What's driving your investment strategy? FOMO or loss aversion?

The Dow Jones dropped 1,032 points on Monday and 879 points on Tuesday due to concerns about COVID-19.  It seems logical that a slowdown in activity would negatively impact the global economy.  And since things were already heading downhill last year - GDP growth in 4thQ was 2.1%, before corrections which generally lower it significantly - we are not well poised to withstand a downturn.

So investors have to decide what motivates them more.  FOMO or loss aversion. 

We are hard wired to fear change.  And we hate to lose more than we like to win.  It's called "loss aversion."  In their seminal study on Prospect Theory in 1992, Tversky & Kahneman identified a two to one ratio.  Meaning that we hate to lose twice as much as we like to win. (Tversky & Kahneman, 1992)

On the other hand, we also hate to miss out.  That's why sales of tickets for Broadway shows soar after they announce their pending closure.  So that's where the FOMO comes in.  A move to safer investments could mean losing out if the stock market continues to climb.

So the question is which of these opposing forces will win out.  I'm betting on loss aversion.  How about you?

Tversky, A. & Kahneman, D. (1992) Advances in Prospect Theory: Cumulative Representation of Uncertainty.  Journal of Risk & Uncertainty.  Retrieved February 25, 2020, from

http://psych.fullerton.edu/mBIRNBAUM/psych466/articles/Tversky_Kahneman_JRU_92.pdf

60 is old.

I turned 60 last week and I am still trying to process it.  The average life expectancy in 2019 was 78.8 years.  Hmm.  Suddenly that doesn't seem so far away.

As if that isn't discouraging enough, the average age of Americans in 2020 is 45.  The median age is 40.  And the mode is 30. 

So clearly 60 is old, but am I?  Cue the denial.  That's what people do when they hold two conflicting points of view which they need to reconcile.  To eliminate their discomfort they discount one point or the other.

Option one is of course to accept the truth that 60 is old and so am I. 

Option two however is to deny that 60 is old since I can't possibly be old.  That's why people run around saying silly things like "60 is the new 50."  What does that even mean? 

The truth hurts.  Literally.  I used to swim two hours a day, five days a week.  Now I can only manage 45 minutes twice a week -  if I use my foam roller faithfully at night.  So I find myself thinking "If you think 60 isn't old, you must not be very active." 

Which brings me back to where I started.  60 is old.  And if you aren't thinking about your legacy instead of spouting silly denials then you need to get real.   

How do you want to be remembered?

Do you prefer your LEGO with or without instructions?

I love LEGO.  I played with them as a child and have been lucky enough to play with them again with two generations of nephews.  But I am strictly a free form user.  I like to use my imagination to build houses and furnish them.  That's why my grandfather thought I might become an architect someday. :-)

But , after a loss in 1998, LEGO made a licensing deal with Star Wars and switched to producing branded sets rather than plain bricks.  The move saved the company by bringing in an entirely new group of users - those who prefer to follow directions. (Bhattarai, 2020)

People who like instructions find following them relaxing.  Interestingly they have the exact opposite effect on me.  Where they see the opportunity to find perfection, I see the opportunity to make a mistake. 

It all comes down to personality type.  Myers-Briggs has identified four preferences based on the way that we see and interact with the world.  I am an ENTJ.  So what does that mean in LEGO terms?  As an "N" I like to use my imagination and create new things.  And as an off the charts "J" I am a perfectionist who hates to make mistakes.

But it is interesting to note that I am part of a very small group.  Most people are "S's" not "N's".  That means that they like what is known and familar, what's real.  And they like instructions.

Since 70% of Americans are "S's." Kits are definitely the way to go.  But I hope they keep making raw bricks for the "N's" too. ;-)

Bhattarai, A. (2020, January 16)  Lego sets its sights on a growing market: Stressed-out adults.  washingtonpost.com.  Retrieved February 3, 2020, from  https://www.washingtonpost.com/business/2020/01/16/legos-toys-for-stressed-adults/