Do we need to change our minds about index funds?

31:57And that's this idea of doubling down on your beliefs if you hold them strongly enough. And I think that's the situation that Fisher was in. Like, he was so committed, he couldn't back away. Let's talk about this idea of, like, cope, call it, you know, like, changing the narrative to suit it. I thought it would have been funny if the aliens were like, oh, we're stuck in traffic. That's what your aliens would say. So you said that Fisher didn't change, Keynes did. You've talked about index funds and the importance of those as an investment vehicle for the masses. And a lot of the like, what I firmly believe is that a consistent investment approach through thick and thin into say like a globally diversified portfolio is probably a sensible investment approach.

32:43Not the best, not the worst, but it's likely the one that will get me to my end result. And it's likely that one that 99 % of investors can kind of wrap their head around and participate in. Yeah, I mean, I'd say it probably is the best, to be honest. Okay, amazing. Yeah, I mean, obviously, if you know who's going to win the Grand National, then put all your money on that. But if you don't actually have the ability to see into the future, then yeah, you're a globally diversified index fund, regular investments, don't mess. That is probably the best any of us can do. Well, I could concede that there might be people out there that can beat the market because they're like so into it.

33:16Like Warren Buffett? Yeah, Warren Buffett. But I would even argue over the last 20, 30 years, he is the market. He can't beat the market because he's so big, right? Also, Warren Buffett, in his advice to his wife, said, when I die, put the money into a standard and poor index fund. So even Warren Buffett is like, you know, I wouldn't advise you to try to do what I do. But that's the point. Like, it's like, you know, the best outcome for the most people is the index because, you know, mechanics aren't Warren Buffett. And they should be the Warren Buffett of mechanics. They should try and be world class in what they do every day.

33:53Rather than going, oh, I've now got to become world class in this field that takes a lifetime. Yeah. But I would say, I mean, we can get deeper into this if you want. It's not just about, oh, mechanics can't be Warren Buffett. It's the hedge funds can't be Warren Buffett. There are investment professionals whose entire job and who are paid enormous sums of money, the whole job is to pick the right stocks and they can't do it. And this has been well documented for many, many years that basically index funds will beat most professional stock pickers, most active funds, most hedge funds. And the ones who do beat the market, it's normally a fluke.

34:33On a long enough timeline, it'll beat them all, pretty much, because they blow up or something goes wrong. There's only really Warren and a couple that checked out after a 20-year period or died. Simmons, he died, basically, didn't he? But yeah, so it's not just a case of, oh, you're not a professional, so you should invest in an index fund. Even the professionals do better if they invest in index funds. I would argue that most professionals just track indexes now because they don't want to be seen to be underperforming. They just want the assets under management. And charge a bit extra. Yeah.

35:06There's an amazing bit of maths about this. So a colleague of mine at the FT once did this calculation. He said, imagine Warren Buffett. So, okay, he's the greatest investor in history. He's got 50 years worth or whatever of investment performance. Imagine Warren Buffett was split into two. So you had Warren Buffett, the hedge fund. and Warren Buffett, the investor who is trusting the hedge fund with his money. And Warren Buffett, the hedge fund, charges what hedge funds usually charge, which is two in 20. So you can hit the red button if you like. I was about to, but I was like, you're probably going to explain what two in 20 is.

35:44So two in 20. You can hit it as well. So two is 2 % a year and 20 is 20 % of any of your gains. So if your investment goes up 20%, you get 20 % of that 20%, which is 4%. So you're paying the 4 % plus you're getting the 2%. But you don't mind that because you got 20%, that's a pretty good return. You don't mind paying those fees. So total fees of 6%, that would be, but you're still getting 14%, which is a fantastic gain. so that the idea is well imagine if you had warren buffett and he's charging hedge fund fees and so you've you've and you've got these two warren buffetts and you're one of them is making warren buffett returns um but paying hedge fund fees and the other is just gradually collecting in the hedge fund fees and and the question is where where is the money at the end of the 50 years and the answer is almost all of it is with hedge fund buffett because hedge fund buffett is basically just slowly, slowly, slowly accumulating the money from charging, and then he's investing his own money and he's not having to pay the fees on it.

