Why we convince ourselves that something is true because we want it to be true.
Hey everyone, Schuyler Cristopher here. Today I'm going to dive into a fascinating concept from Peter Thiel's "Zero to One," called appealing fictions, where we convince ourselves that something is true because we want it to be true. It's a powerful idea that can help us understand why we sometimes make bad decisions with our money.
An appealing fiction is a belief we cling to because it feels good, even if it’s not true. We all have appealing fictions.
Think about this: A friend tells you a certain stock is going to skyrocket, and you're tempted to invest. Maybe you're drawn to the idea of making a big gain. You want it to be true so badly that you gloss over any potential red flags. Or, maybe you're convinced that the stock market is about to crash. You start selling everything because you're terrified of losing your money. You're so invested in that belief that you might be making a very bad decision.
Here's an example: In "The Psychology of Money," author Morgan Housel talks about people who buy lottery tickets. They desperately want to win big. They want to believe they can win. They want it to be true so badly that they ignore the fact that they’re spending their life savings on something with a one-in-millions chance of happening. And it’s not just lottery tickets.
Appealing fictions are common when we’re dealing with complex situations where the stakes are high.
Take a look at this: In "Zero to One," Thiel writes about how people in the 1990s fell for the dot-com bubble. They wanted to believe that the internet was going to revolutionize everything. They were so convinced that they’d invest in companies that were losing tons of money, all for the sake of a future that seemed both imminent and amazing.
Another example: In "Rich Dad Poor Dad," Robert Kiyosaki writes about the prevalence of "Take from the rich" theories. It's an easy idea to believe, because people like to think it's a fair solution to problems. It makes us feel like someone else is in charge of fixing things. But Kiyosaki makes a strong point: The rich actually know how to use the system to their advantage. They’re very good at avoiding taxes and limiting their risks. If you don’t know the system well, then the “Take from the rich” crowd ends up hurting you, and not them.
Why are we so susceptible to appealing fictions? Well, it turns out our brains are actually wired to embrace them.
Here’s why: Nobel laureate Daniel Kahneman explains the idea of loss aversion. It’s a psychological phenomenon that makes the pain of loss feel much stronger than the pleasure of gain. For example, losing $100 feels a lot worse than gaining $100 feels good. We’re often so terrified of losing that we’ll make decisions that look reasonable in the short term, but cost us dearly in the long term.
An example: We can see this in the aftermath of a stock market crash. People often sell out near the bottom—right when they should be buying—because they’re terrified of more losses.
What can we do to avoid falling victim to appealing fictions?
Here’s a tip: Be wary of any advice or “sure thing” that sounds too good to be true.
Another: Take a step back and ask yourself: Why do I want to believe this? Is it because I want it to be true, or is it because the facts really do support it?
Remember this: The most important part of any investment plan is recognizing the risks that could derail it. Don’t let your desire for a great outcome cloud your judgment. Be a skeptic, not a believer.
In his book "Zero to One," Thiel writes about the dangers of letting our faith in the past dictate our view of the future. He notes that we often rely on history as a guide to future outcomes, when it’s not really a map at all. History is filled with surprises. We must avoid making assumptions about the future based solely on the past. Instead, we must question the things we think we know about the world.
The best investors and business leaders think for themselves. They question everything. They take the time to dig deeper, and they don’t fear being wrong.
We’re all susceptible to appealing fictions. It’s part of being human. But we can all learn to fight back. When you understand appealing fictions, you’re on your way to making smarter financial decisions. Now, go forth and conquer, and may your money management be as good as your reasoning.
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