Origins of Greed and Fear

Jan 31, 2019 by Morgan Housel

Greed and fear control everything in investing.

There is no amount of growth that can’t be destroyed by an investor’s temptation to grab too much of it. And there is no opportunity so appealing that it will catch the eye of someone who refuses to look.

But greed and fear aren’t always character flaws. People with the best intentions and ethics fall for their temptation. The two traits evolve from something innocent: the amount of confidence we have that our actions influence our outcomes. Figuring out how much of what you do influences what you get requires calculating odds in situations where accurately knowing the odds is impossible.

The problem happens when convenience masquerades as a calculation, and you cling to the most comfortable odds by thinking opportunities are more, or less, in your control than they really are. This form of greed – which has nothing to do with bad ethics – is pervasive. And this form of fear is innate. But they are powerful. They apply to investments, businesses, industries, and countries. Confronting them just once can make or break a career. And while greed and fear are typically seen as opposites, they share an origin.

There is a natural cycle where innocent analysis evolves into greed, turns into denial, then confusion, then fear. It often drops you off where you began, with the lesson you think you learned from experiencing fear setting up your next meeting with greed.

Here’s how it happens.

Part 1: Greed

Greed begins with the most innocent idea: You deserve to be right.

The decisions you’ve made. The decisions you’ll make. The worldview you hold. The strategy you use. It’s hard to wake up in the morning and look in the mirror without telling yourself that you can make good decisions. Nothing would get done if people doubted themselves all day. This is especially true if you’ve had past success in education and work.

And you deserve to be right because you’ve put so much effort into developing your views and decisions. You went to school for years. Passed hard tests. Did hard thinking.

Put in long hours. No one wants to hear they went through that grind and still don’t deserve to be right. And deserving to be right means you should be rewarded for being right. Effort equals reward. That’s how the world works, isn’t it?

Escaping this thinking is not easy.

It’s hard to make it through the day admitting you don’t know how the world works. So no one does it. The humblest of people use simplified stories that guide their belief in cause and effect. And it’s agonizing to rewrite your worldview, or your investment strategy, or your business model, from scratch after years of effort. So people become good at clinging to views even when they’re built on flimsy evidence.

Views that we insist are right and deserve to be rewarded are often tied to the random chance of our past experience. The investor who happened to be born in the 1930s was ravaged by high inflation in the 1970s.

To continue reading, please go to the original article here:

https://www.collaborativefund.com/blog/origins-of-greed-and-fear/