36:52Whereas the retail investor who's getting a fantastic Warren Buffett-style performance but paying the 2 in 20 fees, I mean, they're doing fine. But it's the hedge fund manager who's making all the money is the point of that. Even if your hedge fund manager is Warren Buffett, he's going to end up with all the money not you and i think that's the that's the importance of that piece of math yeah like a one percent fee with an average return over an investing timeline will take a quarter of your pot like just one percent so when you get to two percent they're taking majority yeah you know fees yeah and and by the way if the i think this is true if the fund falls one year they'll give you 20 they'll give you a discount they'll give you the money back no and they're still taking that two percent that two percent is the crippler right because it's rain or shine and yeah and it does rain and they're still creaming off the top they're kicking you while they're going down basically and people think it's worth exploring you said you said even one percent it'll eat up a quarter of your portfolio over the course of your investment career and i think people don't often follow the arithmetic of that i was just thinking about as i was coming here i was i was thinking about that that point it makes such a difference because if you imagine um you know you got some money you put some money in a fund and it's and you're 25 so you put some money in a fund you take one percent okay then you're 26 maybe put a bit more money in the fund 1 % comes off that but another 1 % comes off the first bit of cash the cash you invested when you were 25 now when you're 27 you put some more money in you pay 1 % on that but you also pay 1 % on the stuff you invested when you were 26 and you pay 1 % on the stuff you invested when you're 25 and by the time you're an old man like me you've been paying the 1 % on that first bit for 26 27 years and I'm not retired yet so you're paying it over and over again and sure the stuff right at the end you only pay the one percent once but some of that stuff you've paid one percent again and again and again and again and again and and it can really really add up huge amount yeah so the i love the tangents we're going on by the way don't stop because i think the storytelling is amazing but the point i was making about the indexes was that i i it's almost like a religion and it sounds like you're sipping the kool-aid too like you know zoltan one of us yeah Like you're part of the cult.

39:04No, absolutely. Absolutely, yeah. But you said that Fisher's biggest issue was that he wasn't flexible and he didn't change and Keynes did. So how do we cope with that? Yeah, yeah. Are we all just, you know, because basically index of funds have existed since the 70s. The dominant trend since the 70s has been declining real interest rates and now reversing. American supremacy. Like there's so many fat things I could point to to go, well, maybe that narrative is changing. Yeah, maybe the narrative is changing. I think that what I would say is, why would you expect it to change? What is it? So people say, oh, it's an increasing market or it's a declining market.

39:44If it's a bull market, then, of course, index funds will beat active funds. But in a bear market, when the market's falling, then the active funds will beat the index funds. Why? Why is that? I don't understand why that would be. I've never had anybody clearly explain to me. I totally understand why index funds do well. And in a way, it's kind of obvious. I mean, if you average up all the active funds, then that's the index. That is the market, right? So, of course, on average, it's going to do as well as the active funds on average, and the fees are lower. So after fees, it's going to do better.

40:20So that logic seems really, really strong. But I haven't seen a really strong logic. I've just seen a lot of special pleading as to why that should change. and I would accept that maybe there's a situation where the stock market's not the right place to invest and maybe you should go into a bond index fund or you should go to a commodities index fund or maybe you should be investing in property. I could understand that's a logic that that's not really what I do but I could understand that that might be the right thing to do. Periods of upperformance for other asset classes. Yeah. So you're timing like asset classes then.

40:53Yeah, I can see how that might be. We might get a period where gold does better than the stock market. Yeah, exactly. Well, you do sometimes get a period where gold does better. But what I don't see is the fundamental thing of like, if you're investing in stocks, then I don't see why you would ever not want to choose an index fund. Because the fees are certain and you get that gain instantly. But the active will say that indexes have distorted the market to the point where because of market capitalization weighted indexes, you're just pouring your money into the big seven. And they're now 25 % of the total index.

