08 April 2022

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Inflation: you have to know it to deal with it

Author: Luigi Campopiano

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The investment decisions we make throughout our life are strongly connected to the experiences we have lived, especially in the first part of adulthood.

The 70s offer an important starting point due to the high inflation present in the West. Although it may seem strange, let's start with Family Ties / Casa Keaton, a TV series: the character was Alex P. Keaton, a 17-year-old boy who, in opposition to his parents' hippy ideas, has conservative values and is interested in finance. And the economy. There is an episode in which Alex had gone to visit his grandmother, and together with his parents and uncle, they remembered the missing grandfather to whom Alex was very attached. They shared a passion for the stock market and enjoyed browsing the list of listed stocks and betting on which company would grow in value in the following months.

His grandfather seemed like a great investor, but talking to his father, he discovered that his grandfather hardly ever invested in the stock market, preferring bank certificates of deposit, government bonds, etc. Alex asked why and was answered by the fact that his grandfather had experienced the Great Depression on his skin: he was part of a generation that had seen most of their savings and jobs vanish overnight. So, the first thing he looked for in investment was security.

This lesson in behavioral finance came to us in the early 1980s, well before the studies by Kahneman, Thaler, and many others on the importance of psychological research within the economy. Even then, it was clear that the investment decisions we make over life are connected to the experiences we have lived, especially in the first part of adulthood.

If a person grew up during a period of bull market for equities, as an adult, they would be more inclined to invest in equities than someone who was a boy when these stocks were weak. You can read entire books on the history of the Great Depression, watch documentaries, and now know every detail. Still, the emotional scars of those who lived it will never develop.

A parallel can be drawn with the current economic situation. Today we should be surprised by the lack of attention we give to the issue of inflation: we are close to 5% on an annual basis in Europe, yet there are only timid protests (limited to high bills). Inflation is a formidable tax, capable of significantly eroding our purchasing power: perhaps little is said about it precisely because few of us have experienced it on our own skin. Let's just hope we don't all have to get used to it again!