Holly's blog: We are all certifiably bonkers

11 July, 2017

This week I’m reminded of quite how irrational humans are – and why all this investment stuff is couched in the language of economics and science, but in reality is driven by very strange emotional humans!

Gorging on debt

As we approach the 10 year anniversary of the 2008 financial crisis – 29th Sep to be precise – the financial world hasn’t evolved as one might have expected. It does feel a bit like watching a teenager who has just crashed a car veering off down the road at 70 mph again.

We still live in a glut of debt. Back in 2008 there was too much debt around, lenders and borrowers got burned as the house of sub-prime cards came falling down. But hang on. We still gobble debt and at the end of 2017, across the globe it was 217% of GDP. This is like someone who earns £10,000 a year having debt of £21,700. You don’t have to be a genius to know that this doesn’t really stack up as a sustainable position.

The Wall Street brigade who arguably started this mess by playing clever b*ggers with sub-prime mortgages continue to rule the world as London is shaken by Brexit. And US investment banks ride high. The big names who are too big to fail, well, they’re still big and still dominant. So not many lessons learnt there.

You could lose £20. What potential gain would you need to flip the coin?

It’s not just the big guys who defy common sense. This week we’re looking at the results of a survey we conducted with The Times readers about risk, in prep for our upcoming annual conference.

It’s quite well known that we hate loss about twice as much as we like gain. We asked people how much the upside would need to be from the flip of a coin, if the downside (or potential loss) was £20. Sure enough the median answer was £40. Interestingly if the possible loss is magnified to £100, the median potential gain required was £151. So proportionately less gain required as the stakes rose.

Here’s a cracking one. We gave people a scenario of a lottery with an equal chance of any set of numbers coming up. Despite this, 19% of respondents would pay twice as much (£2 rather than £1) for a ticket where they were able to choose their own numbers. We like feeling in control. Psychologist Paul Davies (https://www.boringmoney.co.uk/learn/articles/why-are-behave-irrationally-with-money/) who we’re working with at our annual conference (https://www.boringmoneybusiness.co.uk/events/) gave me another example. People would rather wait longer for a train if they could see its arrival time on a board (eg 5 minutes) than wait for 4 minutes but not know when that train was coming. We like to be in control and we like certainty.

All of which goes someway to explain why 72% of ISA contributions in the UK still go into cash. It does interest me that the regulator pushes groups to produce endless copy about risk, when we know from our research that most people associate risk with loss, and not just partial loss but absolute loss - “I could lose it all”, “It’s like gambling”. How do we balance responsible warnings with the other message that risk, or volatility, has upside too? Work to be done.

And finally is ‘ethical’ investing a bonkers idea or the future?

Last week we asked you to help us with a survey about ethical investing.

Would you rather buy oil and fags if you thought it would make you more money?

Or are you, as one lady wrote to me, interested enough to do some research and invest in companies like Fishy Filaments, which takes used fishing nets and recycles the plastics in them to produce filament for use in 3D printing. Wow.