41:26you know so what you're actually doing is you're you're just buying companies that are overvalued whereas what we do is we will find opportunities within it that are fairly valued yeah you know well they haven't done they haven't done it yet no no i mean i'm i'm not that i'm not anti-active i'm just trying to throw the arguments yeah i mean there's so there's a there's a couple of couple of ways to to sort of interpret what what that argument that you've just relayed so one is it's a bad investment to get into index funds because they're too concentrated. Maybe that's true. If you're worried about that, there are kind of equal weight index funds.

42:05So you could basically say, do you want to hit the button? No, no, no, no. We are very familiar with equal. I can hit the button. Oh, you want to hit the button. So the idea is, say it's the S &P 500, so the top 500 companies in the United States. an equal weight fund would just say right well$500$1 in each of those companies whereas a more traditional index fund would say well Nvidia is a really valuable company so we put more of your$500 in Nvidia and in Apple and in Google and so on in the big ones I mean I maybe I don't I'm maybe I'm not I'm not hugely convinced but there's a separate argument that says in the end even though it's a good idea as an investor it's a bad idea for the world for everyone to be in in passive investing.

42:52It's not allocated capital properly. And that argument, I think, has got some merit, although I would say it's not my problem to set prices in the market. But I think at the moment, it's about 50-50, so about half the money in the market, I think, could be out of date. This is a funds, right? Yeah. I think half the money... 51 % is passive and it's tipped, but there's a lot of people that still hold individual companies. So there's probably a much bigger component of active. If you call active anyone who picks a stock. Yeah. So the question is, at what point do you have so many people who are just saying, I just want to buy the market, and so few people who are actually picking stocks that there's no information in the market anymore?

43:31So the fear is, if you imagine Joe Stiglitz, Nobel Prize winning economist, once wrote a paper about this. If you imagine a situation where literally nobody picks stocks, everybody just goes, I just want to buy the market. At that point, there's no reason to believe that any of the prices of any of these companies are fair. And if you actually came along and did a bit of fundamental analysis and said, actually, what are the profits of these companies looking like? What are the growth prospects? Which is the best deal? You get fantastic bargains. So if you were in that situation where literally nobody was a stock picker, you could make a killing being a stock picker.

44:10The opportunity swings the other way. Yeah, exactly. So the question is, we're at 50-50, as you say, ish. Does that create opportunities for the stock pickers? I suspect not. This is just an instinct based on economic theory, not based on any data. I think, I don't know, 10 % of people, 5 % of people, you don't need that many, because 5 % of investors is still a lot of money. You only need a few people setting the price doing the stock picking. And everyone else can go, you know what, you guys you guys are so clever you do it and i'll have 95 uh passive i'm speculating but but but the point yeah the point is you don't you and when you go into tesco or sainsbury's though the prices of those products reflect the cost of the product and they reflect the competition from other stores so what's you know i go into tesco did i check what the price was in Sainsbury's?

45:10Did I check what the Asda price was? Did I check what the price was in M &S? Generally, no. Just going to Tesco. It's fine. There are some people who are checking. I wrote a column once about the idea of their grandmother who's in front of you in the checkout queue. And you're like, I can't believe this woman has taken so long to pay for her groceries. And she's got all these vouchers. Be thankful to her because she's the one. She's the active investor. She's the active investor. She's keeping them honest. And as long as you've got a few people who are actually really, really keenly comparing the prices, then you don't need to bother.

45:45And the same basic thing, I think, applies in the stock market. You need some, you don't need everyone. I love the fact that you knew what the equal weighting was. It was like a proud moment. I've come a long way, buddy. I've come a long way. Don't need the buzzer. So, okay, I want to talk about, because I think the active guys, my theory on this, it's not well thought out, But I think what's actually happened is index funds have just allowed people to participate in the market where they're not getting ripped off. Whereas before it was like through a broker who was charging you a fee. And basically like a lot of the return that's generated is just the saving in fees that you pointed out.

