Human beings love to speculate. How can you avoid letting it hurt you?


MR. MICHAEL LIERSCH:  Hey, humans.  I’m Michael Liersch and this is My Next Move podcast, presented by JP Morgan.  I’m a behavioral scientist, which is just a fancy way of saying I help humans understand their behaviors to make better money decisions.  Each episode, I take a look at our interactions with money and consider science-based techniques to help you move closer to your financial goals.

In this episode, we’re going to talk about why human beings love to speculate.  Speculation.  Well, I have to say this is kind of one of my favorite things because when you think of speculation, all it really is, is trying to make predictions.  In dorky, behavioral finance terms we call that hypothesis testing.  What human beings like to do is really say, well, I’m going to hypothesize that a certain thing’s going to happen in the future and many human beings will then put their money on it.

Whether it’s speculation in terms of gambling, and I don’t know if I’m allowed to say that on this podcast, all the way to speculation in terms of investing.  For whatever reason, people love that hypothesis testing process.  Were my predictions right?  Especially, especially, my speculation for things that are what we call tale events, so things that would never be expected to happen, but magically, I thought they would happen and they did.  Those kinds of ideas are really out there.  People like them.  It’s so much fun when my predictions were right.  What we forget is, many times when we speculate, we’re not so good at it.  It’s not going to work out like we want it to.

When we speculate with money that actually we need to achieve our goals, what we want to accomplish in our financial life that might not be such a great idea.  When it comes to speculation, this is an area where spouses and partners get into a lot of arguments.  That’s why we really want to address this topic because it’s actually one of the most common dynamics I get into when I’m in client meetings.  What happens is one member of the couple loves to speculate.  The other one doesn't.  Actually, this happens cross-generationally too.  A lot of times, either children will get very anxious about their parent’s speculation or vice versa.  Speculation creates a lot of conflict in the family.  It's an important thing for you to pay attention to.

The most common form of speculation is when one member of the couple or partnership wants to take a lot of risk with money.  They like doing it in this very binary way, where if we invest or put our money towards this, it'll either lead to nothing.  We’ll get nothing from it, or we’ll get tons and tons of money at the end.  The end, by the way, could be tomorrow, or it could be 10 years or 12 years from now.

The other partner or spouse says no way.  I will never be able to sleep for that entire period of time that this money is at risk.  Really think about that dynamic, that example.  Does that exist in your family on any level?  If so, really think through the research-based tips I gave you because you have to, have to, address that dynamic so that it doesn't lead to either unintended outcomes financially speaking, or unintended outcomes emotionally speaking, in your financial relationship with other human beings.

When we think about this idea about really getting out of the speculative mindset, I want to give you some research-based thoughts.  The first one, really, really seek out evidence that contradicts what you think is going to happen, your prediction.  Why that's so important is human beings don't like to do that.  People love to find other human beings who confirm their thoughts.  That's just so awesome.  You can talk about people yessing you.  You can talk about people being like-minded.  This is what a human being is like.

Seeking out people who disagree with you, or don't actually believe in what you're saying, this is not natural.  If you're able to go in that unnatural direction, what's strange about it is the hypotheses that you have will tend to be more accurate because by getting that contradictory information, that contradictory evidence, you actually think through your original hypothesis more, and then you can actually make better predictions.

A bit of irony there, seek out people who don't believe in what you're saying, or don't believe in your predictions, especially when it comes to financial predictions and thinking around your money because it'll actually get you to refine your thinking, find those logical holes in your thoughts in a lot more productive way and strangely enough, get you to better predictions.

Second thought for you, don't always access experts for your predictions and your speculative thoughts.  Don't do it.  You might think to yourself, why?  Why wouldn't I do that?  Well, I am this dorky.  I do have a research paper on this topic, me and my academic advisor.  His name's Craig McKenzie, an awesome human being, by the way.  We did research on who was more accurate, experts or non-experts, which you might call a novice.  Someone who knew everything about the things that they're talking about, and then someone who didn't know those things.  When you ask experts and novices to make predictions or to give answers to questions, strangely enough, experts and novices are wrong or, to reframe, are right the same exact amount of times.  Experts actually don't give more accurate predictions than novices.

