My mother taught my son a new word this weekend. “Mine.” He’s at an age where he understands more than he can say, so he jumps on any word he can pronounce. Last weekend, the word was “ice” in the cooler that held our beers while tailgating at a college football game. This weekend, it was “mine” as in the cracker with hummus. He loves hummus so much that he licks it off the cracker and asks for a refill, never eating the cracker that gets soggier with every lick.
Mine. The possessive. What a mind-blowing concept for a 1-year-old. Some things are mine, and the rest belong to someone else. Isn’t that what drives us? The desire to acquire more, even if not necessarily more things but more knowledge, more skills, more experiences, more praise, more power.
In their seminal 1979 paper “Prospect Theory”, Daniel Kahneman and Amos Tversky found that participants take safe bets when faced with gains, but they gamble when facing losses. In other words, participants were willing to bet to avoid a sure loss but preferred a small sure win over a 50/50 gamble to win twice as much. It appears that once something is “mine”, we are not keen to lose it and will engage in risky behavior to hold on to it.
Perhaps loss aversion explains why markets tend to fall faster than they rise. We gamble on the way down. I’ve long wondered whether gravity applies to the markets. It takes a painstakingly long time for markets to climb, but they fall quickly and easily. In a scramble to protect “mine” investors trade furiously, believing that action is superior to inaction. How could you sit there and watch it collapse?
U.S. stocks dropped 10% in October. Many investors refused to panic. Been there, done that, got the tee-shirt. Maybe an anchoring bias to the Great Financial Crisis is helpful. If the market isn’t down 40%, it can’t possibly be a crisis. I doubt that this fortitude will last in a more prolonged market decline. We can take a short burst of pain, but years feel very long when the market is down.
When the next bear market comes, and it most certainly will even though we won’t know when in advance, there will be an urge to do something in your portfolio. It’s human nature to grasp at something, anything to make us feel like we tried to escape the pain. But most of the time, it makes sense to do nothing and ride it out, especially if you have a properly allocated and diversified portfolio.
As we drove home yesterday, I couldn’t help but think about what the word “mine” means to me today. I’ve prided myself in my ability to avoid excess consumerism and the temptation to “keep up with the Jones”. But I’m ready for life to get a little easier. I don’t want to budget the experiences I can provide for my son as he starts to explore the world. It doesn’t mean we need to stay at the Four Seasons or wear Gucci, but I’m ready to have enough “mine” to remove a few more barriers.
After that, we’ll see…