Let's say you make a choice that had you chosen differently, things would ostensibly have turned out more favourably. Later on, a similar situation comes up and you make the choice you think you should have made previously in the hope that the result you wanted before will come true this time around. This is called counterfactual thinking and it forms the main topic of our discussion in today’s episode. First publicized in a fascinating paper called The Psychology of Preferences, Daniel Kahneman and Amos Tversky explore the abundance of instances where humans employ irrational ‘what if’ thinking in their processing of recently made decisions that resulted in an undesirable outcome. People tend to think back and wish that they had made a different choice, irrationally thinking that if they had, things would have worked out better. This idea, of course, has applications to investing in stocks with particular implications due to the utter randomness of the market. This is a mind-blowing discussion about human irrationality with links to many leading papers that research this principle in relation to different situations. Outside of our main discussion, we also touch on why you should think twice before buying a condo, the utter absurdity of the Robo-Advisor business model, monthly posted DVD accounts and the surprising birth of Netflix, and finally, the ambiguity of Vanguard’s partnering with HarbourVest.
Key Points From This Episode:
The story of Netflix’s origin starting by renting DVDs out by post. [0:02:30.0]
Life expectancy, annuities, and Wade Pfau’s ideas on Safety-First retirement planning. [0:04:56]
Investor/insurer reluctance and why you shouldn’t buy a condo. [0:07:23]
The Robo-Advisor financing crisis and eventual merge of software and humans. [0:11:28]
Counterfactual thinking and how it affects investment patterns. [0:17:40]
The central role closeness of a related incident plays in ‘what if’ thinking. [0:21:21]
Contrast effects: winning $50 feels good unless you could have won $100. [0:24:42]
Causal inference effects: rectifying a past problem by acting its solution in the future. [0:27:37]
Investor preferences reflecting counterfactual thinking and attachment to stocks. [0:31:27]
The effect the end of WW1 had on people to blind them to the coming depression. [0:36:00]
How there is no proof that if we acted differently a desired set of realities would result. [0:40:22]
The randomness of the stock market and how mastering it is thus impossible. [0:41:34]
Tools for beating counterfactual thinking: document your original rationale, etc. [0:43:19]
Jason Zweig’s tips: lightning rarely strikes twice, and only gamble 10% of your money. [0:44:17]
Bad or good advice? Vanguard’s partnering with HarbourVest. [0:47:32]
How private equity valuations used to be low, resulting in high expected returns. [0:50:09]
Read the Transcript:
Ben Felix: This is The Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making for Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore.
Cameron Passmore: Yeah, this is about the rational decision making that people make, but we always seem to be kicking off lately with an update on Ben's 3D printing journey with the boys. I don't know if you saw the comment on the Rational Reminder site today, but someone went on there, recommended SolidWorks, trim to software to design.
Ben Felix: Oh yeah.
Cameron Passmore: And said, if you joined the Experimental Aircraft Association, you can get that for about $40 a year.
Ben Felix: Oh wow.
Cameron Passmore: So, you should check it out.
Ben Felix: I wonder how much the Experimental Aircraft Association costs.
Cameron Passmore: I don't know, but you should check into it, kind of sounds like it might be your thing.
Ben Felix: Could be.
Cameron Passmore: You got back the prototype?
Ben Felix: Yeah. I mean, no, no real updates. We did get back the prototype. We put the bearings on there that fit perfectly. It's pretty cool. The boys thought it was cool.
Cameron Passmore: Awesome.
Ben Felix: That's the extent of the updates.
Cameron Passmore: Another beautiful weekend in Ottawa. This is the last weekend of Winterlude, so put a plug in for our city. This time of year, the canal, seven kilometers of the canal is a great big skate way and it's packed this morning. Beautiful day.
Ben Felix: I'm not going to go check it out.
Cameron Passmore: I'm not a big skater either, but it looks people are having fun out there, which is all right.
Ben Felix: That's good.
Cameron Passmore: Good episode today, I think, long depth discussion in the middle, which I think is fascinating.
Ben Felix: Yeah. I thought that the main chunk of content, the portfolio/planning topic that we combined together doing that research was really interesting. Just thinking about how basically, why do people regret decisions and why do we even form thoughts of what if scenarios in our heads and thinking about the psychology of where those thoughts come from and why they happen and what we can do to deal with them. Yeah, those ...
Cameron Passmore: And how it always happens.
Ben Felix: Yeah.
Cameron Passmore: This goes on all the time.
Ben Felix: Yeah. But I guess it was a bit of a different type of deep dive because we usually do deep dives on technical investing topics, but I was really excited to find that there was a pretty substantial body of research, both in psychology and specific to investing on this idea of counterfactual thinking. It's always nice when there's an existing body of research, I guess, obviously to dig into, because I'm not going to do the research on that.
Cameron Passmore: All right. With that, we'll let you jump into episode 86.
Ben Felix: Welcome to episode 86 of the Rational Reminder Podcast.
Cameron Passmore: For content this week, I'm sure you're an avid Netflix watcher.
Ben Felix: I do actually watch Netflix in the evening with my wife.
Cameron Passmore: Cool. Anyway, this book came across, I heard about, That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea by Mark Randolph. This is the guy who actually found a Netflix back in the mid to late '90s. Do you know the story at all?
Ben Felix: I didn't know, mid to late '90s, Netflix?
Cameron Passmore: Mid to late '90s. Yes. Back when blockbuster was a big deal.
Ben Felix: I remember when I was in living in Boston, I remember the Mail Service, we used to use that.
Cameron Passmore: Yeah. That's the way it started. This guy, Mark Randolph, was like an idea animal, came up with ideas all the time and was trying to create something to make into a big business. Kind of like the, I know you've read Shoe Dog, that Phil Knight of Nike.
Ben Felix: Oh, that is such a good book.
Cameron Passmore: I don't think this book is quite as good as that. I love that book, but it's so interesting how someone who had all kinds of ideas finally honed in on rental of DVDs by mail, and you think it, but it's just such a crazy idea in hindsight going over against blockbuster. He ended up getting an investor to join him. I won't tell the whole story, of course, but the breakthrough was, they ended up mainly selling DVDs, like the vast majority of the business was selling DVDs as opposed to the rental side.
This is when Amazon was just starting. So, he went and talked to Jeff Bezos and realized that Bezos was going to eat his lunch on the sale of DVDs. Then all of a sudden, he came up with the idea of monthly recurring fee and that was the breakthrough. He did a no late fee, but you could have up to three rentals at a time and just return whenever you wanted, then when you would return one, they would send you another one. Then the other breakthrough was he met someone who knew so much about movies and could match up the movie choices with what the viewers would want.
