We Are Less Than Rational

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

InvestmentBeliefssm2 (2)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

“I Have a Dream”

Martin Luther King gave the most famous speech of the 20th Century fifty years ago today as the final speaker at the March on Washington.  It is a day worth commemorating and, even more so, he is a man worth remembering. Dr. King was committed to keeping his remarks to about 10 minutes.  He had completed his prepared remarks in about that time when the wonderful gospel singer Mahalia Jackson, who had sung earlier and who was sitting behind the podium, called out asking Dr. King to “tell them about the Dream,” referring to remarks she had heard him use in smaller settings.  Believing he was led by the Spirit of God, Dr. King obliged and that improvisation turned an excellent speech into history.  

In Memoriam

Martin Luther King was assassinated 45 years ago today.  It is a day worth commemorating and, even more so, he was a man worth remembering.

I Have a Dream

Note:  The cellphone was launched 40 years ago yesterday.  It’s interesting to consider the relative impact of both Dr. King and our most ubiquitous technology and what that comparison says about our culture and our future.