this is what we need to rely on to curb our irrational decisions. There’s profound wisdom in the age-old saying, “Take a deep breath.” If there were a problem or important decision to be made, Pericles would withdraw to his home and calmly think it over, consider all the potential consequences and make the decision that’s in everyone’s best interest, not just the leaders or wealthiest people.

In the world of investing, it pays to be patient and to make decisions based on well-thought-out reasoning instead of based on emotions and impulses.

The longer you can resist reacting and the more mental space for actual reflection you can make for yourself, the smarter the investment decisions you’ll be able to make.

Start with fasting from news and social media. Ignore influencers and celebrities with hidden agendas. Ignore all the noise from your family, society, schooling, jobs, and the media acquired over your lifetime, and focus on the facts and data before you. Make up your mind.

If investors who lost half their life savings in 2008 or as recently as 2022 from crypto took a step back and understood the house of cards the stock market and crypto teetered on, they would have made different investment choices.

Faced with future investment opportunities, take a step back and take a moment to think. Ignore the hype, noise, and emotions. You may end up finding that it’s the investments that everyone else finds a boring or old school that end up being the most rational options.

So, whenever possible, increase your reaction time so that you’re not making decisions in the heat of an emotional moment. And meanwhile, try to consider all the possible biases influencing your decision-making. You just might discover that the old, boring investments like private real estate and private businesses – ones that are inherently insulated from irrational investor behavior because of their illiquidity – are the right investments for you.

Choose investments that are not affected by the media, world events, or the Fed’s next move, and you might find peace of mind in your investment experience and more prosperity.

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