Risk, Trust, & Financial Decisions: The Impact of Emotions on Investments
It's amazing how every event and circumstance always leads me back to Morgan Housel. His teaching is proving to be as timeless as the reviews say. This evening, while I wait for dinner to be done, I decided to see an episode of What If to pass the time.
Source I met the lady, Lisa, who is married to Sean. Lisa is trying to get her company up and running, being late on payments like Rent and Payrolls, she desperately needs Angel investors who will believe in her medical ideas and invest in her company. She has done many pitches and presentations to suitable investors and none of them yield the desired results.
She came home on the last one in which she was so sure she'll be able to get them to say yes and sobbed in the presence of her husband, Sean. Sean believes in her, and even though the loan they got from Lisa's parents to finance her business seems to be due and all her funds are running out, her husband believes in her to be able to stay afloat until she finds an investor.
But there's a twist of events when he tried to close up early so he could go to the hotel and comfort her. He meets an older lady who looks as though she's hitting on him and Sean would have nothing to do with her because as he told her, he's married and happy.
Surprisingly, he got to the hotel room and handed Lisa a card from the lady he met at the bar. It turned out Anne, the lady, is a well-respected and influential lady and any firm would kill to have her take even a glance at their ideas.
Lisa is elated and accepts the invitation to meet Anne. Together, they attended a party in her apartment, where Anne reveals she wants a piece of Sean if she was going to invest even a tiny cent in Lisa's company. This is where it gets tricky and emotions start flowing in.
Sean loves Lisa and Lisa loves Sean so much that they wouldn't do such a thing as sharing themselves with other people. Most importantly, they trust themselves. They were offended by Anne's offer and rejected it on the spot.
But life surely had different plans for them.
While they celebrated their brief victory over rejecting the money Anne offered in exchange to have her come between them, none of them expected the turn of events. Sean happened to save the life of a family the next day and was accepted into the Academy as compensation. And Lisa finds out her family is struggling and her dad would need the money he loaned her for her business. What it meant was that they began to question the decision they made the previous night.
Lisa would want to refund the money she borrowed because her family needed it more than ever. And Sean attending the academy means their financial positions will be strained as none of them will be bringing the beacon home. They thought it over and over, weighing their first meeting, how everything changed and they became man and wife up to this point where they have to sacrifice what they shared for them to be alive, survive, and probably do better.
Sean is willing to take Anne's offer so Lisa can get the funding for her company. And Lisa is willing to let Sean do it because she loves him enough to trust him. Their emotions were placed on trial at this point and even though they felt really bad about this, life wasn't giving them any green cards, except the one Anne was offering.
I am sharing this story because, for the umpteenth time, Morgan Housel is right about the decisions people make about their finances when they get to a crossroads. Like Theresa Mendoza, in Queen of the South decided to move her investments out of the market when Tony's life was at risk, Lisa and Sean decided to leave their emotions by the door and step into a world where risk and return are the only languages that investors understood.
Indeed, people make investment decisions that may not look rational to the next person but it's completely reasonable to the person doing it. And of course, vice versa. And the honest truth is that no matter what it is they decide to do with their money, it still boils down to the fact that no one is crazy.
Even the fact that Anne desires a pound of flesh before giving her money away is not in any way crazy. And that's because of maybe the experiences she had in the past. This still makes Housel right about how people who lived through a period when inflation was high compared to those who grew up during stable prices will react to risk and return.
It's the same when you are comparing someone who grew up in poverty and one who was basking in wealth. Housel says, no matter how each person tries to fathom why the other person chooses to handle money the way they did, they wouldn't be able to fathom since their experiences are completely different.
The power that fear and uncertainty has on us is something that could take years to understand and this is not something that studying hard or keeping an open mind can handle. In fact, I am sure that Lisa and Sean's marriage will go through a rough time because of the agreement they signed just to set Lisa up. The surprising part is that there's a clause where Sean is not allowed to discuss any of the things that happen between him and Anne with Lisa.
In all amount of sincerity, every financial lesson has to be experienced before you can completely understand. You will always think the next person is crazy if you do not make peace with the fact that your ability to handle or bear risk depends extensively on your history. And that no matter how much you try to be rational, your emotions will always have a part to play in your investment decisions. And this emotion will arise from the experiences you had with money as you travel through life's path.