#5 The Missing Billionaires - People are not robots

[This series is a slow chapter-by-chapter review of the book The Mission Billionaires by James White and Victor Haghani. It's getting special treatment on this blog because it is novel and can potentially result in a new Dr Wealth course. To understand it all, the best option is to read the book. Otherwise, you may need to read from the first instalment of this series here.]

The subsequent two chapters of the book are less technical in nature.

The authors begin to address the weaknesses and critiques of investing based on expected utility maximization.

• One critique is to look at the field of behavioural finance, where people find that folks are risk-seeking when they are in a loss position and risk-averse when they have gains. 
• Another is the idea that there are non-financial benefits that may inflate the utility of some losing bets, like buying 4D and gambling in casinos. 

It is not too difficult to realise that we are not robots and attempts to explain our behaviour with a few elegant equations is bound to result in inaccuracies. 

The last chapter is the most fun because one of the authors was a founding partner of LTCM which failed really spectacularly before the 2000s. The chapter considered whether the founder would have been much wiser to apply the Merton Share and perhaps allocate his capital more responsibly to maximise his utility rather than his expected earnings. If he would have done so, he would have lost a significantly less than what he actually lost.

But this is hindsight 20-20.

I met so many crypto bros who were flying high with 7-digit net worth in 2021. I always told them that they should lock their gains into a piece of physical property because, when things go south, at least they can see the house that they've won by crypto speculation. 

During that heyday of crypto, no one ever took my advice. The 21% Anchor protocol yields were partly to blame because it looked like riskless profit. 

In the end, I lost money on crypto too, but this was less than 1% of my total net worth today.  

Right now, I continue to hold onto my millions of LUNC and my algorithmic bets on GBTC are already ahead by 25% after two months of initiation.