Bitcoin, A Reasonable View of The World, and Passion Is The Inverse of Information

**Morgan Housel** (0:10)
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Investing involves risks, including possible loss of principle. Welcome back. And of course, this new format of the podcast that we're 10 or so episodes into right now. And a quick word about that, this podcast is now part of the Compound Media Network. It's the media network of podcasts run by my friends, Michael Batnick, Josh Brown, Barry Ritholtz, Ben Carlson, the whole crew who are the best in the world at what they do with financial content. Really honored and excited to be part of that. And the people behind the scenes who are making the show possible that you're watching, Graham, Duncan, John, Travis, Katie, Nicole, the whole crew. Thank you for everything. It's really an honor to be part of this. And now let's jump right into this. I saw this poll the other day that that was very interesting, and somebody tagged me in and asked for my comments on it. And it was a poll of a bunch of people in the United Kingdom asking them, would you rather have 50,000 pounds upfront, guaranteed, or a 50% chance at a million pounds?
And about 75% of the participants said, give me 50 grand upfront. I'd rather have $50,000, I'm sure it could translate to, than a 50% chance of $1 million. Now, if you are a stats geek, a math geek, and you think the world works inside of Excel spreadsheets, that doesn't make any sense to you, because a 50% chance of a million dollars means the expected value, what you should expect to earn, is half a million dollars, half a million pounds. And so what this is basically saying is, most people would rather have a guaranteed 50 grand than the expected value of half a million dollars, a 50% chance at a million dollars. Again, that doesn't make sense if you're a stats geek. And someone tagged me and said, what does Morgan Housel have to think about this? And I said, I don't mind it at all. I think it makes perfect sense that people would rather have 50 grand in their pocket than a 50% chance to earn a million dollars, even if it doesn't work on a spreadsheet, even if the expected value is more by taking the bigger bet, the chance to earn a million dollars. That's not how people's heads work. Particularly normal people who are dealing with bills and rent and groceries and inflation, they'd much rather have the 50 grand. And if that bothers you as a finance nerd, as a math nerd, as a logic thinker, welcome to the real world. And I think this is a really important thing in finance, that a lot of behavior across the spectrum of how people deal with money comes down to the fact that they don't think like mathematicians. They are not spreadsheets. They are normal, ordinary, hormonal, emotional, scared, anxious people. I think you see a lot of weird things that happen when you don't agree with that. Sam Begman Fried, who is the founder and CEO of FTX, which is the big crypto exchange that imploded several years ago, once made this comment, this was before the whole thing fell apart and imploded, that if he could take a bet that was a 49% chance of humanity being wiped out, or a 51% chance of doubling the value of humanity, he would take the 51%. He would make that bet every single time.
That the expected value, because it's a 51% chance of doubling the value of humanity or 49% chance of wiping it out, he would take that bet. And that is the kind of thing, that's the kind of thinking that someone would say who is now in prison. Because I think that is just not how the real world works at all. And of course, he made bets in his own life and in his own career and at his own company that landed him in jail.
And so the idea that people are not mathematicians, they are ordinary people, tends to go overlooked. I'll give you another example of this that I've always loved. Many years, many decades ago, a guy named Harry Markowitz, an academic, won the Nobel Prize in economics for his work on capital asset pricing model, which is a complex set of formulas and mathematical concepts that will tell you exactly how much of your money should be in stocks versus bonds, depending on how much risk you want to take. Very complicated, very elegant, won the Nobel Prize for this stuff. Markowitz is like the foremost authority on mathematical principles for how to rationally manage your money, the best. And very interestingly, he was once asked how he manages his own personal money. Harry Markowitz, you won the Nobel Prize for this stuff. What do you do with your own money? And his answer was, quoting him here, he said, I visualize my grief if the stock market went way up and I wasn't in it, or if it went way down and I was fully in it. And so I split my contributions 50-50 between stocks and bonds. And so here is the godfather of mathematical models of very elegant, rational thinking for how do you invest your money. And for his own money, basically what he did is he put his finger in the air and he said, this feels about right. And that is not a criticism because I think that's actually not a bad way at all. I think that's actually a very good way to manage your money. Two, the goal is not to make the spreadsheets happy. It's to have some allocation where you can look at it and say, that feels pretty good. Now, my point here is, don't expect to always be rational with your money. I think the aim should be to be reasonable. Not unreasonable, of course. There is a limit to that. But if you are merely reasonable with the financial decisions that you make, even if you cannot explain them on a spreadsheet, that is fine. That's the best that we can do. And a lot of people get hung up making financial decisions. How they earn money, how they save money, invest money, how they spend money, whatever it might be, that they say, look, I have this thing, but it actually doesn't pencil out on the spreadsheet. Actually, I should be doing something different. And so maybe I should go do something different. And I think a lot of the time, more than half the time, the answer is no, you shouldn't. It's fine to do that little quirky thing if it makes you happy, if it makes you feel better. Jason Zweig, great journalist from The Wall Street Journal, once interviewed Harry Markowitz about his comment. And I want to read you Jason's quote here. He says, My own view is that people are neither rational nor irrational. We are human. We don't like to think harder than we need to, and we have unceasing demands on our attention. Seen in that light, there is nothing surprising about the fact that the pioneer of modern portfolio theory, Harry Markowitz, built his initial portfolio with so little regard for his own research. Fantastic. I love that. Everyone should take some insight, some wisdom from Jason's comment there. The other thing that comes to mind is, I remember this was probably 10 or 15 years ago. I saw a study from the finance department at Yale. When I read the headline in the study, I thought to myself, that's the stupidest thing I've ever read.