Are You Winning?
How borrowing a psychological trick from the casinos can help you understand that you actually are winning.
Imagine sitting down in front of a modern-day slot machine with a bewildering number of symbols, pay lines and an indecipherable payout schedule. You feed the machine and decide to play 50 credits for your first spin. You hit the spin button and, with great anticipation, let things fly. As the final reel settles into place, you are rewarded with flashing lights, upbeat sound effects, and a message that you have just Won 10 Credits!
Casinos Get an A+ in Psychology
You get a bit of an adrenaline rush and prepare to spin again.
But wait, what just happened?
You bet 50 credits and “won” back 10 credits. In other words, you just lost 80% of your money. It turns out that the casinos get an A+ in psychology. In fact:
Casinos make you feel like you’re winning when you’re losing.
Later, you arrive back home to find your quarterly update on your 401(k) plan. You immediately feel stressed since you have heard the stock market has been down recently. With some trepidation, you look at your statement and, sure enough, your 401(k) balance has gone down.
The Financial Industry Gets an F in Psychology
You’re not sure what to do. Maybe it’s time to move some money out of stocks, at least until the stock market settles down. But then, what if it goes back up again while you’re out of the market? It’s overwhelming and stressful.
But wait, what just happened?
You’re not planning to retire for another 20 years. Why are you even paying attention to what happened over the past three months?
The short answer is that it’s because that’s where the financial industry has focused your attention.
Changing Your Perspective
If you changed your perspective, however, things would be quite different. Viewed through a longer-term lens, things look much better. You have plenty of time for the stock market to recover from the inevitable short-term dips. In fact, based on stock market history, your chances of having lost money 20 years from now are virtually not-existent.
Beyond that, once you look far enough down the road, the power of compounding kicks in and, wow, is it impressive. You’re actually on track to have more money than you could have imagined.
It turns out that, by focusing your attention on short-term changes even though you’re a long-term investor, the financial industry gets an F in psychology. Unlike the casino:
The financial industry makes you feel like you’re losing when you’re winning.
And, unfortunately, this isn’t going to change anytime soon.
But while the industry might not change their focus, you can change yours. It all comes down to context (something we discussed in our Core Post No 2).
This won’t be easy, but the payoff is worthwhile—our recurring theme of: more money; less stress.
The next time you think about your investments, stop for a moment and ask yourself when you’ll need the money. If you’re retiring in 20 years, your time horizon is in the 20 to 50 year range (you don’t stop investing when you retire; you invest throughout retirement).
You can actually borrow a psychological trick from the casinos and:
Make yourself feel like you’re winning because you really are winning.
Stuart & Sharon Crickmer