When you're accessing expert opinions, you really need to think about that.  You might say to yourself, well, then what's the point of expertise?  Well, I'm going to tell you.  The point of accessing experts is that, while they may be wrong the same amount of time as a novice, when they do give a prediction or they do give information, it tends to be closer to the right answer, even though it's wrong, tends to be closer to the right answer than a novice.  That's the real benefit of expert opinion is that it's going to be more generally right, or it's going to be less generally wrong than a novice, but don't just go with it mindlessly, please.  If you'd like more information about the topic, go to where you'll find more.

The third thought for you if you love to speculate, or you know someone who loves to speculate is to try not to invest in a way where you're making predictions about where the markets will go.  This is prototype behavioral finance dorky research.  People love to time the markets, but they can't do it.  Even financial professionals find it difficult to time markets.  When markets go up, can you predict that?  The answer is, for most human beings, no, they can't predict it.  When markets go down, can you predict that?  For most human beings, the answer is no.

In fact, what human beings tend to do is think they can predict it and when markets go up, what they tend to do is they tend to buy more and then when markets go down what they tend to do is sell more.  What they end up doing is buying high and selling low.  Think about that dynamic.  When you buy investments at a peak, and then you sell them at a trough, or at a bottom, what you've done is actually churned and burned your own account.  We talked about this in a prior episode, why should I invest now.  You should listen to that.  That came out in January 2020.  Check it out.

Make market timing something that is not your friend because most human beings can do it.  Instead, flip that.  Make time in the market your friend.  What I mean by that is really think about your investment time horizon.  If you have enough time to just stick it out in the market.  I'm not saying set it and forget it.  You all know I don't like the set and forget it idea, but the idea is actively say how long can I be invested.

Instead of speculate, just make sure you're committing to being invested during that period of time and whether you can handle the ups and downs.  You have to ask yourself that question.  Also if there are going to be big ups and downs, whether you can truly afford to manage those ups and downs, especially if you might need to take out money when the markets are down.  Make market timing something that's not your friend and instead make time in the markets your friend.

With that, I want to leave you with one last thought.  If you love to speculate or know someone who loves to speculate, I want you to really consider why.  I have another line of research that suggests that some people love to speculate, not because they like figuring out if their hypotheses are right or whether their predictions are right.  They just love the feeling of speculation.  They just enjoy that.  They love the risk.  They love going out with a bang.  They love it.  We did this research in the context of horse racing.

Some people just like putting all their money on the long-shot horse the last race of the day because it's fun.  It's enjoyable.  If you know someone like that, that's okay.  I want you to help that person or yourself think about if you are just enjoying the idea of speculation, can you segment a certain amount of money, just parse a certain amount of money, put it aside to use for that fun speculation?  What I mean by that is use that money in that way, but don't commingle it with money that you need to live your financial life and achieve your goals.  Make that your fun money.  That idea can then help that speculative mindset be an okay thing to just enjoy and not have to do the other activities I mentioned.

What I'd like you to take away from this episode is the following.  If you are speculative, especially when it comes to your money, seek out evidence that contradicts your viewpoint.  Make sure you recognize you shouldn't just do exactly what experts say.  You should really think through whether the expert answer is truly right or wrong and make time in the markets your friend, not market timing.

That's it for this episode of My Next Move, produced by JP Morgan.  If there's a topic you human beings want me to discuss, email it to  I read all of the suggestions myself and there have been some very interesting ones so far.  Please keep them coming.  If you like My Next Move, please tell your friends and rate the show wherever you listen.  I'm Michael Liersch reminding you to make your next move today.


Human beings like speculation—hypothesis testing—because it’s fun when their predictions are right, says behavioral finance expert Michael Liersch in this episode. We often forget, though, that very often, speculation doesn’t work out. Can you avoid letting speculation hurt you?

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