Versions of Reality
Hello everyone and welcome to “ The Adventurous Money”!
I have finally changed the name of the newsletter to reflect what I wish to explore and write going forward. I hope you will enjoy the journey!
Before we move on to today’s post I would like to wish each one of you a Merry Christmas and a Happy New year!
Onto today’s post!
Believe nothing you hear, and only one half that you see
Edgar Allan Poe
I heard these lines spoken by Wednesday Addam! For those of you who don't know what I'm referring to, she is the mysterious young teenage girl from the Addams family who hates colors and emotions and has psychic abilities.
The quote stuck with me because I have been reading about humans' ability to perceive things, or, in other words, how every one of us perceives things differently even when we are looking at the same object. It's amazing how each one of us lives in a different reality due to how we perceive things.
For instance, Emily Balcetis, a professor of psychology, talks in her podcast about how people with a low hip-to-waist ratio perceive distances to be greater than that of people with a higher hip-to-waist ratio. So the next time your short friend complains about how they have walked more than you, believe them because they have both physically and mentally walked more than you in their reality, even though you both have walked the same distance.
Ms. Balcetis further states that we are never really challenged by the things we see, but all the information that we receive from our other sensory organs is challenged quite often. And it happens to me more than I would care to admit. My conversations with my friends, my girlfriend, and my mom are filled with inaccurate understandings of what was said. I sometimes buy the wrong amount of groceries or the wrong stuff altogether when my mom sends me over to buy stuff. However, these mistakes are frequently corrected after I have double-checked the items I have purchased with her.
Similarly, the information that we get from our sense of smell usually comes with a partial understanding of the subject. For instance, think about the last time you were sitting in a restaurant and you smelled or tasted something good. Were you exactly able to tell where the smell or taste came from? Even though you knew it was something good, you weren’t able to describe it accurately. Where did the flavor come from, or what ingredient made the food taste so good? At best, we take a guess, and we are cognizant of the fact that we don't have the whole picture.
The good part about our hearing and smelling inaccuracies is that they are corrected more often than our visual inaccuracies. We usually get feedback, which allows us to update our worldview and understanding and adjust our capabilities. This rarely happens with the information we consume visually.
In comparison to hearing and tasting, our visual information abilities are severely limited. And before you move on with the article, I want you to try this exercise once!
Stretch both your arms forward and make a fist, pointing your thumbs upwards. Now focus on both of your thumbnails.
What happened when you did that?
Your vision blurred out everything around your thumbs. You can see the details on your thumbnail and the lines on your thumb, but everything around it loses edges and color. We miss out on a lot of information when it does not come from our area of focus. This narrow point of focus creates an illusion of complete information in our minds, which is filled with missing details we can't notice. These gaps in information is called the perception reality gap.
What we perceive through our senses, including information obtained through our sense of vision is questionable since our physiology prevents us from obtaining the whole picture. Don’t get me wrong. I am not blaming the way humans have developed. Our physiology is probably one of the reasons why we have survived for such a long time on this planet. In short, our bodies are designed to make a tradeoff for efficiency than accuracy. If we start absorbing all the information around us, every small detail, our brain will catch fire because of the amount of information it will have to process.
The perception-reality gap is similar to what Morgan Housel calls "The Man in the Car Paradox." When you see someone drive an expensive car on the road, you don't say, "Man, that dude is driving a BMW. He must be so cool" instead, most of us think, "Man, I would be so cool if I were driving that BMW."
There are two points of reality in that sentence. The status signaling by the driver of the BMW creates the perception of reality in his mind that he has made it, that he is successful in his life, and that he is an important person. While the reality is that people rarely think about the individual driving the BWM, they are rather more interested in wondering how they would feel if they were in that position.
In my experience, the perception-reality gap has entrapped a lot of investors when it comes to investing. mainly due to a lack of awareness. I see many individuals just wasting their precious time in front of screens trying to learn trading or reading books about trading because social media has created the perception that trading is easy or that trading is a key that will magically start making them money once they learn about it.
The reality is far different from what it is on the internet. Making decent money from trading is not something everyone is capable of, and this includes me. The CEO of India’s biggest trading platform, Zerodha, warns investors about the downsides of trading himself.
I am sure asking people to trade less is not in his best interest!
Statistically speaking, In "any given year, only about 19% of the heavy (>$20k per day) traders made positive abnormal returns (i.e., did better than the market) net of fees. That's 1 in 5 yes". Occasionally, even I would bet here and there and trade, but that is more so because I enjoy the thrill of betting and not necessarily trading in itself. I would rather do something that I enjoy and keep working on my skills to help people create meaningful financial plans than waste my time staring at a screen and taking some stranger's reality on the internet as mine.
The odds of being successful in trading are enormously against an individual, and that's the reality. You can either keep dreaming about you getting successful in trading or actually get better at your real job, whatever that is! Believe me, the world would not be the place it is today if all of us were successful traders.
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