The cost of looking | Second Order

The moment

Every month, somewhere in India, a few lakh people open a portfolio app on the morning their SIP debits. They are not there to change anything. The money has already gone. They look anyway, the way you check a locked door twice.

I do it too. Most mornings, before tea, I glance at a number that has no business being looked at daily. On a green day it tells me nothing useful. On a red day it tells me something false: that something has gone wrong.

The habit is easy to explain. The number is always there, one tap away, refreshed every few seconds, and it is about something we care about. Looking feels responsible. Not looking feels careless.

What interests me is not the habit. It is what the habit does to us over months.

The lens Myopic loss aversion

In 1997, Richard Thaler, Amos Tversky, Daniel Kahneman and Alan Schwartz ran an experiment that I think every investor should know about. Participants managed a simple portfolio split between two funds, one steady and one volatile with higher long-run returns. The only thing the researchers changed between groups was how often people saw their results.

Those who received feedback most frequently ended up putting far less into the higher-returning, more volatile option. Those who saw results rarely held more of it and, over the experiment, earned more. Same choices, same funds, same underlying returns. The difference was how often they looked.

Figure 1 · The 1997 experiment

Same funds. Different viewing habits.

Share of the portfolio placed in the volatile, higher-returning fund at the end of the experiment.

Source: Thaler, Tversky, Kahneman and Schwartz, "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test", Quarterly Journal of Economics 112(2), 1997. Figures rounded, as commonly reported.

The researchers called it myopic loss aversion. Two ideas sit inside the name. Losses hurt roughly twice as much as equal gains please. And the more often we evaluate, the more losses we see, because over short windows a volatile asset falls often even when it rises over long ones. Look daily and you collect a steady supply of small pains. Look yearly and most of them never register.

~2xHow much more a loss stings than an equal gain pleases

52%Chance a single daily look shows a gain, in the illustration below

75%Chance a single yearly look shows a gain, same portfolio

Figure 2 · The arithmetic of looking

The closer you look, the more it looks like a coin toss.

One hypothetical portfolio. Chance that any single look shows a gain since the last look. The dashed line is a coin toss.

Illustration only. A hypothetical portfolio assumed to return 12 percent a year with 18 percent annual volatility, using a simple normal approximation over 252 trading days. Not a forecast and not about any fund. The method follows Nassim Nicholas Taleb, Fooled by Randomness (2001).

The second-order effect is the one that matters. Frequent looking does not just make us feel worse. It changes what we are willing to own. We drift, quietly, toward whatever hurts least to watch, which is rarely what we set out to hold.

Table 1 · One year, five habits

What a year feels like, depending on how often you check.

Same hypothetical portfolio as Figure 2. Losses counted twice, to reflect how they feel.

You look	Gains seen	Losses seen	Felt balance
Daily252 looks	130	122	−113
Weekly52 looks	28	24	−20
Monthly12 looks	6.9	5.1	−3.3
Quarterly4 looks	2.5	1.5	−0.4
Yearly1 look	0.75	0.25	+0.2

Felt balance = gains seen minus twice the losses seen, in expected counts. The portfolio is the same in every row. Only the habit changes, and with it the experience.

For a monthly investor this shows up in a familiar way. A plan chosen for ten years gets judged on ten days. A fall that would be a footnote on a decade's chart becomes the whole story of a Tuesday. Nothing about the plan has changed. Only the distance from which we are looking at it.

I find this humbling because it means the problem is not information. We have more of it than any generation of investors before us. The problem is the rhythm at which we let it reach us.

The line

The investor's chief problem, and even his worst enemy, is likely to be himself.
Benjamin Graham · The Intelligent Investor

The week ahead 26 October to 8 November

The coming week is a busy one, and the calendar turns at the end of it.

When	What	What it may feel like
All week	September quarter results continue, with a long list of companies reporting	A daily stream of beats and misses
Tue 27 Oct	Monthly F&O expiry	Busier screens, sharper moves within the day
27 to 28 Oct	US Federal Reserve meeting; the decision reaches India late on Wednesday night	Thursday's headlines may lead with it
From 1 Nov	Start-of-month SIP debits begin	The morning many of us open the app
Sun 8 Nov	Diwali Muhurat trading session	A festive hour that gets read as a signal

Weeks like this can feel louder than they are. Headlines will arrive faster than anything underneath them actually changes. If the number on your screen moves, it may be worth noticing how you feel before deciding what it means.

One question

If you looked at your investments once a quarter instead of once a day, what would you stop worrying about, and what would you start paying attention to instead?

Until next Saturday,Ajitesh