46:20And we now have a position where I can explain to people on my YouTube channel who would never have invested the simplicity of these broad indexes. And they'll participate. And that can only be a good thing. And I think traditional finance is just bitching because they're like, we should be getting 2 % of that. And we're not. I'm worried. There's any day now it's going to turn. And the one year that active beats passive, they're all going to be like, look, even though the record is 50 to nil. There was a lot of money to be made convincing people to pay fees. They did great at it, yeah. But yeah, when there's a lot of money to be made convincing you to pay fees, I'm like, maybe you shouldn't be taking these guys too seriously.

47:01Paul Samuelson, so he was the guy behind the index fund theory. and we'll talk about the story in a sec, but he said that markets were efficient as well. Is that correct? He did. Do you think that they are then, based on what we're talking about there, where we're all like, you know, highly inefficient? I think they are nearly efficient. I think it's useful to think of them as efficient. So we should probably remind people. You're taking this buzzer out of my cold, dead hands. so what just to remind people what we mean by efficient market so efficient markets basically there's no there's no systematic advantage to be gained you know there's no obvious bargains so um you know whatever the markets might go up they might go down but they won't do that in a predictable way there's no there's no kind of obvious thing like oh markets always go up on monday or markets always go up in december or like this company is clearly massively undervalued and you could just buy it for a song because the markets the market knows all of that and the markets already dealt with all of that and so what's left is is the surprise and that's that's where the idea of the random walk comes from so it's just like random news moves the market yeah but it could be just all it doesn't have to be black swans just like anything that anything wasn't predicted small stuff big stuff tariffs yeah bombing a run anything yeah could be anything and a lot of it's quite a lot of it's small stuff and a lot of it's like industry specific stuff because remember it's not the market it's it's 500 companies in the s &p 500 and they've all got their own little stories going on no one could have seen the boeing plane you know like coming down and that affects the share price and then you own the index you're like why am i down a fraction of a percent yeah and it's because you've got you've got one five hundredth of or 1.500 of your money is in Boeing.

48:51So that's the idea of the efficient markets hypothesis. And it's not quite right. There are systematic errors that the market makes. There are times where there are measures that fairly reliably suggest the market is overvalued. And in the past, they've always basically said, you should probably be buying less and other measures that suggest the market's undervalued. And there are systematic effects like small companies seem to be better valued than big companies. and things like January, I think, does quite well and August does badly. Sometimes these anomalies are identified and they kind of go away and sometimes they seem to persist.

49:28But the point is not that markets are absolutely perfect, are absolutely efficient, but they're probably efficient enough that you should act like they're efficient. And what does that mean? Well, first of all, it means buy an index fund, as we've discussed. If you think markets are efficient, buy an index fund. If you think they're massively inefficient, patient then you know do your analysis and be clever and pick the right stock so that's the first thing second thing is you get the sort of the no free lunch idea so for example just before the financial crisis 2007 2008 you had these financial products that were being sold not to retail investors but to professional investors so like bank to bank or bank to pension fund So they're basically saying, oh, this product will pay 10%, like a really good rate of return.

50:17And it's incredibly safe. We've done all the modelling. It's super safe, and it'll pay 10%. Efficient markets hypothesis says no. If it's paying 10%, it's not safe. Turns out it wasn't safe. So I think it's a... I'm not saying the markets are always efficient, but I am saying you will tend to make the right kind of decision if you act as though they are. And you'd have to be working pretty hard to spot the inefficiency because broadly they're efficient. Very hard. Very, very hard. What I think a good message is to people is if your mate down the pub is telling you to buy Tesla because electric cars are the future, the market already knows.

50:48What does he know? What does your mate know? Why has he spotted the inefficiency in the market? Because I think these are the narratives that sucker people in. They hear AI and they go, oh, AI is the future. The market knows this potentially. Or, you know, any narrative that you hold off a common person, the market's priced it in and weighed it. I mean, my little pet theory is that most people don't understand how rich people get rich. Why would they? Most people aren't rich. Most people haven't spent a long time hanging out with rich people. And therefore, they assume that rich people get rich because of some sort of corruption, some sort of tip they got.

