The great thing about financial panics is that they teach you a lot about yourself and test the boundaries of existing thought which exposes the world to yearn for new understandings. The Great Financial Crisis was one of the most educational periods in finance and economics in modern times. But it’s funny to look back on the world because, as the old saying goes, the more things change the more they remain the same. While there was so much to learn from this period I am not so sure that we’ve actually digested all of those lessons. But I know my views have certainly evolved and changed over this period so here’s some of my big takeaways from the post-crisis period. They might not change your mind, but maybe they’ll challenge them a little bit:
- Learn to be voraciously open-minded. People are more interested in confirming what they already know than they are in learning something that forces them to admit they were wrong. Learning is hard. Assuming you already know everything is much easier. Therefore, when confronted with a big problem the path of least resistance is to fall back on what you think you already know. This is just good old Dunning Kruger (most people think they’re better at things than they really are) and confirmation bias at work. The crisis taught me that I know a lot less than I thought. Around 2010/2011 I got so fed up with the pessimism, politics and biases that I decided to make a concerted effort to be more objective. I decided that I would learn how the system actually works and form an objective view and model that tries to make unbiased and objective determinations. I went through a great evolution in thought during this time and I even promoted some theories that I later learned were wrong (like Modern Monetary Theory). But the key to all of this evolution and learning was recognizing that I knew less than I thought and that my previous views had been wrong. The crisis taught me that no one has all the right answers in finance and economics and that you need to be voraciously open-minded to competing views. Being an independent thinker, avoiding cult-like groups (sorry in advance – Bogleheads, MMT, Austrian Economics, etc) and always asking yourself if you could be wrong, are essential to becoming an objective critical analyst.
- Emotional biases will destroy your portfolio and your economic understandings. The one thing I’ve seen over and over again since the crisis is the destruction of emotional biases. This is particularly pervasive in political groups where emotions (mainly fear) can trigger strong biases. I’ve busted a ton of economic and finance myths over the last 10 years (see the biggest myths in economics here and the biggest myths in investing here). And I’d argue that most of them stem from some deeply emotional bias. People either have an irrational fear of the financial markets based on biased misunderstandings or they have strong political biases that corrupt their ability to think about economics objectively. When it comes to economics and finance you need to check your emotions and politics at the door.
- Perfect is the enemy of the good. The financial crisis led to a voracious appetite to better understand our monetary world. And while this learning was good, it could also be destructive. For instance, I found myself watching financial TV every day during the crisis only to realize over time that none of that was helping me learn. It was mostly just filling my brain with things I didn’t need to know and exposing me to emotional short-termism. I turned off the TV 5 years ago and I’ve learned infinitely more since. But this is just one example of how trying to learn too much can be destructive. The reality is, you don’t need to know everything and you won’t ever know everything. The monetary system is too complex and too dynamic for you to understand it all. So it’s better to understand enough that you can be competent, but not so much that you become a danger to yourself. More importantly, in portfolio management the pursuit of perfection is a pitfall in that the grass will always look greener elsewhere. There’s a certain freedom and comfort in knowing that you have a good understanding, a good process and that you don’t need to chase the very best investments or the absolute perfect economic theory. This sort of reverse Dunning Kruger mentality will likely result in better decision making and outcomes over time.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.