You combine those two things together with a change like technology, you can see how it all happened, but it certainly was not obvious at the time. They flew to meet blockbuster to try to get them to do a joint venture or to sell the company, and blockbuster laughed them out of the room.
Ben Felix: Then blockbuster tried to launch something similar, but it was total flop.
Cameron Passmore: Total flop, and now think there's one blockbuster store left, and look at Netflix.
Ben Felix: Didn't it close last year, or something like that?
Cameron Passmore: Oh, did it? In the book it says it's still open. I don't know. Anyways, the point is you can't predict a future, and industries somehow figure stuff out, so I thought it was pretty cool. Anything, and you and I have been talking about this another book is Safety‑First Retirement Planning.
Ben Felix: Oh yeah. Now you're speaking my language. All right.
Cameron Passmore: Yeah. We're back in your home territory. We interviewed Wade Pfau this week for an upcoming episode. For those keeners on retirement planning and income planning, this is a great book to read ahead of that interview.
Ben Felix: I haven't read it. I've read Pfau's work. I feel like I know what the book is going to say, even though I haven't read it because he publishes all of this stuff in blog posts for free. I'm sure the book is more comprehensive, but his thinking, it's not just his thinking, it's his ability to communicate because this thinking has been done, and he says this in our podcast interview, Moshe Milevsky, he's done most of this thinking, but Pfau is able to communicate. If you ever read a Milevsky paper, there'll be in-tears. Have you tried to read one of his papers?
Cameron Passmore: Oh yes.
Ben Felix: Oh man, because the math is so complex, but Pfau was able to take that complexity and communicate it in a way that's like, oh wow, how is everyone not doing this? It's like annuities, like we've talked about in the past.
Cameron Passmore: He's a brilliant communicator, and that's the magic. The book is an easy read, but it's so sensible for anyone who is serious about their ... And who wants to take a safety first approach.
Ben Felix: What's been the biggest impact for you from reading the book so far?
Cameron Passmore: Well, it came out of the interview, how he described to us some kind of rules of thumb like annuities are just throwing your money away. No, they're not. It actually could leave a larger inheritance.
Ben Felix: That's the craziest part to me.
Cameron Passmore: And so many people can live so much longer. I mean, Ric Edelman talked about that on his podcast with Kitces, which I know we both re-listened to this week, talked about the stats show that more and more people can live well into their hundreds. We do most of our planning at the 25th percentile of life expectancy, which is mid to late nineties. That could be too low. You start running your planning thinking you could run out of money at that point, and the beautiful part about annuities is that you get the guaranteed cash for life, which means you can enjoy the rest of your assets.
Ben Felix: There's no way to replicate that. You can replicate the cashflows. We're going down an annuity tangent here, but you can replicate the cashflows of an annuity with bonds. You can build a bond ladder to give yourself guaranteed income for a fixed period of time, but the challenge is that that does not ensure you against longevity.
Cameron Passmore: You're not picking up the mortality credits that are available.
Ben Felix: On the shot side, if you live shorter than expected, the bond letter makes you better off because you don't give up the asset. But if you end up living longer, that's where the annuity becomes really interesting.
Cameron Passmore: Anyways, Safety-First Retirement Planning. If you're keen and you want to get a lot out of the interview with Wade Pfau in a few weeks, I'd highly suggest picking up, it's on Kindle as well. Current topic, number one, Canadian Real Estate. This is an article that you found.
Ben Felix: There's been a few. I think it's interesting because I saw a post about this on Reddit first. Every now and then someone would talk about my condo insurance premium's going up 700%, what should I do? Then people are talking about it on Reddit, but then you see these news stories start to come out, and it's like, okay, this is ... It's a bit of a systemic issue.
Cameron Passmore: If you can get the insurance, a lot of people are being denied.
Ben Felix: Yeah, and there was a post like that on Reddit too, like I got denied for this thing, and whatever. I'm worried about renewing my mortgage. I think in that case, they were able to renew their mortgage. Apparently, it would be much harder if they were getting a new mortgage. Anyway, what's happening is property insurers are getting, I guess, nervous about insuring property, particularly in BC.
Cameron Passmore: Why is this a BC and Alberta thing? Any the idea?
Ben Felix: Alberta, maybe because of the fire and the flood, the Fort McMurray fire and the flood. That's what one of the articles mentioned as a possible reason. Just really bad experience with the insurance companies causing them to increase premiums. In BC, as I understand it, there's a lot of concern about the prices being so high so the replacement costs of staff would just be really high.
Cameron Passmore: But there's massive premium increases, and in many cases, massive deductible increases.
Ben Felix: Yeah, so I think the strata, which is like the Condo board in BC, the strata has to have a policy for the building as a whole, and then the individual unit holders would be expected to have their own policies, but the individual unit holders can be made to pay the deductible for the strata for the Condo Corps insurance claim. If something happens that your unit gets damaged and the insurance has to cover it, like the Condo boards insurance has to cover it, you can still be made to pay the deductible. Yeah, like you said, deductibles have gone up to, in some cases, $50,000, which means that then the unit holders have to make sure they've got enough insurance to cover at least the deductible from the Condo Corps.
Cameron Passmore: I wonder how many purchases have been affected where you make an offer on a condo thinking that insurance is no big deal.
Ben Felix: Well, these are the anecdotal things that I've seen on Reddit is people have had this happen, like transactions have not gone through because conditional on financing, and then they couldn't get financing because they couldn't get insurance, or the building didn't have insurance and therefore the bank wouldn't finance the purchase. Well, I saw a story about this in Toronto, too, again, anecdotal on Reddit, but it seems like this is happening more and more, which is scary because you think about what's one of the reasons that property prices have been increasing is because debt is super cheap and relatively easy to access.
If people can't access debt anymore, you got to think there aren't enough people that have million dollars to buy a place in Toronto, or even Ottawa, or Vancouver in cash, even if they are borrowing from the bank of mom and dad, like people don't have that much cash.
Cameron Passmore: One of my takeaways is, I guess I better be spending more time on Reddit.
Ben Felix: Well, these were two stories, one from Garth Turner's blog. He wrote about it. And one from CTV news, but they're both interviewing ... Well, I think Garth might've drawn from the same interview that the CTV article had, but they're talking to industry experts and people that are involved with the insurance business in BC, but it's scary. Real estate prices are high, and if people can't get insurance anymore, partially because of the high prices ...
Cameron Passmore: They may not stay high.
Ben Felix: You talking about having hard economic caps on home prices, like maybe income is often cited as one thing. If people don't have the income to support home prices, you'd expect them to go down. Nobody thought about, I didn't. I don't think people were thinking about insurance as being one of the other limiting factors. Insurers will not take the risk at a certain level of price. If that's the case, that becomes one of the [crosstalk 00:11:08].
