Irrationality | Above the Market

Investment Belief #3: We aren’t nearly as rational as we assume

Traditional economic theory insists that we humans are rational actors making rational decisions amidst uncertainty in order to maximize our marginal utility. Sometimes we even try to believe it. But we aren’t nearly as rational as we tend to assume. We frequently delude ourselves and are readily manipulated – a fact that the advertising industry is eager to exploit.¹

Watch Mad Men‘s Don Draper (Jon Hamm) use the emotional power of words to sell a couple of Kodak executives on himself and his firm while turning what they perceive to be a technological achievement (the “wheel”) into something much richer and more compelling – the “carousel.”

Those Kodak guys will hire Draper, of course, but their decision-making will hardly be rational. Homo economicus is thus a myth. But, of course, we already knew that. Even young and inexperienced investors can recognize that after just a brief exposure to the real world markets. The “rational man” is as non-existent as the Loch Ness Monster, Bigfoot and (perhaps) moderate Republicans. Yet the idea that we’re essentially rational creatures is a very seductive myth, especially as and when we relate the concept to ourselves (few lose money preying on another’s ego). We love to think that we’re rational actors carefully examining and weighing the available evidence in order to reach the best possible conclusions.

Oh that it were so. If we aren’t really careful, we will remain deluded that we see things as they really are. The truth is that we see things the way we really are. I frequently note that investing successfully is very difficult. And so it is. But the reasons why that is so go well beyond the technical aspects of investing. Sometimes it is retaining honesty, lucidity and simplicity – seeing what is really there – that is what’s so hard. Continue reading →

If you are ever tempted to think that we are basically rational creatures, acting in accordance with our reasoned self-interest, think of this nonsense. I can’t imagine caring more about anything than the safety and well-being of my children. I have no doubt that virtually every parent feels the same way. Yet a multi-state ring of apparently well-meaning parents, wary of vaccinations that prevent the disease, swapped or even purchased lollipops through the mail allegedly licked by a child sick with chickenpox after connecting via social media. These suckers’ idea was to give the lollipops to their children so as to infect them with chickenpox and so they would develop immunity without the shot. Let’s count the ways this is mind-numbingly stupid.

It ignores (denies!) modern science. Vaccinations are safe and effective.
Chickenpox can cause severe disease and death.
Sending a virus or disease through the U.S. mail or private carriers is illegal.
It also violates federal law to adulterate or tamper with consumer products, such as candy.
Why would anyone buy infected or contaminated body fluids from complete strangers and given them to their children? Is there any reason to trust them or to determine that some crackpot out to hurt their child isn’t scamming them?
Although it is possible, it is unlikely to achieve the goal of transmitting chickenpox. William Schaffner, M.D., president of the National Foundation for Infectious Diseases and chair of the department of preventive medicine at Vanderbilt University, explains that “chickenpox is not spread through oral secretions but by the respiratory route. You have to inhale this virus for it to be successful. It’s spread through sneezing or couching or just breathing out the virus.”
There will definitely be other germs, bacteria and perhaps viruses on the used lollipop. So the child being given the used chickenpox lollipop probably won’t get chickenpox, but may be receiving something else, such as a staph infection or hepatitis.
Even if the scheme succeeds in getting a child sick with chickenpox,there may be “worst-case” consequences such as chickenpox encephalitis and chickenpox pneumonia.