Wednesday, September 30, 2020

Expectations

Morgan Housel 

“The world is full of obvious things which nobody ever observes,” says Sherlock Holmes.

In a different scene he tells a friend while thinking about a crime: “It seems, from what I gather, to be one of those simple cases which are so extremely difficult.”

Lots of things work like that.

Learning from something has two parts: whether it’s important and whether it captures your attention. The number of things that check the first box but not the second are higher than any of us want.

It’s not that the simple things are hidden. It’s that our attention is drawn to things we assume make the biggest difference, and the idea that obvious equals ineffective is more powerful than the reverse.

Two examples of obvious things that are easy to overlook in finance:

1. It is impossible to feel wealthy if your expectations grow faster than your income.

Former Goldman Sachs CEO Lloyd Blankfein is worth a billion dollars. But he told The Financial Times earlier this year that he considers himself well-to-do, not rich. “I can’t even say ‘rich’,” he said. “I don’t feel that way.”

Let’s assume there’s more than false modesty here. Consider a few points:


Blankfein is not even among the 10 richest people in his own apartment building.


The Bloomberg list of global billionaires stops counting anyone worth less than $4.6 billion. A mere $4.2 billion – four Lloyds – is now socially unmentionable.


To become a top-five earning financier consistently requires earning at least $1 billion in a single year, let alone a lifetime.

Spare Lloyd your tears, but pay attention to two things that affect all of us: People gauge their wellbeing relative to those around them. And rising income tends to raise the gaze of your aspirations as much as your bank account.

A thing that’s obvious but easily overlooked is that feeling wealthy has little to do with what you have. It’s more about the gap between what you have and what you expect. And what you expect is driven by what other people around you have.

It’s been like that forever and for everyone. John D. Rockefeller never had penicillin, sunscreen, or Advil. But you can’t say a low-income American with Advil and sunscreen should feel better off than Rockefeller, because that’s not how people’s heads work. What would have seemed like magic to Rockefeller became our baseline expectation.

Incomes fall into the same trap. Median family income adjusted for inflation was $29,000 in 1955. In 1965 it was $42,000. Today it’s just over $62,000. We think of the 1950s and 1960s as the golden age of middle-class prosperity. But the median household today has roughly twice the income as the median family of 1955. Part of the disconnect can be explained by lots of people’s expectations being inflated by the lifestyles of a small share of people whose wealth grew exponentially over the last 40 years.

There are a million ways to get more money. But the only way to feel wealthy is to maintain a gap between what you have and what you expect. The expectation part has to be managed as much as the income part. It’s easy to ignore the expectation part because focusing on the income side alone is much more intuitive.

In 2004 the New York Times interviewed Stephen Hawking, the late scientist whose incurable motor-neuron disease left him paralyzed and unable to talk since age 21.

“Are you always this cheerful?” the Times asked.

“My expectations were reduced to zero when I was 21,” Hawking said. “Everything since then has been a bonus,” he replied.

A useful financial skill, too.

2. Few things fuel denial and ignorance like randomness, and change.

A hard thing about finance – lots of fields, but especially finance – is that the signals of success are both seductive and deceiving. They’re seductive because they can be so lucrative, so flattering. But they’re deceiving because it’s hard to tell whether they reflect your skill, or whether you can maintain your skill, or how long they’ll last.

It’s obvious that skills expire and circumstances change. It’s much harder to identify those in real time, especially for yourself when you’re willing.

There are four dangerous kinds of success that plant the seeds of their own destruction:


Mistaking a temporary trend for a competitive advantage.


Mistaking seeming luck as skill, which increases confidence but not ability.


Legitimate skill and success that makes you too busy to focus on the skill that once made you successful.


Legitimate skill that reduces focus and paranoia, when focus and paranoia is what made you successful to begin with.

Of course that’s the case, and of course it’s common. It shouldn’t be controversial. It should be obvious.

But it’s easy to overlook because all winning feels good. It’s the goal, so you don’t want to question it when it comes. You definitely don’t want to fight it, or assume it’s temporary. It feels reckless to reject a signal from the world that says, “you’re doing great!”

A few people have. Jerry Seinfeld said part of the reason he quit his show at the top because the show was based on recreating real events from his and Larry David’s normal life. But they put so much time into the show – and became so famous – that they were running out of material because it had been so long since they’d lived a normal life. It had been years since they could casually watch people order at a deli, or what happens when you board a plane. Jerry had every signal of success – he was offered $5 million per show to stay on another season – but quit because he knew the thing that made the show great was slipping away.