51:27That smarter insight. Yeah, yeah. Somebody told them something. And then, so you've got this view of like, that's where real money comes from is somebody whispers something to you and you take advantage of it. And that's how you get rich. But that is not how most rich people get rich. Most rich people get rich through being incredibly good at investment banking or being incredibly good at programming or setting up a company or inheriting a lot of money. Or, you know, it's not because they got this great tip. Elon Musk did not become the richest man in the world because someone gave him a great tip about some stock.

52:00That's not how it works. No, and most people are just parking money in the market, right? Like the money's over the in-earn. The people who have loads of money in the market probably put loads of money into the market or they lived as long as Warren Buffett has and invested since the age of 11. You know, how many people are fabulously wealthy solely off investing in the stock market? Like to the point where they're like billionaires. I think there's probably a handful, right? Yeah, not many. That's not the normal way. When you've got money, as you say, you park it in the market and it snowballs.

52:29But that's not how Bill Gates got rich. That's not how Elon Musk got rich. It's not like how Larry Ellison, the head of Oracle, got rich. It's not how the heads of LVMH got rich. All these billionaires, they were making money in another way. It's Buffett's the one. And there are a couple of others like Jim Simmons, who you mentioned. It's not usually too clever investment savvy. Can we talk a little bit about the index funding? Because I think it's an interesting story. Yeah, we just celebrated 50 years. Yeah, yeah, yeah, yeah. In the church. So, yeah, so the idea, or at least part of the idea, came from Paul Samuelson, who we mentioned, who was one of the first economists to get the Nobel Memorial Prize in economics.

53:16He was the real star of post-war economics. He wrote this super famous textbook that everybody had. He advised John F. Kennedy. He really contributed to the mathematisation of economics and bringing ideas in from physics to sort of make economics more sort of mathematically rigorous, which maybe is a good thing, maybe isn't, but very, very influential. But he also had this kind of brainstorm that if the market is efficient, then stock picking doesn't work. And if stock picking doesn't work, maybe you should just buy the index and he so he published this essay where he was called i think it was called a challenge to judgment basically said if you if you stock pickers are so good prove that you can beat the index let's let's see and if you can't maybe you should take up plumbing or something instead something more useful yeah um i mean we should say in order to have that insight first of all someone needs to invent the index and that had happened uh that was Dow, I think, of Dow Jones fame.

54:17And that had been like 50 years before or maybe more. And that was just a benchmark. It was a benchmark. So that you could, well, you could, I mean, he also founded the Wall Street Journal. And one of the things you could do then is to print a news story that says the market went up yesterday. Because he created the market. Yeah, he invented the Dow Jones Industrial Average, which was 30 stocks. I mean, it's a slightly weird benchmark. It's not how you would do an index today. But just that insight of, oh, I guess we could talk about how the market is doing. Previously, you would have to say, how are stocks in JP Morgan doing, or Pullman, or Exxon?

54:54It wouldn't have been Exxon back then, it would have been Standard Oil. But that's an interesting moment. Anyway, with the idea that you have the index that measures the performance of the market, at that point, you get to the situation where, well, we could just create a product that tracks the index. And John Bogle, who is the creator of the index fund, read Samuelson's article, and he'd already set up a fund management company, and he was trying to work out what funds to launch. And he thought, well, I guess I'll launch an index fund. The interesting thing is, there was a total flop at first.

55:30No one liked it. No one liked it. The folly of Bogle. Yeah, Bogle's folly, yeah. And And partly it was basically, he's going, do you want me to absolutely guarantee completely mediocre performance? People are like, hell no, this is America. No, it's not sexy. Yeah, I want top 1%. We all want top 1%. You're not all going to get top 1%. But in the end, it caught on. And slowly, slowly, slowly, and it has been a really slow build, Vanguard and other companies selling index funds are now, as you say, about 50 % of the markets. and they've saved investors, I think literally half a trillion in fees is one estimate.

