Orpheus, Behavioral Finance, and Your Portfolio
A couple of summers ago, my daughter became engrossed with Greek mythology. Before long, she was well versed in gods and goddesses, heroes, monsters, and all the other elements that make the myths so fun. I also love mythology, so it was fun talking to her about how the ancient Greeks used these stories to explain phenomena that they didn’t understand, as well as to pass along morals through symbols and parables.
One myth has been on my mind recently, namely the myth of Orpheus and Eurydice. For those who haven’t picked up a copy of Bullfinch’s Mythology in a while, Orpheus was the most incredible musician of his age. He was so talented that his playing was enough to overcome the powerful song of the Sirens, thereby saving Jason and the Argonauts during their quest to find the Golden Fleece. (Stay with me.)
Once home, he married a woman named Eurydice, who later died of a snakebite. Orpheus was overcome with grief, so much so that he traveled to the underground to plead with Hades, the god of death, to let Eurydice come back to the land of the living. Again, his music was so good that Hades relented, with one condition: if Orpheus turned around to look at Eurydice before they made it out of the underworld, she would remain in the afterlife and Orpheus would never see her again.
Even if you don’t know the myth, you probably know where this is going. Orpheus almost made it, but overcome with curiosity and longing, he turned around just a little too soon and saw a whiff of smoke in the shape of Eurydice, who vanished forever.
Passion, true love, delayed gratification…it’s a powerful story. Moreover, the enduring lesson of Orpheus and Eurydice can be combined with stock market history and behavioral finance to provide a healthy take on how to approach your investment portfolio, particularly during times of stress.
Historically, the chance of seeing a gain in the broad stock market (as measured by the S&P 500 index) on a day-to-day basis is a little higher than 50/50, or basically a coin flip. When we extend the time frame to a calendar month, quarter, and year, however, we see that the likelihood of gains in that time frame grows to about 60%, 70% and 75%, respectively.
Setting aside for a moment that few folks have portfolios consisting only of the S&P 500, these probabilities have real-life implications. If you check your portfolio every day (or even worse, multiple times throughout the day), there is a decent chance you are going to be disappointed. But if you only check your portfolio every week – or month or quarter – you have significantly increased your odds of a positive experience.
To that, we’ll add the behavioral finance concept of loss aversion. Put simply, loss aversion means that on average, losses hurt more than gains feel good. And not just by a little. The data suggests that losses feel about two times worse than a comparable gain feels good.
When we combine the historical statistical outcomes of the market with the concept of loss aversion, we’ve got a recipe for something that behavioral scientists call hedonic arbitrage, which is not only fun to say but also potentially transformative. At its core, hedonic arbitrage refers to how people might budget things (time, money, attention, effort, etc.) in a way to maximize their happiness. For example, if we know that looking at our portfolio on a weekly basis instead of a daily basis could potentially increase our happiness, maybe we should budget our time that way. And if we can be dramatically happier looking monthly rather than weekly, perhaps we should give that a try.
Unfortunately, the modern world is not set up well to practice hedonic arbitrage as it relates to portfolio values, particularly during times of market volatility. We’re too bombarded by information. Financial planners used to tell folks to turn off their televisions, but now we need to tell people not to look at their cell phones. That’s a tall order.
We can’t realistically tell or expect folks to look at their portfolio statements every 6 months or every quarter. But if you are in the habit of looking at market values throughout the day, can you challenge yourself to look only at the end of the day? Or better yet, can you try to only look every two days, then three days? Can you make it a week? Check in with yourself…do you find that you are happier when you do that?
To be sure, ingrained habits are hard to break. But both the ancient Greeks and modern behavioral scientists seem to agree that one of the paths to greater happiness could be to just not look.