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rational vs irrational thinking

Rational Vs Irrational thinking: Why do stories need rational thinking but real life is a series of irrational events?

There is a fundamental realization among filmmakers and storytellers that are not so evident to the common man,

Stories need logic and rules, reality is devoid of both

Why do stories need rational thinking but real life is a series of irrational events?
Rational Vs Irrational thinking

Dwell on that line a little bit and think if that makes sense to you.

Your story or your script needs to follow the rules and logic set by that era or the society of that time, if it does not then it will not be non-fiction anymore and will be characterized in different genres like fantasy, sci-fi.

For example, if you tell me a fictional story that in a few years humans will breathe carbon dioxide and will not need oxygen anymore. The world and I would dismiss this as not possible at all and my response would be ‘No chance! How is this logical?’.

But if you can show me a person in reality who is breathing CO2 instead of oxygen then I will believe you and the question I will ask is ‘What is the reason for this? Are there any theories for this?’

The similarity between the two is disbelief, the difference is that I dismissed the first scenario but not the second.

That is why real life is devoid of rationality.

Now let us see an example of this in a recent real-life scenario.

>> This article is part of the Dealing with Money Newsletter.

Rational vs Irrational thinking: Evidence of irrationality in financial markets

GameStop – $3.78 → $325

If you had told me a decade earlier that in the future, a company called GameStop, whose stock price has seen a high of $60 since IPO, would grow from $3.78 to $325 within a matter of just 16 months and there was no change to the management or the business model and that the revenue was actually dropping considerably during this period,

And a group of stock traders on Reddit, Discord, and Twitter would join together to pump the price nearly 1000000000% and would be followed by a bigger group of people who would pour all their life savings into this same stock,

Would you believe me?

You will dismiss me the next second and would never listen to stock advice from me ever again.

This is understandable because the whole scenario is pretty absurd as it lacks both rules and logic.

Now I present to you the proof that what I said above actually happened,

GameStop Stock Plunges, Testing Resolve of Reddit Investors - The New York  Times
GameStop stock price rise. Source; NY Times

Here is the proof of this – The Guardian, MarketWatch, NPR, ABC News.

There are more outlets out there that covered the same story but you get my point.

Now you are wondering, how great I am because I ‘predicted’ this and you will listen to my advice for buying stocks for years together.

You notice the difference between the two, in the first I am untrustworthy, in the second I am your official stock market expert.

This is why stories need logic and rules but the reality is devoid of both.

Apple – $3 Trillion company

Here is a timeline of Apple,

  • had only one money-making product
  • subsequent product launches were a failure
  • no alternate source of income
  • the founder was forced to quit
  • the founder was called back and he fired the CEO

At this point, you wouldn’t even touch Apple stock with a hundred-foot pole. The company smells of chaos and is on the verge of destruction. Again you would have dismissed me for lunacy if I had asked you to make Apple the main stock of your portfolio.

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Here is what happened after,

  • ‘Think Different’ campaign was designed
  • iPod was launched
  • iTunes was launched
  • iPhone was launched
  • App Store was launched
  • Many versions and models were released for the above three products
  • Apple watch was launched
  • AirPods was launched

Now it is effectively on paper a $3 trillion company. Here is proof of this story happening, All About Steve Jobs.

Now I am your stock advisor again.

There are many such logic-defying events happening in today’s world in every sector not only the financial sector.

If you try to look into why, you would go deep inside a rabbit hole that does not have a definite answer.

Irrationality cannot be predicted, cannot be controlled, cannot be stopped.

So how can you leverage this?

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    Leveraging rational Vs irrational thinking in financial decisions

    Having a play fund

    There is a famous dialogue in the hit TV show, Billions, where the lead actor says,

    ‘What is the point of having fuck you money if you never say fuck you?’

    Billons TV Show

    Let me be absolutely clear that anybody and everybody have fuck you money with them right now. The amount varies from person to person, but everyone has it.

    If you say you don’t, then the $4 Starbucks coffee you get daily is in itself fuck you money.

