How the fear of death affects our investment processes

Many of our investment decisions are driven by one simple fact: the knowledge that, one day, we will be dead. Here, in an extract from his new book, John Stepek explains why.

Mexico City Day Of The Dead  © Getty Images

This year, I published my first book. It's called The Sceptical Investor, and it's about contrarian investing or, as I've slightly cheekily rebranded it, sceptical investing.

My publisher, Harriman House, is offering a cracking deal on the book right now. You can get 40% off by ordering it here, and entering the code SCEPTIC40 at the check-out.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

If you're not convinced by that fantastic value investment, let me share an extract with you in today's Money Morning it's from Chapter 5, entitled "You vs the crowd".

A simple way to think about human thinking

As with any complex system, you can't model the human mind perfectly. We're a morass of conflicting, shifting desires affected by changes in both our internal environment (our own biochemistry) and our interactions with our external environment (other people, the weather, what's on the telly).

Advertisement
Advertisement - Article continues below

But we don't need to go into complicated models of individual minds to get a good idea of how crowds work. There are just two key impulses to wrap your head around.

They're commonly described as greed' and fear'. But I'm not so keen on those labels both have very negative connotations. I prefer to say we have an expansionary impulse and a contractionary one.

When you are in an expansionary mood, your focus is on growing your wealth, grabbing a bigger piece of the cake, empire-building. When you are in contractionary mode, you want to hunker down, build walls, protect what is yours.

These two impulses are in turn driven by one simple fact: the knowledge that, one day, you will be dead.

We don't crave happiness we crave security

When evolutionary psychologists and behavioural economists talk about what drives our herding instincts, they often hark back to the days when we were dwelling in Stone Age tribes out on the African savannah, at constant risk of being picked off by lions, dying of dehydration, or nibbling on some poisonous vegetation.

The idea is that we are programmed to run with the crowd because it's safer. But there's more to it than a simple evolutionary hangover. You really don't have to go back to the Stone Age to find unforgiving death lurking around every corner.

Advertisement
Advertisement - Article continues below

Vaccines and antibiotics only became widely available to most people (in developed countries at that) in the middle of the last century.

In 1924, four years before the discovery of penicillin, the 16-year-old son of one of the most powerful men in the world US president Calvin Coolidge died of septicaemia that resulted from a blister that developed on his toe while he was playing tennis in ill-fitting shoes.

Even today, and even in the most advanced societies, life is unpredictable and full of potentially lethal threats. And while all animals have a fight or flight' instinct when faced with life- threatening situations, only humans (as far as we can tell) have a sufficiently evolved brain to bless us with an ever-present awareness of the inevitability of our own extinction.

This fear may not always be at the forefront of our minds, but it's never far away.

What does any fundamentally rational being crave in such an environment? It's not happiness or contentment (although these may be desirable side effects).

It's security and certainty.

Advertisement
Advertisement - Article continues below

I want to keep myself and my loved ones safe, and I also want to know that after I am gone, the things that I value will persist (it doesn't matter that I'll be gone at that point what matters is how I feel about that now, while I'm alive).

To do that, I need to be able to do two things. I need to get out there and explore and master my environment in order to take advantage of opportunities that could make my life better and my situation more secure (the expansionary impulse).

But I also need to be highly alert to danger and ready to raise my defences in response to threats to that security (the contractionary impulse).

Building and defending our models of the world

So how do we navigate an uncertain world? How do we impose order on the chaos around us? It's simple. We look for elements that appear to be predictable we seek patterns.

We look for cause-and-effect rules that govern outcomes and can be used to influence them. If we know (or at least think we know) that x' causes y', then we can increase our level of certainty in our world view.

Some rules are governed by natural phenomenon don't fall off cliffs; don't eat poisonous mushrooms. Some are instinctive (social animals such as humans and apes have been found to have an inherent sense of fairness', even though the world itself is clearly not naturally fair').

Advertisement
Advertisement - Article continues below

But many of the most important ones are social (such as learning the conventions for crossing a road or transacting with one another).

And the critical point is that we don't formulate these worldviews alone. They are passed down from our parents, and reinforced by our schools, friends, co-religionists and colleagues.

In fact, historian Yuval Noah Harari, in his recent bestseller Sapiens, argues that this ability to create and believe in epic, society-spanning shared world views from religions to legal systems to money itself (which ultimately derives its value from our belief in it, and the social structures that give everyone the confidence to rely upon it) is key to our spectacular success as a species.

You can call them stories, as Harari does, or you can call them social structures, or you can think of them as rules for a particularly complicated board game.

But however you describe them, they are all systems that human beings have invented to enable us to cooperate in a more mutually bene cial way and our brains are wired to be receptive to information presented like this.

Which unfortunately, can be a real handicap in the world of investment.

Advertisement
Advertisement - Article continues below

Buy the book now at a massive discount

Enjoyed this sample? Get the book for 40% off just enter SCEPTIC40 at the checkout.

Advertisement

Recommended

Visit/investments/investment-strategy/600637/buying-shares-can-be-a-tricky-business
Investment strategy

Buying shares can be a tricky business

A tip gone bad reminds John Stepek that buying shares in troubled companies in the hope that they can turn themselves around doesn't always pay off.
16 Jan 2020
Visit/520115/investment-trusts-the-cinderella-of-investment-arrives-at-the-ball
Funds

Investment trusts: the Cinderella of investment arrives at the ball

Investors should look beyond the market noise of a single year and examine the bigger picture. Max King explains what we can learn from 25 years of in…
8 Jan 2020
Visit/520292/passive-investing-etfs-wont-cause-the-next-market-crash
Stock markets

The boom in passive investing won’t cause the next crash

Passive investment funds such as ETFs are now such a fundamental part of financial markets that some people worry that they will spark the next crash.…
7 Jan 2020
Visit/520258/running-with-the-crowd-is-bad-for-your-finances-heres-how-to-resist-it
Investment strategy

Running with the crowd is bad for your finances – here’s how to resist it

To be a good contrarian investor, you have to avoid being swayed by the crowd. John Stepek explains how to go about it.
3 Jan 2020

Most Popular

Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020
Visit/currencies/600665/currency-corner-new-zealand-dollar-kiwi-vs-us-dollar
Currencies

Currency Corner: how is the New Zealand dollar doing against its US counterpart?

The New Zealand dollar has been doing well against the US dollar in recent months, but has started to wobble a little. Is it still a buy? Dominic Fris…
20 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600641/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020