5 Psychological Traps That Will Ruin Your Finances

You probably saw GameStop's stock go wild recently, but you may not have realized that the psychology behind its explosion is fascinating. That's why in this video, we're breaking down the seven biggest psychological lessons that will help you understand group dynamics and make wiser financial decisions than 99% of the population. But first, here's a brief recap of the rise of GameStop. Plenty of channels have gone deep on this, so we'll just do a quick overview and then get into the mental aspect. Some Wall street hedge funds viewed GameStop as a dying business and made big bets that its stock would go down. Some people on Reddit forum called WallStreetBets realized that if the stock went up instead, the hedge funds who bet against it would be forced to buy the stock as part of their bet. This would cause a bidding war between the hedge funds, driving the price up an insane amount. They put their plan into action, and between a combination of regular people buying en masse plus the hedge funds being forced to buy, GameStop skyrocketed. Now, most of the time, WallStreetBets is just a bunch of individuals trying to make themselves money. So how were strangers on the Internet able to band together to pull this off? The first thing unique to GameStop's situation was the existence of a common enemy. This is obvious in politics and seems used almost daily these days. A common enemy lets you unite people in an us versus Them mentality, but this is a rare to experience event in the stock market. The hedge funds that shorted GameStop created a unique opportunity to know exactly who you were betting against. This was strengthened further by the villain trope. Simply put, you'll rally together harder against a common enemy and if you perceive them not just as other, but as powerful, evil, and unfairly using power to disadvantage you. In that sense, the public perception of hedge funds makes them a near perfect common enemy to unite people. That's why you saw comments like I'm buying GameStop, I don't care if I lose it all and I will continue to invest in companies being shorted by hedge funds until they are all bankrupt. In a bit of irony, people were buying a stock just to participate in an anti Wall street movement. The unity and appeal of the group was strengthened even further by the use of heroic language and mythology. This may seem hard to believe, but seeing yourself portrayed in memes of Spartans from 300 or the Scottish from Braveheart incepts your reptile brain a bit. Even if you know in your front brain it's just a joke so now, buying the stock doesn't just give you the chance to make money. You get to feel like part of this group of brave men and women charging into certain death with the chance for glory. This is why it's important to be cautious when someone tries to give you an us versus them mentality, especially if they dehumanize or villainize the enemy as unique, different and morally inferior. It's an extremely common tactic, and if you see it, you're likely being manipulated by someone who wants you to do something. As we'll see later, this can lead you to make decisions that are quite bad for you. Beyond the people who got in early and held, there was another group of people actually buying in at 300 and $400 a share. On the surface, this seems crazy. Why would you buy a stock you know almost nothing about after it's already gone up 100x in a year? In addition to the reasons we already discussed, one obvious reason is recency bias. The fact it had been skyrocketing every day makes you think it'll keep going. But the bigger reason people were buying at the top was scarcity. The fear of not buying and regretting, missing out on a once in a lifetime opportunity. It's counterintuitive, but in both cases, the fact that GameStop had already skyrocketed was exactly why people were rushing to buy it. As a side note, scarcity is probably the single most powerful trigger to get a person to buy something, and salespeople know it. If someone ever tries to sell you on something by saying it'll be gone, if you take too much time to think, that's a huge red flag to be wary. So with all this powerful psychology pushing people to buy, why did the stock fall back to earth first? Something extremely unexpected happened on Thursday, January 28th. The stock jumped from 350 to 480 in the first hour of trading. It looked like it was heading to the moon. Then people found that some brokerage firms had prevented them from the ability to buy GameStop, but not the ability to sell. So the stock fell massively, then made a second push up and then fell 70%, losing massive amounts of money for anyone who held, sometimes far more than they could afford. So what happened? Where did the momentum go? And why wasn't the line holding? One reason is that GameStop shareholders found themselves in a modified prisoner's dilemma. Here's the situation. If every shareholder holds, even if no one can buy, the price can't drop. Then the hedge funds who shorted are forced to buy and shareholders make big money. The problem is if a shareholder doesn't trust that everyone else will hold than to maximize their own money they should sell before everyone else does. And if everyone thinks that way, the price plummets. So what do you do when you're in a prisoner's dilemma with a bunch of people you don't know? The biggest problem for the many people trying to hold the line is that the community of GameStop owners lacks two key components of an actual community. Transparency and accountability. If you were on WallStreetBets when the stock was spiking, you'd have seen posts about holding forever with 100,000 upvotes. But what you weren't seeing was was the people quietly selling. This is a very common mistake people make. Don't assume silence means compliance. This lack of transparency also meant that no one really knew if the falling price was being caused by hedge fund shenanigans or regular people and institutions selling beyond transparency. Even if it does become public, you sold GameStop, you don't actually get exiled from your community. It's not necessarily a good thing, but it is a fact Some of the most strongly united communities have life altering penalties if you try to leave or disobey the majority. With the community of GameStop owners, people can publicly state that they're in it forever and then flip whenever they feel like it with no penalty. An interesting example of this was Dave Portnoy. One day he was tweeting about having diamond hands aka never selling. The next he retweeted to hold and 24 hours later he sold everything. And at least Dave had skin in the game. Many celebrities being praised for supporting GameStop investors didn't actually put money into GameStop. That's another valuable lesson from this whole thing. Look at people's actions, not their words. Elon Musk tweeted gamestonk, but did he invest a meaningful amount? Mark Cuban did an AMA for WallStreetBets where he advised people that if the reason you like the stock hasn't changed, then hold. But if he hasn't bought the stock, what he's saying is that he personally doesn't like the investment enough to buy in. Neither of them did anything wrong. The mistake was investors saw those tweets and those AMAs and thought that Elon and Mark were with them. If either of them suddenly buy a ton of GameStop stock, that is the moment you'll know that they think it's a good investment. In general. If anyone tells you they have a great opportunity for you and they aren't doing it themselves. Be wary. One area this is rampant today is with online business gurus who try to sell you advice on how to get wealthy in ways that they themselves have never done. So where do we go from here? No one knows what GameStop will do. It could skyrocket again or keep falling, and the more investment return you chase, the more risk you have to take on. Ultimately, maybe we're all better off trying to make money by doing something that isn't a zero sum game and actually makes people's lives better. Also, if you're one of those people who looks at hedge fund billionaires and wishes that they would do more to help the people with less, you have a chance to show them how it's done. Every day, 1400 children die from diseases caused by unsafe water. Compared to them, we are all the 1%. But it doesn't take much for you to make a difference. We're running a charity water fundraiser and every $40 gets someone clean water for 10 years plus for the first hundred thousand dollars donated, Charlie and I are going to match your donation so you can donate $20. We'll match you and together that gets someone clean water for 10 years who otherwise wouldn't have access to it. 100% of the money donated will be used to build clean water projects and when they're complete, water will send you photos so you can see the exact community you helped. If you'd like to help the cause, you can click the link on screen now or in the description below. Either way, we really hope you enjoyed this video. Big shout out to our amazing editing team of Therese, Andre and Ivan and hopefully we'll see you in the next video.