The Happiness Equation
As an investor, your happiness depends on having realistic expectations about returns and viewing market events in proper context. These two factors can drive your sense of financial well-being and influence the financial outcome you experience.
To say that “money isn’t everything” is more than a cliché. Studies in the early 1970s demonstrated that a sense of well-being, or happiness, had not increased commensurately with income over the previous half century. That trend continues as the modern world has arguably made well-being more elusive than ever.
Fortunately, positive psychology arose in the 1990s, attempting to find the key to understanding what makes people flourish. It has spawned the so-called “happiness literature” that seeks modern truth by weaving together science and ancient wisdom. How to Be Happier is now the most popular course at Harvard and Yale.
Business people and entrepreneurs are also contemplating some of these age-old questions. Mo Gawdat, a serial entrepreneur and Chief Business Officer at Google X, tried to engineer a path to joy in his book, Solve for Happy, by expressing happiness as an equation.
HAPPINESS ≥ Your Perception of the EVENTS of your life − Your EXPECTATIONS of how life should behave
According to Gawdat’s model, if you perceive events as equal to or greater than your expectations, then you’re happy—or at least not unhappy. Investors wanting to increase their wealth and well-being should consider his model. You can’t control many events that affect your portfolio, but events themselves are not part of the equation. Fortunately, you have some control over the two variables driving happiness—your perception of the events and your expectations.
Case in point: The three-month bear market in stocks during the fourth quarter of 2018, prompted by widespread panic about a global economic recession that never materialized, led many investors to feel a sense of anxiety and despondency largely forgotten since the 2008-09 global market crash. Who could have possibly known last Christmas Eve, that stocks this year would snap back so quickly and decisively, largely erasing the previous declines? Not even optimistic ME saw that one coming!
Successfully navigating emotional declines like last year’s requires an unshakeable understanding that those kinds of events occur with great regularity over time and they don’t need to leave any real lasting impact on our success as investors; as long as we remain calm and don’t forget that market declines are as inevitable as winter storms. With that kind of attitude and expectations, we will not cling to the unrealistic belief that every day will be a sunny one in the financial markets. That never has, and never will be the case. Despite the inevitable storms, since 1928, stocks have returned between 8% and 12% per year above the returns of T-Bills.
Ultimately, your happiness and success as an investor depends on how your perception of events stacks up against your expectations. Proper expectations alongside the appropriate perception can really help you stay the course and may also improve your wealth and well-being.