Why your brain is ruining your finances🧠
and how to fix it.
In 2014, Vladimir Tenev and Baiju Bhatt created a stock trading app called Robinhood.
The company's mission was simple: "provide everyone with access to financial services - not just the wealthy"
Today, Robinhood has 31 million users mostly in the US and UK.
At first glance, it's easy to admire what they've created.
But the truth is a lot more sinister. And it's relevant to you.
In their latest filings, Robinhood revealed that 100% of the users who have funded their accounts are active every month.
Even worse, 47% of them are active every day.
This means that 47% of Robinhood users trade every day, and 100% trade at least once a month.
Shocking? Maybe not.
Except when you consider that 97% of people who short-term trade lose money.
That number extends to 99% on a 15-year horizon.
This means that almost every single Robinhood investor loses money over the long term.
This phenomenon isn't limited to Robinhood users by the way.
So if we know how fruitless and destructive it is, then why do we do it?
Checking stock prices and trading both trigger dopamine releases in the brain.
We anticipate all the money we're going to make.
And so we feel good.
This is a natural human behavior by the way.
In a study of 32 professional goalkeepers, 94% preferred to jump than do nothing even if it meant losing.
Doing nothing is inherently difficult for humans. We survived for 2 million years by being the most paranoid species on the planet.
We're wired to do. Our brain pathways reward action - even if the action is destructive.
What we don't realize is that every time we release dopamine, the brain releases an equal amount of pain.
This creates an urge, a craving, a deprivation that can feel uncontrollable.
If you've eaten chocolate cake only to desire it again 3 hours later, you know what I'm talking about.
Depending on the behavior, this dopamine deprivation can be painful.
So to get out of it, we indulge in more of the behavior that caused it in the first place.
That's why quitting smoking is hard. The withdrawal symptoms are so strong we'll do anything to escape them. And so we smoke again.
Now, some dopamine-inducing activities have milder effects on our well-being - like a good cup of coffee.
Coffee is also self-limiting: there's only so much coffee you can ingest in a day.
But trading is a destructive rabbit hole. The data backs this up, time and time again.
Access to investments isn't what will make you wealthy.
Compound interest is.
Einstein called compound interest the 8th wonder of the world.
Yet it's misunderstood and elusive.
Professor Albert Barlett famously said that "the greatest shortcoming of the human race is its inability to understand the exponential function."
And Charlie Munger has called compound interest the “most important, but also most difficult thing to get in life.”
That's because the most important rule in compounding is to never interrupt it.
Yet we all do, all the time.
In fact, it's what 100% of Robinhood investors do every month.
Maybe it's something you've done too. I know I certainly have.
I used to check stock prices every day. I used to trade daily, thinking I could outsmart the market.
But it was just a dopamine rollercoaster that ruined me emotionally.
I eventually came around to realize that the single greatest advantage in investing is a long-term horizon.
It's the ability to take advantage of compound interest.
And that's what I want for you.
To be able to buy a great investment (like bitcoin) and let it sit for years.
Not checking its price. Not feeling the urge to sell. Not indulging in the destructive dopamine-induced habit of trading.
Remember, the most important part of investing & wealth is psychology.
So if you're ready for a real paradigm shift about how you perceive your own behaviors, check out this podcast -
It was hands down the most illuminating thing I listened to this week -
Understanding our patterns is the first step in building a wealthier and happier life.
I hope you find this useful.
Sending you all much love,