Top Learnings from 2022 (plus 23 in 23 Special Guest Shaun Tomson) (EP.235)

Episode Summary

Executive Summary: Episode 235 reflects on the hosts’ biggest learning moments from 2022—especially ICAPM, long-run asset risk, the true nature of money, financial literacy, and goal-setting—then launches the 23 and 23 reading challenge and features surfer-turned-speaker Sean Thompson on purpose, resilience, and his “code” method. The show ties together investing theory, financial planning, and life design through evidence-based insights and personal stories.

Main Topics: ICAPM vs. CAPM and multi-dimensional risk (Priority: 5/5): Benjamin highlights ICAPM as a major lightbulb: investors care not only about mean and variance, but also covariance with other states of the world, including bad economic outcomes and future investment opportunities. This reframes risk-free assets, portfolio choice, and why factor premia may exist. Long-run risks in stocks, bonds, and diversification (Priority: 5/5): The hosts discuss new empirical work by MacKew and Scott Cederberg showing that long-horizon equity investing is still risky and that bonds can be riskier than commonly assumed in real terms. Diversification across countries and return sources meaningfully changes loss probabilities and safe withdrawal outcomes. The nature of money and trust (Priority: 4/5): The discussion challenges the barter/commodity origin story of money, arguing instead that money is a social construct, a unit of account and means of payment grounded in credit, taxation, and issuer credibility. This lens also informs their view of quantitative easing and Bitcoin. Financial literacy and its economic impact (Priority: 4/5): The hosts note that the empirical literature on financial literacy shows substantial effects on household outcomes, even as Robert Merton questioned whether product design may matter more than education. The tension between literacy and product design is framed as an important policy question. How to set financial goals (Priority: 4/5): They summarize research showing that people often miss or under-identify their own objectives and that structured goal generation—free listing, doubling the list, using categories, and consulting a master list—can materially improve clarity and decision-making. Sean Thompson, purpose, and the 'code' method (Priority: 3/5): Former world surfing champion Sean Thompson joins to discuss using surfing as a metaphor for life, the death of his son, and his 12-line 'I will' code as a tool for purpose, commitment, resilience, and positive decision-making. The book The Surfer and the Sage is introduced as a companion to the 23 and 23 reading challenge. Community updates and reading challenge (Priority: 3/5): The after-show covers listener feedback, meetups in Canadian cities, teacher requests for Talking Sense cards, and practical details for the 23 and 23 challenge, reinforcing the podcast’s educational and community-building mission.

Key Arguments: ICAPM provides a cleaner and more realistic framework than CAPM because investors care about multiple risks, not just variance; this helps explain factor returns and why some assets hedge labor income or future investment opportunities. The riskiness of an asset depends on horizon and context: nominal bonds and bills can be very risky in real terms for long-term investors, while short-term volatility can make long-term assets less risky for patient investors. Historical return data are incomplete and survivorship-biased; using broader international datasets and bootstrap methods reveals non-trivial probabilities of long-run real losses in stocks, bonds, and bills. Diversification matters not only across stocks and bonds but also across geographies and sources of expected return; adding international stocks reduces loss probabilities and improves withdrawal-rate outcomes. Money is better understood as a trust-based social system than as a physical commodity; its value depends on issuer credibility and tax acceptance, which helps explain inflation and central-bank balance-sheet policies. Financial literacy appears to affect real household outcomes, but there is debate over whether education or better product design is the more effective intervention. Goal-setting is not trivial: people often fail to articulate their objectives unless prompted through structured methods, and abstract, purpose-driven goals improve motivation and follow-through. Purpose can improve both life and finance: Sean Thompson argues that writing one’s own commitments creates accountability and transformation, and that clarity of purpose improves decisions and resilience. The hosts see common threads across investing theory, money, risk, and goal-setting: clearer understanding of what is being hedged or pursued leads to better long-term decisions.

Data Points: Podcast episode: 235 - Episode number for this Rational Reminder installment. Weeks since last recording: Over 3 weeks - The hosts note it had been more than three weeks since they last recorded. Stocks vs. bonds win rate at 30 years: 68% - Edward MacKew’s full-sample U.S. data on the probability that U.S. stocks beat bonds over 30 years. Domestic stocks real loss probability at 30 years: 13% - Scott Cederberg’s 38-country sample (1890 onward) for domestic stocks. International stocks real loss probability at 30 years: 4% - Scott Cederberg’s same multi-country sample for international stocks. Bonds real loss probability at 30 years: 27% - Scott Cederberg’s multi-country sample for 10-year government bonds. Bills real loss probability at 30 years: 37% - Scott Cederberg’s multi-country sample for bills. Domestic stocks real loss probability (JFE paper): 12% - Scott Cederberg’s 39-country paper going back to 1841. Domestic stocks loss probability post-1960: 9% - Robustness check using later starting dates in Scott Cederberg’s bootstrap analysis. Domestic stocks loss probability post-2000: 18% - Robustness check using a 2000 starting date in Scott Cederberg’s bootstrap analysis. Loss probability excluding countries without full continuous data: 5% - Robustness check in the multi-country bootstrap analysis. U.S. stocks loss probability in same framework: 1% - United States-only bootstrap result in Scott Cederberg’s analysis. UK stocks loss probability in same framework: 3% - United Kingdom-only bootstrap result in Scott Cederberg’s analysis. Survey responses on financial goals: People may omit around half of their objectives - Referenced research on goal identification and objective generation. Reading challenge completion: 74 people - Number of participants who completed the 22 and 22 challenge. Reading challenge impact: 85% - Share of readers who said the challenge helped them read more books. Company valuation: $1 billion unicorn status - Sean Thompson recounts speaking to a company that had just reached unicorn status. Pulitzer nomination count: 28 books - Noah Benche’s book output described in the book review section. Large-study sample on purpose and longevity: 70,000+ people - Sean Thompson cites a University of Michigan study linking purpose with longer life. CEO survey sample: 460 CEOs - Sean Thompson references an Ernst & Young study on purpose-led organizations. Purpose-led performance advantage: 42% better - Sean Thompson cites Ernst & Young findings that purpose-led organizations outperform others. Purpose framework: 12 lines beginning with 'I will' - Sean Thompson’s code method for writing a personal mantra. Code-writing time: 15 minutes - Sean Thompson says the code can be written quickly as a practical exercise.

Pivotal Quotes: "In ICAPM theory, they care about mean, variance, and covariance with other states of the world." — Benjamin Felix: Benjamin’s concise summary of why ICAPM expands on CAPM. "Money is more of a system of mutual trust than a system of efficient barter." — Benjamin Felix: His takeaway from reading historical and academic books on money. "If you want to create transformation, your own words are the words that are precursors to action." — Sean Thompson: Sean explains why writing one’s own code is more powerful than merely hearing others’ inspirational words.

Implications: Listeners are encouraged to think more carefully about risk, diversification, money, and goals as connected parts of life planning. The episode argues that better frameworks—and clearer purpose—can improve investing, behavior, and long-term well-being.