Ali Hajaji’s son was sick. Elders in his Yemeni village proposed a folk remedy: shove the tip of a burning stick through his son’s chest to drain the sickness from his body.
After the procedure, Hajaji told the New York Times: “When you have no money, and your son is sick, you’ll believe anything.”
Medicine predates useful medicine by thousands of years. Before the scientific method and the discovery of germs there was blood-letting, starvation therapy, cutting holes in your body to let the evils out, and other treatments that did nothing but hasten your demise.
It seems crazy. But if you desperately need a solution and a good one isn’t known or readily available to you, the path of least resistance is toward Hajaji’s reasoning: willing to believe anything. Not just try anything, but believe it.
Chronicling the Great Plague of London, Daniel Defoe wrote in 1722:
The people were more addicted to prophecies and astrological conjurations, dreams, and old wives’ tales than ever they were before or since … almanacs frighted them terribly … the posts of houses and corners of streets were plastered over with doctors’ bills and papers of ignorant fellows, quacking and inviting the people to come to them for remedies, which was generally set off with such flourishes as these: ‘Infallible preventive pills against the plague.’ ‘Neverfailing preservatives against the infection.’ ‘Sovereign cordials against the corruption of the air.’
The plague killed a quarter of Londoners in 18 months. You’ll believe just about anything when the stakes are that high.
That’s the trigger of misbelief: high stakes and limited options. A good way to think about beliefs is that they’re rarely just a calculation of something’s cold utility. They’re always formed within the context of how badly you want and need that thing to be true.
This is relevant to business and investing, where high stakes are high and options are limited.
Why do people listen to TV investment commentary that has little track record of success? Partly because the stakes are so high in investing. If there’s a 1% chance that someone’s prediction will come true, and it coming true will change your life, it’s not crazy to pay attention – just in case. And there are so many of these opinions that once you pick a strategy or side you are invested in them both financially and mentally. The problem is that viewers can’t, or don’t, calibrate the odds of success at 1%. Many default to a firm belief that it’s true. But they’re only doing that because the possibility of a huge outcome exists.
Investing is one of the only venues that offer daily opportunities for extreme rewards. People believe in financial quackery in a way they never would for, say, weather quackery because the rewards for correctly predicting what the stock market will do next week are in a different universe than the rewards for predicting whether it will be sunny or rainy next week.
Wanting and needing something to be true messes with your ability to gauge its potential. Take lottery tickets. Most are purchased by low-income households. Why are people who can’t afford lotto tickets more attracted to them than people who can? Perhaps because the poorer you are the more desperately you want to believe that a big, easy payout is around the corner. This is especially true if you feel you have no chance or desire to become a doctor or a lawyer or a successful entrepreneur. If you view a lotto ticket as your only path to riches, you become faithful. Big stakes, few options. This is your shot.
A lot of us fall for this at some level.
There are tens of thousands of investment funds. Most of their managers will be rewarded handsomely for being right. But they have a limited time frame and a limited number of strategies to prove their rightness. And the intersection of high stakes and limited options makes people believe deeply in whatever options they have in front of them. It’s the same as Hajaji’s reasoning, with orders of magnitude lower importance. That idea, I think, helps explain why so many smart people in finance do so many weird, irrational, things.
Tali Sharot, in her book Optimism Bias, writes:
The optimism bias protects us from accurately perceiving the pain and difficulties the future undoubtedly holds, and it may defend us from viewing our options in life as somewhat limited. As a result, stress and anxiety are reduced, physical and mental health are improved, and the motivation to act and be productive is enhanced. In order to progress, we need to be able to imagine alternative realities—not just any old realities, but better ones, and we need to believe them to be possible.
Everyone has to believe something and in the right circumstances they’ll believe anything. We’re all susceptible to this and should spend more time thinking about how our incentives impact our reasoning.
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