Cameron Passmore: The catalyst.
Ben Felix: I think it's also important to say that we're not bearish on the real estate market. I don't really have a position. Who knows what's going to happen.
Cameron Passmore: And we do not profess to be real estate gurus.
Ben Felix: I think it's sensible to expect the long-term expected return on real estate, which is maybe 1% above inflation, but stuff like this happening is still interesting to watch, especially as a renter.
Cameron Passmore: Another news item this week, which I'm sure a lot of listeners kind of think will be talking about anyways, which is article from The Globe on February 7th, titled, Why Wealthsimple and robo-advisers aren't scaring Bay Street anymore.
Ben Felix: It was a bit skating actually.
Cameron Passmore: Yeah. It took a bit of a hard edge on it.
Ben Felix: It did. One of the opening bits of the article was quoting Michael Cashin from 2017 talk that he gave to a startup group. He said, "Once Wealthsimple hit a billion dollars, the bombast started," or something like that. But then they quote him as saying, that the next company to get to $1 trillion, he's referring to BlackRock as being the first one, the next company to get to $1 trillion is going to do it in 15 years or less and I want to be that company. This is Michael Cashin, the CEO of Wealthsimple.
Cameron Passmore: But the question is, can you hang on that long? And there's no way they're making money with the amount of money that's been invested in this like $338 million, the article says, has been invested into Wealthsimple. Right now it's what? $6 billion of assets.
Ben Felix: 6 billion, and what's not clear from the article, and I didn't try and look it up because I don't think there'd be any good sources, but that 6 billion is a mix of ... Because they've got operations in the US, the UK, Canada. So, it's not clear if that's Canadian assets only. Then the other thing is that they just sold off their Wealthsimple Advisors platform, which has about $1 billion.
Cameron Passmore: So, is that in that number or not? I don't know.
Ben Felix: I don't know either.
Cameron Passmore: The article alluded to, it said there's currently 15 robos in Canada with a total of 8 billion in assets, and then it said 6 billion of that is with wealth simple, but still, it's not a lot in the world of asset management.
Ben Felix: It's tiny.
Cameron Passmore: Especially when you look at some US comparisons, which the article did, Vanguard Personal Advisor Services is $200 billion. Wealthfront is 31 billion, and Betterment is 24 billion.
Ben Felix: Big numbers.
Cameron Passmore: Big numbers, and Vanguard is coming after the industry big time at a much lower price point.
Ben Felix: There's one really interesting point in there. There's a quote from The Morningstar analysts, The Morningstar analyst had estimated that American robo-advisors need to gather between 16 and 40 billion assets to breakeven, 16 and 40 to breakeven. That means Wealthfront and Betterment are maybe breaking even. Well, we know that they cannot possibly be anywhere close to breaking even based on that data point, but just based on logic too. Do you remember what the cost of acquisition per client was estimated at in the article?
Cameron Passmore: No, I don't.
Ben Felix: It was something insane, like a thousand dollars per client cost of acquisition.
Cameron Passmore: It takes years to make that money back at the average account size of, whatever, 30,000.
Ben Felix: It's 30,000, so they're making $150 per year per client.
Cameron Passmore: Takes a decade just to breakeven on the acquisition costs. What, two thirds of the revenue goes into marketing, I think they alluded to? Huge marketing budget.
Ben Felix: I think you had the number in there, $20 million. Estimated ad budget of $20 million.
Cameron Passmore: Yep.
Ben Felix: It's staggering really. The other two robo-advisors that the article talks about, the second two biggest ones, which are Nest Wealth and Wealthbar, which had about $500 million each. Nest Wealth has, the article says, pivoted away from the retail service. They still operate it. You can still be a Nest Wealth retail client, but they've shifted their focus to selling their technology platform to firms. Then Wealthbar, the other one, they were acquired by CI Financial.
Cameron Passmore: This is what Ric Edelman talked about again, in that Kitces, Michael Kitces interview, talked about how the two worlds are merging towards each other. Firms I guess who are taking on more technologies were going closer to robos, and robos are getting into more of the advice business, which only makes sense. It's all going to become one thing anyways.
Ben Felix: The article talks about they interviewed a bunch of different consultants, or they had quotes from a bunch of different consultants like industry consultants, like people from Bain, and I don't know if they had McKinsey in it, but those type of firms that have studied the robo-advisor space. The consensus seems to be that people massively overestimated the demand and incorrectly assumed that millennials, because they're more comfortable with technology, would be more comfortable handing all of their money over to a firm that they've never really met a person from.
Anecdotally, we see this all the time, because we know lots of people who even work in technology, and you'd assume if anyone's going to be comfortable with technology, it's going to be them. In a lot of cases, they want to talk to us, even though they know there are robo-advisor services out there, they know Questtraders out there, but they want to talk to and get advice from a human. We've talked about this before, and I know our selection sample is obviously biased because the people coming to talk to us are the ones that have self-selected as wanting that.
But the data from this article kind of backs up that assertion that millennials do still want to talk to people about their personal finances.
Cameron Passmore: That's always been my question for robos. How do you handle client questions? They never stop. Anyway, speaking of questions, we have a question from a listener. You and Ben mentioned the return of value premium has declined, but I'm not sure if the three to five factor models have decayed in terms of explanatory power over the same period. I suspect no.
Ben Felix: Yeah. I just ran a quick regression of, I think a value index is what I looked at, pre and post 1992, which is that same period and use the alpha and R square as proxies for explanatory power. The R squared was pretty much the same. 99% of the variation in the fund was explained by the factors pre and post 1992, and the alpha was zero in both cases. So, the explanatory power of the model has not changed even though the premium, the value premium has ... The value payment in the US has declined, but that's an important qualification for that statement.
Yes, the return of the value premium has declined in the US. We have to qualify that because we talked about this in the last episode where we discussed the value premium. In many other countries, the value premium has been substantial over the same time period that the US value premium has been questionable.
Cameron Passmore: But the explanatory factor is still strong.
Ben Felix: The explanatory power hasn't changed in the US. It's important to note that yes, in the US, the value premium has declined, but it's been very, very different elsewhere, except in Canada, which had a negative value premium over the same time period. I thought that was interesting when we run those numbers.
Cameron Passmore: So, onto our main topic of the week. You did a ton of work on this, this week, and you're putting the idea to both areas of planning and portfolio.
Ben Felix: Yeah, I thought it pertained to both, and it's a pretty discussion, so I figured we could combine them together, go through it. So, it's this idea of counterfactual thinking. It's been studied in all sorts of different fields, like philosophy. There are even some metaphysical implications to this idea of counterfactual thinking. In psychology, it really started being studied in 1982, as far as I could find by Kahneman and Tversky, but maybe we should explain what counterfactual thinking means.
