Formative Years Forever Echo for Investors
Recently, two ideas collided in my head, and they seemed to make some sense taken together. Before I can explain this hybrid idea, I need to describe the two old ones:
First is the idea that our subjective perception of time over our lives is not linear, but logarithmic. This means that when we’re five years old, a year seems like forever because it’s 20% of our life (in fact, it’s probably subjectively more since we don’t even remember our first few years).
When we’re twenty, a year is 5% of our life (or maybe a little more, if we adjust for our unremembered first couple of years). When we’re fifty, a year is now just a tiny fraction of what we’ve lived through, and so on…
This is a plausible explanation for what older people often describe as “time speeding up” and years seeming to be shorter…
The next idea is about how our formative years tend to be a lot more memorable than most random adult years. Our childhood and teenager years take up a lot of room in both our memories and self-image, and I’ve seen older people describe a kind of “U” shape when they look back at their life. They remember the early stuff clearly, and the recent things, but in the middle it seems a lot fuzzier.
Bringing it together from an investor’s point of view
I started investing a bit before the Great Financial Crisis of 2008–2009, and got more serious around 2010–2011, which at the time felt pretty volatile and precarious (the amount of apocalyptic commentary was still high and I was still working on building myself a thick skin for that stuff).
Recently, I realized that unconsciously, I have been feeling for years like things haven’t been going well and that I’ve spent a lot of my investing career looking at red ink and falling charts. Yet if I look at the actual results, a vast majority of the time has been up and to the right…
So why is my perception so mis-calibrated?
Because my formative years were during tough times, and because at the time, months and years seemed longer than they seem now (log-time), so I’ve got this indelible impression that I spent a really long time suffering in a rough market and it colors how I still see things today, which probably isn’t a bad thing, if it makes me more cautious. Throw in loss aversion, which means that losses are felt more acutely than gains, and I think it explains well my perception.
The idea is pretty common — we often hear of people who grew up during the Depression and kept that mindset all their lives — but I’ve never quite seen it explained with these concepts as building blocks before (maybe I just missed it).
If this rings true to you, or you have a similar (or different) experience with these concepts, drop me a note on Twitter @LibertyRPF