56:13Maybe it's a trillion by now. That estimate's a few years old. And partly directly because by charging lower fees, but also because it forced the active guys to charge less as well in competition. So it's - One of the greatest inventions of all time in terms of life. Samuelson said it's like the invention of the wheel or wine or cheese. no the index those are his three things like no sliced bread he just wants a cheese and wine in the wheel sliced bread is it that good cheese and wine cheese and wine's amazing they say the greatest thing since sliced bread don't they that's the saying I know but I think that's supposed to be funny because sliced bread is not what are you sticking your cheese on slice of bread mate I don't know

56:54I need to come back and we need to have a further conversation about bread but that's another subject yeah yeah yeah no to be fair sliced bread is not the best bread is it not yeah There's a, you know, the best breads come whole. Full earth. I think so. I think so. So the one thing that I get from all of your work and everything that you do is that actually the answers are simple, but that feels really counterintuitive. Like your book presents like how to make the world add up. You present like, you know, 10 simple things and you were talking about index investing. Oh, it's actually pretty simple and all this complicatedness that people, if that's a word, that people are engaged.

57:31Complexity. there we go um the shenanigans that they're engaging in ignore all of that yeah is it really that simple well the world is complicated for sure the world is not a simple place in fact one of my books is called adapt and it's it's all about uh trial and error and making mistakes and learning from mistakes and another of my books is called messy which is just about how like the world just doesn't fit into neat categories so i'm not saying the world's simple but often when you're faced with the complicated world fairly simple advice works and i was really struck when i when i was working on on this book how to make the world it up so uh it's a book about how to think clearly about data um so um you can buy it so i was trying to you can buy it right now yeah so it's such good value um the um where where was i so so for for years and years and years i've been presenting this bbc show called more or less which is helping people understand numbers and for years i've been resisting writing a book about numbers because i was like so many books out there i don't think i have anything anything to add and in the end i realized oh no i i do have something to say and and it's partly a defense of numbers because so much of what we do is debunking dodgy statistics, I'm like, actually, they're really important.

58:53And there are a lot of really trustworthy numbers in the world. So don't just make, don't just think that thinking clearly about numbers is just disbelieving numbers, because sometimes the numbers are telling you the truth. But the other thing that I wanted to do was give people, give people psychologically relevant advice. So I can tell you about causation and correlation, I can give you all kinds of technical advice. But often the reason that people make mistakes is not because of a lack of technical skill it's because you know their emotions get the better of them so a lot of the advice in the book is a is about controlling your emotions um but yeah but what one of the one of the inspirations for the books the book gives 10 rules if i was boiling it down i'd give three but i was inspired by a guy called harold pollack who wrote a book you probably know um finance on an index card and his idea was actually all the financial advice you need you can write on a three by five inch card which isn't quite true but it's it's not not true is it there's a there's a lot of insight in spend less than you earn invest the rest in a global index fund inside of a tax efficient account rinse repeat until you retire it's about that isn't it it's about that that i think in the modern world you might want a bit more advice about dodging scams and not but yeah but you know but the point is that'll do that'll get started write that down yeah write that down the side you'll be fine but the point is that might not be all the advice you need but that there's probably like 90 of the of the benefit is the advice on that card and i felt the same way with how to make the world that up like i could probably write statistical advice on an index card and other books there just to it just to um elaborate a bit um but actually the advice that i give people is pretty simple and i wrote a version of this book for 10 year olds and so i've given this advice to 10-year-olds and I've given this advice to the membership of the Royal Statistical Society, who's a bunch of people with PhDs and professorships in statistics.

