Mental Models discussed in this podcast:
- Satisficing
- Absolute vs Relative Returns
- Optimization
- Min-Max Game Theory
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Show Outline
Satisfice definition and Mental Model Uses
- Question from Wobble: “I think it would be interesting to discuss whether it has implications for whether you should focus on absolute or relative returns. Something I’ve been thinking about and it seems relevant. Looking forward to it!”
- Satisfice: accept an available option as satisfactory. (Oxford Languages via Google Search)
- I tend to be an optimizer
- If you optimized everything, you would be paralyzed in life. Unable to make a decision.
- Clothing
- Furniture
- Food Choices
- Where to go to eat?
- Consumers make choices like this every day
- The same can be true in investing. The goal isn’t to maximize your portfolio.
- Your goal should be to find satisfactory investments that allow you to achieve your financial goals with minimal risk.
- In any short-term time period, the investor with the highest return likely took big risks that are not sustainable over the long-term.
- Yet, over the long-term maximization of returns is not necessary.
Summary:
Satisficing is defined as accepting an available option as satisfactory. This mental model is useful because consumers use it instead of optimizing for every purchase. Investors can learn from this behavior to improve their portfolio and investing strategy.
Your goal should be to find satisfactory investments that allow you to achieve your financial goals with minimal risk. Simply trying to maximize the returns of your portfolio could cause you to fail in attaining your goals.
