Saturday, February 2, 2013

Romanconomics: The Short-Run Always Loses

It's February!
Guitars + Tears = Album Sales.
Sorry, Harry Styles.
Even as the world falls apart, two things will never change. Taylor Swift will always write songs about her exes, and February will always be Romanconomics month. So hang on to your heartstrings, kids, because there might be an economic reason for those teardrops on your guitar!

I recently attended a fantastic seminar about personal
finances. My main takeaway was a sense of overwhelming depression that I'm in school, have no income, and thus don't save 15% of my income. Whee! I also learned some helpful tips about personal finances in general—like the difference between IRAs (Individual Retirement Accounts) and 401Ks (not actually shorthand for piles of $401,000, although that would be awesome). Interestingly, one of the best pieces of advice about the stock market also applies to romantic endeavors—the short-run is controlled by emotions. You always lose the short-run game.

Stay cool, man. I've got
aviators.
See, in the short-run, prices rise and fall as fear and greed control headlines. If the market takes a downhill turn, the instinct is to run. Alternatively, when the market is on the up-and-up, the instinct may be to snatch up whatever you can. Everyone has a lot at stake—and everyone is trying to "beat the market" by anticipating those fiduciary mood swings, taking appropriate action ahead of time, and then playing it cool while everyone else runs around overreacting like amateurs.

It turns out that this is a horrible strategy. So some people, aware of their own shortcomings, hire managers to "beat the market" for them. But it turns out that even brilliant managers may lose money in the short-term. So you have to be willing to trust them and forgive them for losing your money now, and hold on for the next 10-60 years.

"I don't have commitment issues!"
It turns out that the short-run dating game is ALSO run by emotions. And the rate of return rises and falls based on fear and greed:

He's acting cold? GET OUT NOW! RUN WHILE YOU CAN STILL PRETEND THAT YOU HAD NO EMOTIONAL CAPITAL ON THE LINE! CUT YOUR LOSSES! GO GO GO! Alternatively, when things are going swimmingly and every restaurant the yummiest and every park the prettiest and every movie the cinematograph-iest, and every joke is just so FUNNY, the temptation is to abandon all former friends and pour every waking minute into this amazing guy you just could never live without.

What people think dating will be like.
Everyone has a lot at stake here. I mean, the dating market isn't exactly a 24/7 funzone, which is why most people enter only for the explicit purpose of finding a spouse and permanently exiting. So all the time and emotion and hoping and waiting is compounded into this highly volatile portfolio (you) that's just seeking a stable asset with a good return on investment (future spouse). And guess what? There's always the chance that you'll lose everything. The flipside is that you might get exactly what you want—but timing is everything, and you can't play the short-run game, because you'll overreact and lose.

What dating is actually like.
But we're short-run people. We have instant communication methods, an overabundance of options (thanks, E-Harmony, for putting all of cyberspace into our network of possible "Mr. Rights"), and very little patience. So we angst over text messages, and put people into mental hierarchies of datability upon introduction, and after about two weeks of anything, we're ready to rip out our hair and start over, promising ourselves to read the signs, and to cooly anticipate everything next time. (See Mr. Aviators above.)

PLEEEEASSEEE don't break my heart
(or lose it in the next dot com bubble).
And it turns out that no matter what kind of amazing, wholly compatible stocks you find out there, you don't actually manage any of them. They're all run by other people, with their own fear and greed and timetables, who are also trying to beat the market. And at some point, after you've done your research, you decide to trust one of these crazy managers with your own emotional portfolio/heart.

Because let's face it. Even the best manager is going to make countless mistakes, and is going to lose a lot of the time. But when you're in it for the long run, you see the return on investment. The long-run market is based on growth and improvement, not on emotion. So even though the headlines and the day-to-day feelings are controlled by fear and greed, in the long-run there's the possibility for growth and improvement and trust. And that, my friends, is a great investment.

I learned about my finances in:
Dark wash boot-cut jeans,* brown cami, brown and white dotted flared jacket, gold and crystal earrings, gold and purple necklace, gold bangles, and brown snakeskin pumps.

*The question of whether denim is "business casual" is hotly debated and is largely answered by region and office culture. Considering this was a weekend event with a "semi-casual" dress code, I decided in favor of a dressed-up jean. Feel free to judge me. 

2 comments:

  1. Dearest TheHarrison:

    Great article. One question: The stock market goes up over time, but it's an index...full of different stocks.

    But in dating, you have to pick one "stock." So how do you pick long-term success of an individual stock without putting significant emphasis on short-term results?

    ReplyDelete
  2. That's a great question, and it's the biggest flaw in my analogy - mostly because you want a diversified portfolio in the stock market, and NOT in matrimony. After a closer look, though, I think the analogy holds reasonably well.

    As you pointed out, the stock market is an index, and is full of lots of different stocks. Even though on a micro-level, individual stocks may rise and fall a lot, in the aggregate, the market rises. So, that's a good reason to "hang in there" with the dating market, even if you have an individual stock tank (break-ups).

    Think of your portfolio of all the people you're ever going to date, or all the managers you're ever going to hire. The more research you do in the preliminary stages, the better your portfolio is going to be initially. If, for example, you get in on gold early on, it's going to be a fantastic investment for the long-run. But most of us aren't that good at guessing.

    So, if you do very little research and pick up everyone who looks decent after five drinks, you're going to have a pretty volatile portfolio/dating history. If you're a little more conservative, you probably have a better portfolio/dating history, but when an individual stock busts, it's worse, because you expected it to do reasonably well in the long-run.

    All that to say, short-term results matter more in dating than in the stock market, but bad results in either can cause panic and overreactions - a feeling of "get out now," or "leave the market forever and join a convent." The goal is to have a long-term strategy to overcome the short-term emotions. But in real life, it's hard to pull off when your long-term strategy just dumped you ... over text.

    That's when you have a pity party, and then you dust yourself off and recall that you're a decent investor, and everyone loses in the short-run at some point.

    Bottom line answer to your question: remember it's an index, and even though short-term results are important, loss today shouldn't keep you out of the market forever.

    Thoughts?

    ReplyDelete