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It is getting colder and it has been tough going. We are in the middle of Africa and look out over the endless grass plains. The sky is dark and wild life, once abundant, has dwindled to very small numbers. Extreme climate changes are having a big impact on all life around us. But maybe the most profound change is for us. Our total population numbers are worrying and we should really think hard about how to survive. It is 70,000 BC and our number of Homo sapiens has dwindled to just 5,000. An ice age and a tremendous volcano eruption changed everything on earth and made life extremely difficult for us. We were about to go extinct…
It is getting warmer and it has been relatively easy going. It is 2014. Contrary to going extinct, we now inhabit the whole world. We diversified as humans and our total population numbers have surpassed 7,000,000,000. Wow, all this in the very small timespan of only 1,500 generations! We know this because we learned to speak, learned to count and learned to map our own genes. We now live in very large groups and expect to live close to a 100 years! There is a slight problem though… our brain was initially designed to live in small groups, hunt, survive and live for about 20 years and its core has not changed a bit.
With that in mind, we, as Homo sapiens/investors, try to calculate the odds of very complex events combined with expected outcomes of value. This is no easy task in many ways. Take the stock market for example, where you could simply apply the following formula: Expected Value = Odds of a Gain * Value of a Gain. Simple yes? Easy, no! When it comes to estimating odds or a value of a gain, we are collectively terrible. It seems that “odds” are greatly influenced by our (social) media combined with our foggy memory and “value” is highly subjective to time, situation and substitution. You see, our brains are still hardwired for short-term and to hunt, albeit for a bargain, as if our life will end at 20. Long-term and longevity are relatively new to us. It seems our brains have yet to catch-up with this fact.
We should accept this limitation when looking at volatility and investing in the stock market. Let alone our own destiny as humans. Luckily, we are a young species and we learn and evolve. Try it… You will help your investments and the next generations of brains to be better, no doubt.