Two plus two equals four.  That’s math.  It’s real.  It’s measurable.  It’s fact.  That’s how finance is supposed to work.

But maybe four is not enough.  Maybe it’s too much.  How quickly can I get from two to four?  I used to be at four but now I’m at two and since four is ‘right’ eventually I’ll get back there.  Yada yada yada.  That’s perception.  That’s fear.  That’s greed.  That’s emotion.  That’s bias.  That’s sentiment and psychology.

Marry the two and you’ve got behavioral finance.

As long-time students of this nascent movement we’ve long been fascinated by the factors that influence decisions.  Most of us like to think we make decisions based upon evidence.  Evidence-based decisions generally fall into three categories:

  1. Evidence can be used to make a decision whenever the decision follows directly from the evidence.
  1. Evidence can be used to inform a decision whenever the decision process combines hard, objective facts with qualitative inputs such as intuition or bargaining.
  1. Evidence can be used to support a decision whenever the evidence is gathered or modified for the sole purpose of lending legitimacy to a decision that has already been made.

But what happens when evidence goes out the window?  We make decisions based upon emotion and then try to justify these decisions to convince ourselves we’re not irrational.  See #3 above.

Enter the upcoming Trump v Biden slugfest.  Many a person has an opinion of who will win the election, who will be good/bad for the country if he wins, the doom and gloom that will be rained down upon us if our preferred candidate doesn’t win and so forth.  Of course there’s likely little to no evidence to support our opinion but we won’t let facts get in the way of a good story.  We’ll just shout our views to anyone who will listen.

But here’s the rub of it.  Financial markets don’t care.  Our stocks and bonds and gold and real estate and…they just don’t care.

The lesson is clear.  Ignore friends, co-workers, family, neighbors, TV, newspapers (do they still exist?), social media, apps, talking heads who must have an opinion to justify their existence, etc.  Sure they mean well (at least some of them do) but they’re all human, they’re all biased, they all have an agenda (whether or not they’re aware of it or will admit to it) and none of them are paying your bills.

What’s more ignore yourself.  Don’t act out of anger or fear or greed or intuition and then justify it.  Stay calm.  Stay rational.  Have a holistic plan that goes beyond investments and stick to it.  Slow and steady wins the race.  Always.