How Driving in Traffic Is Analogous to Investing

I like drawing analogies between finance and driving, because driving is an activity that most people have spent a considerable amount of time doing, so I think the analogies will resonate with a lot of people.

Why can you draw analogies between finance and traffic?

I think the reason you can draw analogies between driving and finance is that both fields involve:
- people making decisions
- participants are pursuing a goal
- other participants' decisions affect your decision-making process (eg avoid I-95 b/c everyone is taking it; avoid shares of XYZ company b/c everyone is buying it)



- If you just focus on the car directly in front of you, you may miss out on valuable information that could be gained from trying to see what the traffic situation is like a half-mile or more down the road.

- 1) On some stretches of road it is easy to see what the traffic looks like a half-mile or more down the road, 2) in other situations it is more difficult and in order to get quick peaks you need to be a) paying close attention when the road bends over a hill or around a corner and/or b) doing special maneuvers like driving on the side of the road, and 3) in still other situations it is impossible to know what things look like.

- if you get stuck in traffic on a particular stretch of highway it may be faster to get on another road, but if that other road has stoplights and winds around enough, it may actually be faster to stay on the highway, even though you're moving at a slower speed along that stretch of road than if you were zipping along on the side-roads. this can be seen as an analogy to having your money in an index fund: if you know there's likely to be a dip in the stock market for the next few years, you could decide to move your money, but you'll have to pay a 15% tax on your capital gains. that 15% dip in your money is something that you'll have to overcome if you decide to move your money. if the place to which you move your money doesn't have a high enough return, it may actually be more profitable to keep your money in the market and ride out the dip rather than move it around, even though you'd earn a higher yearly return if you moved your money than if you kept it in the index fund.

Options


Aggressive participants take advantage of "normal" conditions, which leads to disasters when conditions become abnormal without warning
MI: the way most people drive tends to be fairly predictable in certain ways.
ex1 - on the highway: people almost always stay at the same speed while they're driving, they use their turn signals when changing lanes, and they generally don't change lanes by suddenly swerving into the next lane.
ex2 - around town: when a light turns green, it takes the cars a second or two to accelerate forward.

MI: some aggressive drivers operate on the assumption of this predictability, which allows them to get to their destination faster.
ex 1 - on the highway you'll sometimes see drivers zigging and zagging between cars with only a few feet to spare; the aggressive driver gets to his destination faster, but his behavior depends on the rest of the drivers being "normal".
ex 2 - on the highway you'll sometimes see a driver change lanes without using his turn signal, on the assumption that no other driver is going to be turning into that lane all of a sudden or without using his turn signal.
ex 3 - around town you'll sometimes see cars speeding through yellow lights just as they turn red, on the assumption that no other car will be rushing from the other direction, expecting the intersection to be clear as their light turns green.


If he and another aggressive driver get close to each other without recognizing each other as aggressive drivers, and one ziggs while the other zaggs all of a sudden, you could see an accident happen.