Cameron Passmore: Even where it came from, there's so many good examples lately in the markets with so few stocks making so much of the gains, then living the weeds dot craze over the past three years, or even Crypto.
Ben Felix: It's basically the thought process of creating what if scenarios in your head. That is how I would describe counterfactual thinking. You think about stocks like Tesla recently, like 40% in two days, and if somebody had sold it just before that jump, they might be thinking, oh, if only I'd held out, I could have done whatever.
Cameron Passmore: The story is so easy to see, right. Oh, electric cars are coming. Tesla's the leader? I should've known. I should've done it.
Ben Felix: And everyone's talking about it. It's been the same thing with Shopify, where the price has just gone up like you wouldn't believe. Other stocks too, like Amazon, Apple, it's been the same kind of story. These prices skyrocketing. Then like you mentioned, Cameron, the weed stocks, they went through this sort of phase, but then they all tanked. Some people bought them at the high and held onto them until now and lost 70% of their investment, whatever.
Cameron Passmore: Yup. In both of those cases, when you have something that goes up a lot, or comes down a lot, it makes it very easy to have these counterfactual thoughts. This is, again, my Reddit, not really research, but being on Reddit, I've seen people posting about exactly this. I've seen some Twitter threads about it recently, too, where people are, on one Reddit post, they were saying, I'm depressed because I didn't buy Tesla. Is anyone else feeling this way? It's like, man, wow, this has a real impact on people's psychological wellbeing.
Ben Felix: Especially when there may be other stocks that could have performed just as well that you're not as aware of.
Cameron Passmore: Aw, man, I went this morning before we started talking here. I went on Morningstar Direct and just looked at the year to date returns for all global stocks and sorted them by largest to smallest.
Ben Felix: Oh really? I didn't write down any names or anything like that, but the ones that we hear about Tesla, Shopify, whatever, there are many stocks that have way, way, way higher year to date returns, but you never heard of them.
Cameron Passmore: And probably smaller tap, so they don't have as big an impact on the overall index.
Ben Felix: Also true.
Cameron Passmore: Because one stat I got this week was two-thirds of the S&P 500 year to date of returns, which is about 4.5% came from four stocks, Microsoft, Apple, Amazon, and Google. But they have a bigger weighting because they're bigger stocks. So, you're seeing smaller stocks that don't have as big an impact, because these are market cap based may have had larger returns. So, how come we don't regret buying those?
Ben Felix: That's right. That's exactly what I'm saying. Well, let's talk about counterfactual thinking because that closeness, the ease of creating the counterfactual thought is one of the biggest factors in counterfactual thinking, because to answer your question, why don't we grab the small ones? Because you never heard of them. We regret not buying Tesla because you knew it was there. Like you said, the story was there. Okay. Anyway, in 1982, Kahneman and Tversky had a paper called the psychology of preferences where they introduced this idea. I mentioned closeness. So, Kahneman and Tversky give the example of a passenger who misses their flight by five minutes will generally experience more regret than someone who misses their flight by 30 minutes.
Cameron Passmore: Isn't that nuts?
Ben Felix: It is nuts.
Cameron Passmore: But we all fall prey to this.
Ben Felix: Then there's an example from a different paper that I found that talks about someone's house burning down. If that person had missed their last insurance premium by a day before the fire, so now they're not getting paid off by their insurance because they missed it by one day, the obvious counterfactual thought is, ah, if only they'd made that insurance payment, but if their policy had lapsed six months ago, you don't have that thought. It's like, oh, it sucks, their house burned down, but they didn't have insurance. But there's no thought of, ah, if only, there's no regret, but it's just about closeness.
The other interesting thing about closeness is that it doesn't just have to be time. It's what I mentioned before with the ease with which elements of reality can be cognitively altered to construct a counterfactual. That's from one of the papers, which is fascinating. One that is in my head, and I know you've had the same thought because we've talked about it is Shopify. We mentioned how much the price of Shopify has gone up there in Ottawa.
Cameron Passmore: We can see them from our office. We can see their building from our windows.
Ben Felix: We know some people that work there and I have since way before the IPO, and I knew who the company was way before the IPO, because they're in Ottawa. You hear about them, even when they're just moderately successful starting out. If only, I'd put all my money, or board a bunch of money and put it into their stock when they went public at 17 bucks per share.
Cameron Passmore: Yeah. I read some comments, must've been on Twitter this week, about people who had a chance to get in very early on, long before IPO, brilliant investors who chose not to. Imagine their regret.
Ben Felix: Yeah. That's the closeness. It is really easy for me to imagine an alternative reality where I had done that because I was there and I knew about it and I could have feasibly done it. I think, like you mentioned, the investors not investing, but also you think about employees of any public company, or pre-IPO company, when we talk about closeness, if you're given equity and then make the active decision to sell it before a big rise in the price.
Cameron Passmore: Because it's the right risk adjusted decision to make. You're being prudent.
Ben Felix: That's the sensible decision to make.
Cameron Passmore: Markets are efficient. They price everything in.
Ben Felix: But in terms of forming a counterfactual thought, if only I'd held on, that's even easier than if only I'd bought.
Cameron Passmore: For sure.
Ben Felix: It's even easier for that thought to develop in your head.
Cameron Passmore: Because you could have taken some of your investments and bought pick the stock, Amazon, Tesla, Shopify five years ago. How come you're not in pain or regret?
Ben Felix: But if someone had it and decided to sell, the action makes the counterfactual thought a lot more available.
Cameron Passmore: But it makes no sense, why should you feel different?
Ben Felix: It makes no sense at all. Totally agree. I found another paper that was more recent than Kahneman and Tversky's, although it references that paper called The Psychology of Counterfactual Thinking by a guy named Neal Roese, and Cameron, we talked it'd be pretty cool to get him on the podcast. He gives an overview of the psychological basis of counterfactual thinking. I thought this was fascinating because he breaks down, why do we have these thoughts? We know closeness is one of the things that makes those thoughts easy to have, but what's actually driving these thoughts?
He breaks down into two mechanisms, contrast effects, so that's where we juxtapose reality against what might have been in an alternative reality, and the contrast is important because if we take someone that wins $50, they're happy because they otherwise would have won nothing.
Cameron Passmore: In absolute, you're happy to have won 50 bucks.
Ben Felix: But if you almost want $100 in some contest or whatever, you almost want 100, you just missed it, and instead you won 50 as a constellation or second prize or whatever, it doesn't feel as good anymore. It might even feel bad.
Cameron Passmore: It makes no sense.