    *sorry for using this cliched example, but it works*

    You can surely find $10, $20 even $50 on you right now. Having it in your bank account or just lying on your nightstand isn’t going to move your needle much.

    Put that money in any speculative asset that everyone around you is talking about. Sometime back it was the GameStop frenzy, then came the Dogecoin season, then came the Shiba Inu fad. There are many such assets around you all the damn time.

    No one knows whether the price is going up or down, that is why it is a speculative asset.

    If you used your fuck you $10 and bought some amount of doge or you bought into Gamestop when it was $100 and owned 1/10th of a share. In the former case, you could have made more than $70 or more depending on when you entered the market and in the case of the latter you could have made about $35 at its height.

    I know you all are screaming at me that there are multiple scenarios where you could lose the money.

    Yes of course! You will lose your money at some point. But that is not the case, you will only take something seriously if you have leverage in it. If you had bought $0 worth of doge then everywhere you see you will find doge articles and people talking about doge, you will educate yourself with it. Similarly with GameStop.

    >> You might also like: An interesting way to value companies: Demand vs Supply

    No one learns anything by watching from the sidelines. You learn a lot more riding the highs and lows.

    If you do this long enough, you will come across important assets. What if you used your fuck you money to buy into the Ethereum ICO, bought the first-ever bitcoins, bought a Bored Ape, bought a crypto punk.

    Always keep in mind that the loss you face on an investment,

    *you might need a pen and paper for this, a very difficult calculation*

    is the same amount you put in. $10 in, the stock crashes, $10 loss. Nothing more.

    But imagine the upside, it is limitless. If you bought the first-ever bitcoins, possibly multiple 100s for the $10. You will have $40,000 * 100s at the time of writing this article.

    Let’s assume you watched from the sidelines. ‘Oh, I heard about it when it was just $0.013. Should have invested in it’, ‘Oh, thank God I did not buy that, it crashed’.

    The result is you learned jack shit from either scenario.

    Rational vs Irrational thinking: Irrational bets that pay off always seem rational in the end

    The small fund is for investing in irrational market behaviors. The rational mind is to act on the result of those irrational investments.

    If you started reading and learning about your irrational investment and it makes sense, why not pour more important money into it.

    Irrationality tends to be a short-term phenomenon, while rationality ultimately wins in the long term.

    Should you buy more BTC or ETH after your initial fuck you money returned profits and you are well educated on the topic. Your rational mind will help you here.

    Should I sell this asset, I don’t see an upside. Your rational mind will help you here.

    Your fund manager will never recommend irrational investment options because if it crashes he could lose his job.

    His steady-paying job is more important to him than making you more money and getting a 1% cut of your gains.

    Overthinking your fuck you money is stupid: Over analysis leads to paralysis.

    The overall point of your small fund is for you to just spend that $10 lavishly.

    You wake up one day and see people talking about X, put that $10 into this. Since you bought it, you would now try to follow it and since you are following it, Google will recommend articles on that X coin.

    Whether you make money on that coin or not, you would have definitely learned more about the workings of that coin or in a more important sense, why the coin did not do well.

    Use this knowledge on your next investment, with each bet you become more knowledgeable and in turn, you feed your rational mind to look from different perspectives.

    But when you overthink, you could miss out on the train and go to a point where you never buy anything in the end.

    Final Thoughts

    Leveraging rational vs irrational thinking is very important in your financial decisions.

    I learned everything there is about ETH and BTC and thought that Doge or Shiba Inu does not have any value to it and never bought it.

    In hindsight, those two look like good decisions, but if I had bought it at the prices I first found doge, I would have 100x my money even at this market low and would have more than offset the possible loss on Shiba Inu.

    Guess you heard the above dialogue before. Yes, I am also guilty of being on the sidelines sometimes.

    Always remember,

    Every great investor has only a few wins in their portfolio that offset all their other horrendous mistakes.

    But always use your play money to speculate, and only if you are convinced you should try to increase your holdings.

    Learn the psychology behind your financial decisions

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