The Rational Reminder Podcast

Episode 267: The (Expected) Cost of Pessimism (Plus Matthew Dicks on the Value of Storytelling)

Aug 24, 2023

59:54

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The podcast discusses the expected cost of pessimism in financial decisions, potential solutions to counteract it, and the value of storytelling in communication and financial advice. They also touch on the risks and benefits of using a tax-free savings account for investment and the role of psychologists in financial advice. The episode includes a new segment called 'Mark's Minutes' and updates on events and merchandise.

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Episode notes

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Quick takeaways

Pessimistic beliefs lead investors to avoid stocks, resulting in missed wealth.

Investors can mitigate the costs of pessimism by checking investments less frequently and seeking outside perspectives.

Storytelling is a powerful tool for communication that allows individuals to connect and engage with others.

Deep dives

The Expected Cost of Pessimism

Pessimistic beliefs about the stock market lead investors to allocate less to stocks or avoid them altogether, resulting in missed potential wealth. Despite historical evidence of positive long-term stock returns, investors worry about market crashes and myopically focus on short-term losses. They overestimate the probability of crashes and become more pessimistic when expected returns are high. Media coverage also influences pessimistic beliefs, with negative sentiment increasing crash beliefs. However, stock market returns have been positive over hundreds of years. To mitigate the costs of pessimism, investors can look at their investments less frequently, automate or delegate portfolio management, increase financial literacy, seek outside perspectives, and consider hiring a skilled financial advisor.

Introduction

2min

The Cost of Pessimism in Investment Decisions

20min

Risks and benefits of using a TFSA for investment

8min

The Role of Psychologists in Financial Advice and the Value of a Great Advisor

2min

The Value of Storytelling in Communication

2min

The Power of Storytelling

21min

Events, Merchandise, and Renovations

4min

Today's show is centred on the expected cost of pessimism and how investor expectations of loss negatively affect financial decisions. After concisely exploring the data and literature on the subject, we get into a few solutions to this dynamic and talk about how to find a way around natural human tendencies and myopic loss aversion. We then get into our first Mark's Minutes segment, with our colleague Mark McGrath briefly explaining some interesting ideas about risk and tax-free savings accounts. For today's episode retrospective, we go over Episode 45 and the conversation we had with Moira Somers about effective communication and advice methods. Matthew Dicks, the author of Storyworthy then joins us to offer some insight into the utility of stories in the different areas of life, including financial advice, and more relaxed social settings. Matthew does a great job of describing and demonstrating how stories connect people, and allow ideas to flow in a natural and impactful way, so make sure to tune in.

Key Points From This Episode:

Introducing the inverse relationship between subjective return expectations and expected returns. (0:02:55).
Potential solutions to this issue; checking investments less frequently, ignoring financial media, healthy advisor relationships, and more. (0:15:39)
Mark's Minutes: Mark McGrath shares some background on the TFSA and its positive and negative sides. (0:22:59)
A quick recap of our episode with Moira Somers and its lessons on effective financial advice. (0:30:36)
An introduction to Matthew Dicks and some thoughts on storytelling. (0:32:05)
Matthew talks about the power of storytelling to shape the world. (0:36:35)
Strategies for finding, crafting, and telling great stories. (0:41:45)
Matthew weighs in using storytelling in the world of investing and financial advice. (0:48:23)
Finding the value in your own personal data and experience. (0:52:04)
Today's after-show: upcoming events and news from home. (0:54:40)