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Common Pitfalls

Today I want to discuss three themes that impede our long-term well-being.

Linear thinking is a common way of thinking about the world. However, in our world many processes compound over time and the returns are geometric. This induces people to underestimate the impact of long-term loans on liabilities such as a car. The reverse is also true — long-term investing leads to surprising build-up of wealth.

Hedonic adaptation is how we get accustomed to lifestyle upgrades quickly and no longer derive any joy from those upgrades. Luxuries become necessities. The inflation in lifestyle costs don't lead to perception of joy, but reduce long-term well-being. 

Loss aversion concerns our distaste for engaging in moderately risky endeavors, even when the odds are in our favor. Unlike the previous two pitfalls, this aspect does have a silver lining — it strives to protect us against catastrophic ruin. But we can never eliminate risk completely — the next best thing is to choose our battles on our own turf. Remember that the risks that hurt you the most are the ones you are completely unaware of.

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