Ben Felix: And you can think of what the same thing, like we just talked about the employee of a public company. Say you're awarded $100,000 RSU grant, and as soon as it vests you sell. Let's say the price doesn't change. As soon as it vests, you sell, let's say it vests after a year.
Cameron Passmore: You get a hundred grand, you should be thrilled.
Ben Felix: A hundred grand. You won. You won a hundred grand or you earned whatever you want to call it. But if a year later, the price has now doubled and you would have had 200,000, a hundred thousand might not feel so good anymore, and especially, if we take the specific example of the public company, especially if you're sitting at a desk next to someone who decided not to sell.
Cameron Passmore: Right, and there may not have been a prudent decision to have held.
Ben Felix: With individual stocks, it's usually not going to be a prudent decision to ...
Cameron Passmore: Think of Enron as one example.
Ben Felix: Sure. Well, that's an extreme example. Nortel, maybe is a closer extreme example, closer to us. Anyway, the availability of the counterfactual and the contrast of the outcome that you got and the one that you could have had is one of the things driving this. There's a study that I found that was referenced in the Neal Roese paper that looked at this for Olympic medalists.
Cameron Passmore: I love this.
Ben Felix: Oh, it's fascinating.
Cameron Passmore: I've read this in other places as well.
Ben Felix: It's a 1995 paper called, When less is more: Counterfactual thinking and satisfaction among Olympic medalists. I think they did subjective interviews, but also studied facial expressions of Olympic medalists on the wow on the-
Cameron Passmore: Wow, on the podium.
Ben Felix: On the podium, yeah. They found that the dominant counterfactual that I almost came in first gives a silver medalist, less satisfaction while the dominant counterfactual, I almost came in fourth and didn't medal gives the bronze medalist more satisfaction. So, they found that bronze medalists generally feel better than silver medalists, even though the bronze medalists came in a worst place.
Cameron Passmore: I think I read about this in terms of expectations as well, where someone who is expected to win gold, they come in second or silver. They look more upset in the podium than someone who is just happy to have made it to the medal round, to come in bronze. They're thrilled usually, which is so interesting.
Ben Felix: Yeah.
Cameron Passmore: Why did someone in third thrills, someone in second that's upset?
Ben Felix: It's this contrast effect mechanism of counterfactual thinking. That's one piece. One of-
Cameron Passmore: The contrast effect.
Benjamin Felix:
The contrast effect. Mechanism number one, contrast effect. Mechanism number two, and this one's just ... It's like mind bendingly fascinating to think about, but it's called causal inference effects. I'll explain what that means. When you imagine an alternative reality, for that alternative to reality to exist, there has to be a set of alternative facts.
Cameron Passmore: Explain.
Ben Felix: If you think, if only I had done this one thing different, that one thing, that one, say it was an action, that affected the outcome, you're inferring that, that was the causal force behind the outcome that you got. So, if you change that one causal force, that one action, you assume that you would've gotten a better outcome. Now, where this gets tricky is that, it may be maybe even be true that all else equal, you would have gotten the outcome that you wanted if you'd changed that one action, but in a future scenario, all else will not be equal. So, you think about it in the context of selling Tesla stock right before the big jump. You look back and say, if only I hadn't sold.
Cameron Passmore: I'd be 40% ahead.
Ben Felix: Right. You're making a causal inference that you selling is what drove that outcome. But in reality ...
Cameron Passmore: Or that my action was the cause of that?
Ben Felix: The causal inference is that yes, if only you could change that one thing.
Cameron Passmore: But the person's actually making the assumption that their action was the cause of this.
Ben Felix: Not a good job of the outcome, the outcome that they got. The share price jumped, they sold. They make the causal inference that them selling is what resulted in them missing the game, which is kind of true.
Cameron Passmore: It's true.
Ben Felix: But then you think about applying that to a new scenario. So, say they decide to buy Tesla again, and they decide I'm never going to sell if I buy it again.
Cameron Passmore: Therefore, you're inferring, I'm going to buy and hold, therefore it's going to go up.
Ben Felix: Or just, I think it's going to go up and therefore I'm going to hold because I don't want to miss it again.
Cameron Passmore: I see.
Ben Felix: There's some, what you might call naive learning going on.
Cameron Passmore: So, trying to change their pattern of behavior.
Ben Felix: Yes.
Cameron Passmore: Kind of like people looking for patterns. I can remember way back when with a number of different stocks, it would always was up and down. Therefore, from now on, I'm going to buy when it's low and sell when it's high, that it's going to automatically happen.
Ben Felix: Same kind of idea. Yeah. It's just that causal inference. You're inferring based on the outcome that you got and based on your perception that one action resulted in you getting the outcome that you didn't want. You're inferring that if you change that action, you will get the outcome that you want next time.
Cameron Passmore: Correct. Whereas it's probably a lot more random than that.
Ben Felix: It's far more, the overall outcome is far more random than that, and there are far more variables than your one thing that you're inferring.
Cameron Passmore: So, take a stock, it goes up in price, but you sold, therefore, I'm not going to sell it again when it goes up. I'm going to hang on. Change your behavior because it was your behavior that caused your bad outcome?
Ben Felix: Correct. You got to think about we tie this back to where does counterfactual thinking start? It starts with closeness. Your causal inference is based on you being close to an outcome. So, you're inferring that whatever thing you think you could change based on it being mentally available, so it's that idea of the public company employee receiving stock and deciding to sell one, when if they'd held, they would've had a better outcome. They then infer. It's the same idea. They're then inferring that if they hold onto the stock in the future, they'd get a better outcome.
Cameron Passmore: So, your message is for people to be aware.
Ben Felix: When you start having thoughts about if only or what if, yeah, I think you have to be aware of the contrast effect. Why do I feel bad about this? How does the counterfactual compared to reality, and why am I regretting that based on the counterfactual? The other piece is the causal inference. Is it realistic that changing this one thing would be expected to change my outcome in the future? Or would it be reasonable to expect with the information that I had at the time that I would've known to change, that one action? That's the psychology research in general, in a nutshell, a very small nutshell. It's a huge field of research.
Cameron Passmore: And then you discover some pretty cool investing research subsequent to that.
Ben Felix: Yes, there's a paper that came out in 2010 by Brad Barber, Michal Strahilevitz and Terry Odean called Once Burned, Twice Shy: How Naive Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold. They had a huge data set, which is interesting in and of itself of a retail brokerage and I think a discount brokerage. They had this massive record of trades. What they wanted to examine was the obvious counterfactual that when an investor sells a stock, the obvious counterfactual is they could have not sold it, they could have held it.
They had two hypotheses going into this. One was that investors prefer to repurchase stocks previously sold for a gain, and two, was that investors prefer to repurchase stocks that have gone down in price since they were last sold.
