I got the idea to write this post as I was trying to learn more about investing. Yes - it was a book about money that spurred me to write about religion. 🤭  And no - money is not the religion I'm going to talk about, that would be trite. 

Since I firmly believe that it's easier to prevent disasters from happening than to fix them when they do, I've been reading Morgan Housel's "Psychology of Money" in an attempt to find the loopholes in my behavior as an investor. It's a very informative and quick read, so if you haven't already, do get your hands on it.

In chapter 11, aptly named "Reasonable > Rational", Mr. Housel argues that the best investment strategy that you could choose for yourself is the one you can follow given the intricacies of your personal situation and psychology. He reasons that even the most meticulously calculated financial plan will be rendered useless if you keep interfering with it - which you will - if it's a poor fit for your psyche. 

At first, it was difficult for me to believe that people would readily accept that they would be better off losing money due to a suboptimal investment strategy just because they can't (for lack of a better word) keep it in their pants and not meddle with their positions. 

"The math says otherwise; grow up and take it!" I wanted to scream in disbelief as I imagined myself in their shoes.

At the same time, it sank in - most people are indeed like this. This was a self-awareness development opportunity in disguise, so I set out to understand why I wasn't. I hope you'll find the insights useful and most importantly - actionable. 

It wasn't because of overconfidence - I had started to read blogs about investing a long time before I put a single cent (*Rappen) in the markets. I had been warned time and again by kind strangers on the Internet that "you have to live through a downturn before you know your true risk tolerance", so I was expecting that the sharp drop in March 2020 will cause me to squirm in various unpredictable ways. 

As I watched the value of my portfolio drop, it never crossed my mind to sell in a panic, although I did wonder if I should have kept a larger portion in cash for opportunities like this. I didn't lose sleep over the markets, nor did I obsess over them as I had anticipated. 

Did I trust human productivity growth to get me out of this pickle? I did - in an abstract way. But I haven't been in the markets (or alive, for that matter) long enough to trust it quite so viscerally. 

There had to be something else, so I dug deeper.

"What kind of person would abandon a calculated plan when it had been proven that they had barely any chance of beating the market?" 

And that's when it hit me: they had to be a math non-believer. 

It explained why I had been able to stick to the strategy unfazed: mathematics had been my gateway drug to rationality and I had spent my entire life living in a math bubble. 🧮

(I'm lucky to be active in a branch of engineering where math is closer than it is to a programmer. I'm surrounded by people who are good at math both at work and at home and I was raised in a math-friendly environment too.)

What's crucial though is that math had never disappointed me: no matter how difficult the problem, I could be sure that the answer existed and even if I didn't get it right, I could retrace my steps and adapt my thinking to acquire a correct mental model to eventually find it. People who skew more towards the irrational don't really have hope that a single correct answer exists, that's part of what makes them susceptible to abandon a correct path.

To be a more rational investor, one needs not only to understand math, but also place one's trust in it - to those who've never experienced the epiphany of doing a complex calculation and then making something out of it (a real object that exists in the world) this sounds like a call to faith. Let me explain. 

Two prominent functions of religion are to provide solace in times of despair and a world-view that explains reality - math does both. If you look carefully enough, you will notice that it is the foundation upon which the modern world was built. It carries an aura of mystery for the uninitiated and appears to ask them to just believe, if they can't comprehend. 

For better or for worse, the moral responsibility for all 4 industrial revolutions can be traced back to mathematics, even more so the one we are currently a part of. Even the social sciences are indebted to statistics, which helped them escape sage speculation and enter the actionable advice territory we love and cherish. 

What if engineers hadn't been able to calculate the limitations of their designs? Bridges would collapse, data transmission wouldn't be possible (bye Internet! 👋 ), you'd never know how much money you need to retire and you surely wouldn't be able to fly halfway across the world for a vacation. Oh, and Instagram wouldn't be able to feed you those cat pictures that you like so much (although the relative tragedy of this one is still hotly debated).

Math giveth, I tell you! And it doesn't taketh away once you've understood its magic. The Ancient philosophers (Stoics included) relied on bare-bones rationality to figure out the world and math is just a natural extension to that. So if you're interested in (Stoic) philosophy, but have been repelled by math thus far, I'd like you to reconsider. Not only will it make you a better investor, but you will also find tranquility in being able to explain what makes the world spin. 

Of course it is possible to live a perfectly successful "mathless" existence, but it would be a pity. Even if you never (want to) solve a single equation yourself, the essence of mathematics is still valuable and it is worth knowing intimately; math can teach you how to formulate problems so that they can be solved in a structured way. Assumptions play a crucial role - under what circumstances does your mental model hold for the task at hand i.e.: what needs to happen for your solution to hold true "in the wild"? 

This, I believe, is what would give the dismayed investor peace of mind to stick to their chosen strategy, for they would understand that without staying put in the markets for 30+ years, the average rate of return wouldn't be 7%. Spending the time to examine the assumptions behind any chosen solution will always pay dividends - in the market and in the other parts of your life - you'll be able to adapt when the conditions you deemed necessary for your plan to work no longer fit.

Since you're always making assumptions based on incomplete information (at least in the markets), a re-assessment of your hypothesis is mandatory whenever new information is available. If Mr. Housel recommends constantly tailoring the solution, I would add that adapting your assumptions about the problem is equally important. If nothing else, the two aspects will synergistically keep you on track to reaching your goals. 

So how can you train this math-induced muscle of rationality and flip your switch to becoming a math-believer? Here are a few suggestions:

Well, I'll be on a mission 🚀  to train myself (and you, if you'll allow me) to become the purely rational Homo Economicus that old-school economics textbooks used to model the world, even if behavioral economics proved that (s)he doesn't exist.

Since the quest is theoretically impossible (and because I'm an engineer and I live off of approximations), I'll take an asymptote as a sign that I've succeeded. 😉