1:00:45And basically I said the same thing to them. Just bigger words in the bigger book. It's the same basic advice. And it's about how can you not fool yourself? How can you not be led astray by your emotions? And actually the story of Fisher and Keynes is in the book, because that's two incredibly smart people, one of whom was totally undone because he just fell in love with his own idea there was one um that stan stancheva is that how you say the name yes definitely stancheva i think stancheva so this was interesting in terms of like zero-sum thinking and like if you're talking about being fooled by yourself i think this one is is quite relevant to the political landscape that we operate in today so you said something interesting you said 20 years ago economists were rock stars because of the release of freakonomics yeah and then they've become really kind of unpopular almost laughed at like you know people like oh they do the opposite of what the economists would say is sensible yeah and the research that she's done is focused on people and kind of their belief systems that they have could you talk about yeah i mean that's one of many things that that she does and she's she's a one of big prize as well she's she's 39 yeah so she's won a big prize the bates clark medal which steve levitt the free economics guy also won and And it's the best American-based economist under the age of 40.

1:01:59So, yeah, you've got to be... Just about great. We can get it to you. We can do it. You've got time. But they mostly give it to people in the late 30s for obvious reasons. But so one of the things she does is she interviews people about their feelings and about their opinions. And so one of the things she's been trying to understand is what she calls zero-sum thinking, which I think is a really important idea. And zero-sum is basically like, where does money come from? where does where does success come from well from somebody else like i can't get money unless you know i can't i can't make money unless you lose money you know i can't win unless you lose and that that sort of thinking is i think really prevalent in politics today and so it gets you thinking about this idea of like oh the immigrants are causing the problem you know we've not got the jobs we want because of the immigrants or oh it's the chinese we've wealthy we've boomers I mean, you can pick your group.

1:02:54There are different groups to blame. I'm not saying that nobody in the world deserves to be blamed for anything. I mean, people do bad things. And if they do bad things, then that should be identified. But the point is that sort of zero-sum thinking gets you to a very polarized world of kind of when you're like, okay, we've got this amount of cake. And like anything you get, I don't get. So I just want to maximize how much of this cake I get. Whereas a natural economist's way of thinking about the world is, well, you know, there's always more cake. People are always baking more cakes. You know, we need to figure out nicer, better ways to bake cakes, bigger cakes, tastier cakes, healthier cakes.

1:03:30And so the cake is always getting bigger. The cake is always getting better. And that's a different way of viewing the world. But it's often more accurate. Not always more accurate, but it's often more accurate. So with trade, for example, the idea that like, well, we're trading with China and they give us stuff, we give them money, and that's bad. Like, that's not bad. That's good for them. That's good for us. That's fine. That's not a problem. So really interesting to see the spread of that thinking. And what Stanchiver found was that zero-sum thinking is particularly common among young people, which I think is probably not a surprise.

1:04:10And I don't think it's because young people are inherently like that. I think it's because of the world they've grown up in. So if you're 70 years old, you can remember a time when the economy is booming and booming and booming. You can remember a time when you could buy your own house and it'd be fine and there was a good job. People who are younger, productivity growth has been much less and we've not built enough houses. and so your perception that you can't afford a house unless somebody else is too poor to outbid you, that's not wrong. Or that your parents have to die for you to get a house.

1:04:46It's literally a zero sum. Yeah, so we've helped to create this world where actually the zero sum thinking, maybe that is correct. But I think the answer to that is, well, maybe we need to get back to creating a world where everyone can win because it is possible. I think one thing I've learned from the podcast that a lot of economists kind of leave out, you mentioned earlier, is like so much of investing, apart from your like little index card, is human-like behavior or financial-like human behavior. And that's one of the main things I've had to work on myself, not just once you learn the fundamentals and invest here, you've actually got to work on your habits, your flaws, and like your inner voice and your emotions.

1:05:24I think you're absolutely right. You can do incredibly well by following basic tips, you know, save money, put it in an index fund, all of that kind of stuff. But if you are buying shoes that you don't want, or more generally, if you are not spending your money mindfully, and you're consistently spending money and going, I just wish I hadn't done that. I didn't really enjoy that. And now the money's gone. If that's happening, that's incredibly important. And that's not really something that an economist is going to be able to help you with. The research from the lady we just spoke about, she found that zero-sum thinking was more prevalent in cities.

