“The entire investment industry is centred around making the numbers go up. Not in a bad way – just the way medicine was 50 years ago, when it viewed the noble mission of the profession as knocking out disease, full stop. The investment philosophy is a cousin of the same well-meaning but wrong ethos medicine used to have:
- Everyone wants to make money.
- There is a right and universal way to make it.
You see this in investment commentary.
“What should investors do now?”
“What’s the best trade?”
“Why it’s time to get out now.”
“Half of this stuff is drivel. But even the smart stuff rarely acknowledges who the advice is useful for. And we rarely recognize that most investment debates – debates that literally make markets – are just a reflection of people making different decisions not because they disagree with each other, but because they view investing with a different set of priorities.”
- How to talk to people about money, by Morgan Housel, 29 March 2018.
The name Daniel Bernoulli is not as celebrated in investment circles as it probably should be. A true ‘Renaissance Man’, Bernoulli was an 18th Century Swiss mathematician who was also, in the words of the Victorian statistician Francis Galton, “physician, botanist, and anatomist, writer on hydrodynamics; very precocious”. He also has a good claim to be one of the world’s first behavioural economists. Bernoulli’s (investment) thesis was that people ascribe different values to risk; crucially, we are not all the same. He then went on to observe, as Peter L. Bernstein tells us in his magisterial Against the Gods: the remarkable story of risk, that
The utility resulting from any small increase in wealth will be inversely proportionate to the quantity of goods previously possessed.
