In 2018 Bill Gates offered a free book to all U.S. college and university students. This was not, as one might have expected, about Microsoft, or even focussing on Gates’ humanitarian efforts. Instead, it was one of his favourite books of the year, ‘Factfulness: Ten Reasons We’re Wrong About the World – And Why Things Are Better Than You Think’ by Hans Rosling, a Swedish economist. 

It discusses 10 human instincts (the 10 reasons we are wrong about the world), which cause us to consistently misunderstand the world around us. The book begins by pitting the reader against a chimp in an A B C multiple-choice quiz to see how well you know the world. In the initial outing of the quiz, 80% of readers were less successful than the chimp, who always scores 4/12. Not a single person, of the thousands that took part, achieved a perfect score.

These 10 instincts, impacting how we view the world have an incredible carry over to good investment practices for the retail consumer. In this, first of 2 articles, we discuss the first 5.

INSTINCT 1 – THE GAP INSTINCT

We have a tendency to see two items far apart and fail to see the vast majority of items that either sit in the middle or do not sit beside the first two items.

For investors, it is important not to look at the huge outliers that make up so many headlines but to focus on the vast majority. We see that even throughout 2020, the market overall made a 10% gain (MSCI world index in GBP adjusted for UK RPI). In any year the vast majority of investments will not soar or completely crash but rather they will stay around the middle.

INSTINCT 2 – THE NEGATIVITY INSTINCT

We tend to let negatives affect us more than the corresponding positive. We are hurt more by a bad review than the feel-good from many good ones. In investment there will be ups and downs, some years will be good, some will be bad. The key is not to let a bad year spoil your appetite and to make you cut your losses and run. One must remember periods of good growth will come, we do not know necessarily when, just that they will come.

INSTINCT 3 – THE STRAIGHT LINE INSTINCT

This is when we see a line on a graph or ourselves on a consistent upwards trajectory and expect it to continue. Mature reflection allows us to recognise there is no guarantee it will continue but nevertheless we have a belief (or a hope) that current trajectories continue. Investors must realise that a fund manager who talks about their fantastic returns for the last three years, will not necessarily be able to replicate this success. Be aware that lines can bend, perhaps in your favour or perhaps against.

INSTINCT 4 – THE FEAR INSTINCT

We see frightening things happen all the time. The scarier something is, the more real a possibility it can feel. In ‘Factfulness’, Hans Rosling compares how often things such as natural disasters actually happen and how devastating they are, with how often and how devastating people think they are. The reality is we consistently overestimate how frequent and how bad scary things are. In investment the risks are real but the risk of losing everything overnight is incredibly small. Drops in a portfolio may feel extremely unsettling, but it is important to remember that the chance of sustained losses across years are very low and recovery is normally possible.

INSTINCT 5 – THE SIZE INSTINCT

We have a tendency to be wowed by something large without pausing to consider if it really is as big as it could be. A baby elephant is undeniably a very large animal but when we stop and compare it with its adult counterpart we see its size in proportion. In investing, a bank account generating 1% – 2% returns may feel like a decent return but when we see how inflation has the potential to erode the investments or the rate at which we consume the capital, we realise what we hoped was a solid return may not be all we thought.

Taking time to think through our investment choices and being aware of the ways we can be swayed or undone by instinct is time well spent.

In our second article, we will look at the 5 other human instincts discussed by Hans Rosling in his book.

—

This article is influenced by the book ‘Factfulness’ by Hans Rosling, Ola Rosling and Anna Rosling Rönnlund. 

Patrick Christie
Graduate Intern – WealthFlow
Patrick.Christie@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

Back to Articles  

Head Office & Consulting Rooms: 10 Charlotte Square, Edinburgh EH2 4DR.

Mail correspondence to our Central Scotland Admin Hub: WealthFlow Group Limited, PO Box 14947, Grangemouth FK3 3AU.

WealthFlow Group Ltd is authorised and regulated by the Financial Conduct Authority.

The guidance/advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.

For your protection, unresolved complaints can be referred to the Financial Ombudsman Service.

To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.

Head Office & Consulting Rooms: 10 Charlotte Square, Edinburgh EH2 4DR.

Mail correspondence to our Central Scotland Admin Hub: WealthFlow Group Limited, PO Box 14947, Grangemouth FK3 3AU.

WealthFlow Group Ltd is authorised and regulated by the Financial Conduct Authority.

The guidance/advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.

For your protection, unresolved complaints can be referred to the Financial Ombudsman Service.

To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.