1:06:03Yeah. Which makes no sense because these are areas where collaboration, cooperation, it's like people come together in a city to collaborate. The strength of a city is the unity of people. Yeah. So for then people to think this is a zero-sum game is a bit backwards, right? Well, I can tell you've lived up north, mate. I don't know about too much collaboration in London, man. Yeah. Collaborate and robbing you. No, but they are collaborating, yeah. I'm going to collaborate in my shoes. I'm going to collaborate in your watch, David. It's not the shoes. He didn't want to buy. He didn't want to buy shoes anyway.

1:06:31He was moaning about this pair on a podcast last week. I love them. But, well, that's why you need to grab the data, right? Because I could tell you a different story. I could say, no, it absolutely makes sense that people think zero-sum in cities because you're constantly competing for scarce space, you know, on the underground, on the bus. Parking spaces. Parking spaces, people are getting in your way, and in particular, the housing market. Like, you're trying to rent a house, you're trying to buy a house. Many people are hacking the same flat as you. Yeah, and the estate agent wants to make sure you know it.

1:06:59right? So I could totally tell a story about why zero sum thinking definitely, you know, that's going to be prevalent in cities. But you can tell your story, which also makes sense. You've got to go and ask people, you've got to get the data. So that's why economics has moved past people sitting around in armchairs thinking really hard and actually going out and asking people and getting the data. It's important. You said you could boil down the 10 lessons in this book to three so what are they so they all begin with c number one be calm so take take a take a leaf out of darth vader's book so search your feelings so when you see a statistical claim you're often going to see it in an emotional environment on social media on the front page of a newspaper or website and it's it's designed to get you angry or upset or excited or afraid it's designed to provoke an emotional reaction or someone's trying to sell you something they want to get you greedy just notice how you're feeling it's like oh i got really i've been really excited about that or i'm really frightened and once you've noticed how you're feeling you go back and you think about it again it's totally different totally different kind of head you've got on and the number the claim will often look different so be calm number two is get context so context could be all kinds of things but it's often like where did the number come from is it going up or down?

1:08:19What was the number five years ago or 10 years ago? What's a useful comparison? Like you're making this claim about this investment product, but if I compared another investment product, would that be different? We say this about Britain, but what's the situation in France? So those sorts of contexts, those sorts of pieces of information as comparisons, really important context. It doesn't matter how good you are at numbers. If you don't have the context you just don't understand what you're looking at and the third one is curiosity which um i think we've been curious today haven't we curiosity is just about like going deeper not constantly trying to prove a point not trying to win an argument uh or justify some pre-existing belief but going oh that's interesting i didn't expect that i want to know more i want to understand more i want to know what's going on underneath that and it might seem really obvious but so often we use ideas, we use data, we use claims as weapons in arguments rather than as kind of a starting point for an exploration of the world.

1:09:25So calm, context, curiosity. There you go, that's your three. That's the line. I thought you were going to do that, but yeah.

1:09:38It's the last one of the day. I'm done in now. I need to go and eat and yeah just chill out but I really enjoyed it I didn't want it to stop because he's had a great way of kind of making things seem simple didn't he one of the most interesting economists I've ever met I was a few now as well I know I was perspiring a little bit but um it was really really good not sure what that's got to do with it mate but you're just sweaty self heat mate it's hot out here yeah clammy is the fourth c mate that's you yeah the three c's are very important I also like that he um pointed out that you know he was very bullish on the whole index thing and i like that i like when guests are part of the religion i like that he simplified investing generally yeah if you're looking to get into the index fund approach that we discussed there i've made a completely free course about index fund investing for beginners and hopefully it's nice and simple takes a couple of hours and should take you from a to z or a to c um or a to t whatever it is we'll leave a link in the description for you so you can check it out.

1:10:40Please remember, this is not financial advice. Like we say a lot on the podcast, investments can fall and rise. In fact, it's pretty much a guarantee. Past performance is no guarantee of future results. So your money is at risk with investing and other fees may apply. As with everything financial, please do your own research. We really encourage that because no one cares more about your money than you. I'm Damo. I'm T. This was an episode of Making Money from Our Company Most. It was filmed and edited by the team at Flow Spire.