Cameron Passmore: They're looking at investor's behavior with individual persistent stocks, the same stock, their behavior with the same stock through time?
Ben Felix: Correct. And how does their feature behavior impacted by what the price did after they sold or before they sold? They tested these two hypotheses just by taking the data and examining empirically what people did. They confirm both hypothesis.
Cameron Passmore: First hypothesis was investors prefer to repurchase stocks previously sold for a gain?
Ben Felix: Because they feel good about it. They don't have that counterfactual of, what if, because they got the outcome that they wanted.
Cameron Passmore: I'm just thinking this through. It makes perfect sense. You like that stock.
Ben Felix: You're right. You have a positive association with that stock.
Cameron Passmore: Shopify treated me well, Tesla treating me great last week.
Ben Felix: That's exactly the language they use in the paper, that you are treated well by that stock. Yes.
Cameron Passmore: The other hypothesis, investors preferred to repurchase stocks that have gone down in price since their last sold. So, Shopify treated me well on the way up, it's now gone down, therefore I'm going to go back and get some more love from Shopify stock.
Ben Felix: Yeah. I think they said number one dominates number two. So, if someone's sold for a loss, so they feel like the stock treated them badly, it takes a much bigger drop for them to want to repurchase it again later.
Cameron Passmore: Wow.
Ben Felix: Yeah. But it all ties back to counterfactuals. It all ties back to the, what if or only if scenarios that we make up in our heads. They found empirically that investors were one-half to two-thirds more likely to repurchase stocks previously sold for a gain rather than stocks they had previously sold for a loss.
Cameron Passmore: So, stocks that sold them some love.
Ben Felix: Yeah. They were more likely to repurchase stocks that have lost rather than gain value following a prior sale. So again, confirming the hypothesis, and they were more likely to purchase additional shares of stocks that have lost rather than gained value since being purchased. Their insight was that the basic behavior of buying back previously owned stocks that have gone down in value, this was their empirical finding, that the base behavior of buying back previously owned stocks does not benefit people financially, and they said that there was actually a detriment, and using the same dataset.
Cameron Passmore: Why would that be? They're buying it cheaper.
Ben Felix: The frequent trading, I guess, I don't know.
Cameron Passmore: Interesting.
Ben Felix: They used the same dataset for a different study, and I just thought it was interesting to point out, and they found that the discount brokerage clients, so the exact same dataset from this study, the discount brokerage clients reduced their annual return by about 1.8 percentage points through trading, and on average, they earned significantly lower net returns than they would have from an index fund.
Cameron Passmore: Wow.
Ben Felix: One of their insights was that repurchasing stocks that were sold for a gain results from naive learning. It's that, how did the stock treat me kind of idea. Investors repeat actions that previously resulted in pleasure while avoiding actions that previously led to pain, and that's right in line with the causal inference mechanism of counterfactuals.
Cameron Passmore: Do you think this is true partially as well with blue chip investing? A lot of active managers only invest in the universe of say 50 stocks, so-called blue chip stocks, where you get to know those companies, you like those companies. Doesn't mean there aren't better investments out there, but you end up having this behavioral bias towards those 50 stocks?
Ben Felix: Yeah. I can see that making sense. The story's there you think about the mechanisms that drive counterfactual thinking. I guess if you keep a small universe of stocks, maybe there's less contrast effect.
Cameron Passmore: But if your investment firm is invested in those 50 stocks for the past 50 years, which is arguably what a blue chip stock is, names you know, names you like, treated you well, pay a dividend. I mean, there's no reason why pros can't be susceptible to these effects as well.
Ben Felix: For sure. It comes down to minimizing feelings of regret. There's an article from Morgan Housel recently that I thought of February 7th, it came out, that I thought fit really well with this discussion. The piece was called History is Only Interesting Because Nothing is Inevitable. There was a quote from his post, "Wars, booms, bust, inventions, breakthroughs, none of those things were inevitable. They happened, and they'll keep happening in various forms, but specific events that shape history are always low probability events. Their surprise is what causes them to leave a mark, and they were surprising specifically because they were not inevitable."
We talked about the causal inference effect, that belief that some specific causal force effected the outcome that you got causing you to form a counterfactual and then maybe regret a decision. If you could control for that thing in the future, you'd be able to improve your outcome. Housel took ... He was examining how people felt leading up to the great depression.
Cameron Passmore: What a great idea.
Ben Felix: It was cool. He had a bunch of newspaper articles and gauged the sentiment based on what people were saying in the news at the time. It's actually crazy to read because the American belief at the time, at least as portrayed in the newspapers, was that the levels of prosperity that they were reaching were invincible. They were perpetual that the new era of prosperity was never going to go away.
Cameron Passmore: Well, look at what was going on at the time.
Ben Felix: Yeah.
Cameron Passmore: I mean, the word end, all wars was over.
Ben Felix: Just on that point, there was an interview with some people, I can't remember the details, I should have written it down, but it was people that literally believed there would never be another World War. People at the time truly believed that there was going to be perpetual world peace because World War I had ended. I don't know how commonly held that belief was, but some people believed it.
Cameron Passmore: But think about it, electricity, cars, airplanes, it's incredible, radio.
Ben Felix: Yeah. Globalization.
Cameron Passmore: Yeah. Who would've thought that it was on the edge of the great depression.
Ben Felix: Based on all that stuff, people really believed that prosperity would never stop. One of the things that led to, which was actually viewed as a positive thing at the time, was high levels of consumer debt. That ended up being one of the causes of the great depression. Looking back now, it's really easy for us to say, oh well, if only people hadn't gone into debt. But at the time, based on the information that they had, it looked like prosperity was going to go forever. People were literally saying, smart people, were literally saying that consumer debt was a good thing and that it was fueling the economy and it was all good, and it was never going to stop.
This is like brilliant economists that are saying these things. It's not silly people. Just on that idea of forming counterfactuals based on information that we have, in hindsight, it seems like you can see, well, if only this one thing had been different, but at a given point in time, when we're making a decision, you almost never have the information that will make that causal inference seem obvious in hindsight, we almost never had that information, because nothing is inevitable, like Morgan Housel says in this piece.
Cameron Passmore: This is because humans don't like randomness. We always want to find patterns. We always want to discover explanations.
Ben Felix: I'm sure. Yeah. I'm sure that's one of the things that causes us to form counterfactual thoughts. I didn't dig too much into the ... Because there's a psychology research, there's a philosophical research on this idea of counterfactual thinking. I'm sure that's in there somewhere. I just read the psychology research because there's too much to go through.
Cameron Passmore: We're going to have to do another interview on this with an expert.
Ben Felix: I think getting an expert to talk with us would be super cool. One of the quotes that Housel finishes his post with was, "When you look back at what people said in the late 1920s, their confidence, their clarity, their logic, you can't help, but wonder what we are confident in today that will look foolish in the future." It's crazy to think about.
Cameron Passmore: Well, someone was pontificating on Twitter this past week, about how in 20 years, we can look back and realize that all of us looking down at our phones is so bad for us, letting our kids look at their screens is so bad for them, could be like looking back at smoking. My parents used to smoke at the dinner table. You'd never think of doing that today. We may look back in 30 years, oh my God, you should never let your kids look at cell phone screens, who knows?
Ben Felix: Stuff like that, but you tie it back to the discussion about individual stocks and feeling regret about whatever, it's very easy for us to look back and see, if you'd held on to Tesla, if he'd held on a Shopify, or Amazon, whatever it is, if only you'd held on, you'd have this great outcome, but that's based on the reality that we got, and there's no reason to think that the reality that we got was the reality that we should have expected to get at the time when we were making the decision.
Cameron Passmore: Exactly.
Ben Felix: It's crazy to think about.
Cameron Passmore: Yeah.
Ben Felix: It's crazy to think about. It's crazy to think about how much regret people truly feel based on making good decisions at a point in time, and then they regret it based on the realized outcome in the future. Not rational, but it causes people, like that Reddit post stuck with me. It's like someone actually said that they're feeling, like I'm depressed. I am depressed. Is anyone else feeling this way? I can't believe that I missed out on Tesla. It's like, man. That's powerful.
Cameron Passmore: Very powerful.
Ben Felix: I thought of this kind of a dark conversation maybe, but I thought it'd be interesting to point out a couple of ways to deal with it, a couple of mental tools. I found a piece from Jason Zweig, that he had posted on his blog as an excerpt from a book that he wrote in 2007. I think maybe just to frame the stuff he said, one of the things we have to remember is, with counterfactuals, they can be useful in fields where you can learn, or even just in scenarios where you can learn.
One of the papers that I read had an example of, if you didn't study for a test and failed, the obvious counterfactual's, well, if only I had studied. That's good. That provides good learning. But if you think about stocks, the stock market, they're random. Having counterfactual thoughts of like, if only I had held, or if only I had sold, that will never be productive, because the outcome is always going to be random. There's an interview that I really liked from Daniel Kahneman that is a talk that he gave for a CFA conference.
But he said, it's very difficult to imagine, from the psychological analysis of what expertise is, that you can develop true expertise in predicting the stock market. You cannot develop expertise because the world isn't sufficiently regular for people to learn rules. If you think about that, the counterfactual thinking in the context of the stock market specifically will never be productive, because you cannot learn from "past mistakes."
Cameron Passmore: If you could, AI would probably figure it out.
Ben Felix: Great point. If this were possible to do, AI would have figured it out. Some machine learning algorithm would be decimating the market.
Cameron Passmore: But take any one of these talks we've mentioned, none of us would be surprised if Tesla doubled from here, or got cut in half from here.
Ben Felix: No.
Cameron Passmore: You can write the story right now. It'd be so interesting if people actually anchored or took their decision thinking and anchored it at that point in time. Today, what do you think Tesla's going to do then come back in six months time and see?
Ben Felix: That's one of the coping mechanisms to avoid negative counterfactual thoughts, to avoid that pain, is to document why you made the decision to buy or sell so that you can go back and reflect on how the decision was made. If you can go back and look at, not only what information did you have at the time, but other than expectations about the stock price which probably shouldn't be part of the decision anyway, why else did you make that decision? Maybe you were achieving a financial goal. Maybe you knew you won. You held Tesla from, whatever, early days, and you had a big chunk of money, and you decided to sell half of it more, 80% of it, because that was going to set you up for retirement 10 years from now.
When you document, I mean, that's a big decision. People would probably mentally document it anyway. But when you decision journal, document decisions like that, and you can go back and say, yeah, okay, I missed out on big gains, but another way to think about that is you would never take the money that you needed for retirement and invest it all in Tesla Stock.
Cameron Passmore: So, Jason Zweig, his book, Your Money and Your Brain, you thought had some pretty good lessons to help people that might have the pain of [crosstalk 00:44:15] decisions.
Ben Felix: He had a bunch, I picked off a couple.
Cameron Passmore: It's a really good book.
Ben Felix: Yeah, I haven't read the whole book. This section that he has on his website was great. He said, "Nothing is a sure thing. The anticipation of a potentially big gang can cloud your ability to evaluate their realistic odds of success." Then I wrote a note that odds of success are pretty bad. We've talked with the data on individual stocks in the podcast in the past. You're pretty unlikely to make money in individual stocks.
Cameron Passmore: To that end, his other point is a lightning seldom strikes twice. If you've had a big win in the past, you are no more likely to have one in the future, even if it looks or feels similar.
Ben Felix: He says, "Cap your play money." I don't know if I totally agree with this one, but he says, "no more than 10% in speculative bets." He says, "Put 90% of your money in index funds." If you want to gamble on Tesla or Shopify, it should not exceed 10% of your net worth, which is crazy. If we come back to the example of a public company employee, if they've been granted stock, in many cases, that will end up being far more, maybe even 100% of their net worth. If you follow Jason Zweig's framework, you should be selling most of it as soon as you can.
I said, I don't totally agree with it, and the reason is, I don't know why you take an arbitrary 10% of your net worth and put it in speculative stocks. The way we generally think about the rational approach is to build up what you need to achieve your major financial goals first, and then once that's done, if you want to speculate with the excess, go for it.
Cameron Passmore: Yeah, making goals-based decision as opposed to ...
Ben Felix: Arbitrary percentage.
Cameron Passmore: Arbitrary or greed based decision.
Ben Felix: Yeah. Then the other one that always comes up in this thinking is the marginal utility of wealth. I guess there's a couple different ways to think about that. If you're going to make a speculative bet with a small amount of money, if you're going to take 10% of your net worth and the stock doubles, is that really going to change your life? When you think about it from the other side, if you take the big chunk and it cuts in half, how much is that going to change your life? If it doubles, sure, that'll change your life in a positive way.
Cameron Passmore: But the pain of dropping in half will be way more than the pleasure of gaining by half.
Ben Felix: I said it'll change your life in a positive way if it doubles. That's only true to a point. Once you're at that point where you have, say you need $2 million to meet your retirement income goal, once you're there, if it doubles, is your life going improve? Maybe a bit, maybe you go for more dinners or something like that. But for the amount of risk that you're taking, if we're saying that you're betting on an individual stock with $2 million, think about the margin utility. How much happier will you be with more wealth versus how much sadder will you be with less?
I think that plays into these decisions, and that when you have those counterfactual thoughts, thinking about, what was the marginal utility of wealth? At the time that you made that decision. Anyway, I thought that was a relevant discussion based on just ... There seems to be a lot of this regret out there, as we mentioned before, just with these tech stocks that have exploded and the weed stocks that have crashed. People are feeling sad about their decisions. I mean, hey, here's one, maybe just don't speculate at all. Although, I also mentioned that I have feelings of regret for not buying Shopify, so maybe that doesn't work.
Cameron Passmore: Onto the bad advice of the week.
Ben Felix: Yup.
Cameron Passmore: This week, I'm not sure it's bad advice. I call it bad advice of the week or not. This is about the Vanguard Group launching a private equity fund. So, there's an article from The Wall Street Journal last week called, Vanguard Broadens Reach With Entry Into Private Equity. As part of their push into to broaden their appeal as a financial advisor for larger investors to start, so they have an agreement with HarbourVest Partners, which manages about $68 billion of private equity to offer a product that's available to pensions foundations and endowments only for now. Now, Vanguard manages over $6 trillion of assets. So, partnering with HarbourVest, again, going after the higher end of the marketplace. I'm not sure if this is ...
Ben Felix: This is an interesting point.
Cameron Passmore: Bad advice or not.
Ben Felix: This point from the article is interesting. "Vanguard expects to open private equity in the future to wealthy individuals who use its financial advisory services." That's interesting.
Cameron Passmore: We've talked about this, is often the pitch from other advisory firms that we hear about in the marketplace, 60/40 is dead, so therefore you need us for things like private equity, and there is a ton of money going to private equity. One school of thought is Vanguard will do this in a very high quality way and in a cost efficient way. If you believe in private equity, great, finally, the good guys like Vanguard are bringing that to me. The other school of thought is, oh my God, even Vanguard's selling out and bringing in private equity to people. That's why, is it bad advice or is it not?
Ben Felix: Yeah, I don't know. It mentioned this in the article, the current CEO talking about how one of the challenges he faces is convincing customers that the firm will stay true to its vision of the founder, and you have to wonder, what would John Bogle think about this?
Cameron Passmore: There have been a lot of comments about how he'd be reacting for sure.
Ben Felix: You have to wonder. It's funny, with Vanguard having the personal advisor services business, it does create this interesting dynamic where now they're in a position where if they can make products that are only available to that service, that makes the service potentially compelling to some people, but it's also an inherent conflict of interest. If they start making exclusive products, just for the sake of being a sales pitch, which is often how I view private equity funds, they don't actually have good expected returns, especially after fees, but it was-
Cameron Passmore: But if Vanguard can do it cheaper.
Ben Felix: That helps a bit.
Cameron Passmore: But then the amount of money that would flow there, you need a lot of deal flow to fulfill the amount of money that could go into this could be huge, I bet if went retail.
Ben Felix: I did a bunch of research on private equity a while ago for a project that I was working on. We haven't talked about it on the podcast. Maybe I should dig that research up. There's a great paper from AQR that talked about private equity valuations and how, I can't remember what the timeframe was, but in the past, private equity valuations were crazy low. So, you could access equity investments in the private markets at a much lower valuation, multiple than you could in the public markets, which made the expected returns substantially higher.
But now, today, private equity valuations, they've pretty much converged with public equities. The expected returns of private equity now are not a whole lot. Maybe there's some liquidity premium in there, but then you get the fees too, so I don't know. There's a paper that AQR did. Not a paper, they do their capital market expectations every year. Reading through that document was fascinating, by the way, but they did a whole analysis of private equity expected returns. If I remember correctly, after fees, they're expecting lower than public equities for expected returns for private equity.
Cameron Passmore: Therefore, lower than small cap value.
Ben Felix: Much lower. They said in the paper, they didn't do an estimate for small cap value premium, but they said that they figure, and now their own biases acknowledged because they run multi-factor products, but they figure something like a value tilt should add 50 basis points to your expected return for equities and a multi-factor tilt, including stuff like quality, size, value, momentum, they figure that can add as much as 1% to the expected return. That's their professional opinion, I guess. They didn't really do analysis to support that, but it is in line with our historical data.
I think Buckingham Larry Swedroe's firm uses 50% of the historical premiums, which would end up being roughly 1%.
Cameron Passmore: So, I guess we kind of agree with Eric [Balchunas 00:51:50] on Twitter, who I think it was this morning, he said, "This is less about disrupting private equity, which is probably not going to happen anytime soon and much more about their personal advisor services and upping their game there to compete with the big guys. They feel you need to private equity access." The personal advisory services, as we said earlier, is huge and growing like crazy.
Ben Felix: But then, you know what? They're not wrong. I don't know what it is, but we live it. At a certain level of wealth, people get interested in other stuff, right or wrong, database or not, that is the reality. If that's their goal, to stay up market or move up market, then they're probably not wrong.
Cameron Passmore: Anything else to add?
Ben Felix: No, I think I'm good. You're good?
Cameron Passmore: I'm good. Thanks for listening.
Books From Today’s Episode:
Shoe Dog — https://amzn.to/2Ymj7Ka
That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea — https://amzn.to/2CwzafW
Safety-First Retirement Planning — https://amzn.to/2Nm75di
Your Money and Your Brain — https://amzn.to/2BzBnGI
How Much Can I Spend in Retirement? — https://amzn.to/2WbMrCa
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Shop Merch — https://shop.rationalreminder.ca/
Join the Community — https://community.rationalreminder.ca/
Follow us on Twitter — https://twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — https://twitter.com/benjaminwfelix
Cameron on Twitter — https://twitter.com/CameronPassmore
'Condovirus' — https://www.greaterfool.ca/2020/02/09/the-condovirus/
'Why Wealthsimple and robo-advisers aren’t scaring Bay Street anymore' — https://www.theglobeandmail.com/business/article-the-grim-reality-for-wealthsimple-and-its-peers-robo-advisers-are/
'The Psychology of Preferences' — https://www.jstor.org/stable/24966506?seq=1#metadata_info_tab_contents
'The Psychology of Counterfactual Thinking' — https://www.researchgate.net/publication/255571704_The_Psychology_of_Counterfactual_Thinking
'When Less Is More: Counterfactual Thinking and Satisfaction Among Olympic Medalists' — https://www.researchgate.net/publication/15726123_When_Less_Is_More_Counterfactual_Thinking_and_Satisfaction_Among_Olympic_Medalists
'Once Burned, Twice Shy: How Naive Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold' — https://journals.sagepub.com/doi/10.1509/jmkr.48.SPL.S102
'History is Only Interesting Because Nothing is Inevitable' — https://www.collaborativefund.com/blog/history-is-only-interesting-because-nothing-is-inevitable/