A lot of people find it very hard to accept the randomness in economic cycles [1], the stock markets – or in life.
If a share goes down 5%, they have a reason for it. If a share rises 5%, they have a reason for it. Yet if there IS a reason for it, you can be sure they don’t all have the right answer. The sheer multiplicity of their explanations guarantees that.
The snap conclusions that we’re all inclined to make about share prices is a manifestation of The God Complex, a quirk of human psychology [2] that basically says that no matter how complex the situation you’re looking at, you strongly believe your own solution is correct.
Worse, if you’re an expert then you’re even more convinced – when in reality, your superior knowledge should often encourage you to be more circumspect.
It’s well worth taking 18 minutes of your time to watch the following presentation from TED by Tim Harford, the author of The Undercover Economist [3]
No doubt the God complex equipped us well for life on the plains of Africa, when we had to move quickly and with confidence to avoid being a snack for a passing lion. But it doesn’t help us to evaluate a share for potential investment, or to solve other complex investing issues.
I can barely remember a time when those prepared to speak out about complex economic problems like the debt crisis in the US and Europe spoke in such simplistic, misleading and vehement terms, nor when in contrast those who feared that very complexity were so reluctant to make a move in the market.
For example, I seem to be alone in thinking that European politicians are doing exactly the right think with Greece. They are edging towards a solution via trial and error, seeing how much time a bit of fiddling at the fringes can buy – time for the infinitely more capable market to move towards a solution.
I’m more than happy to keep investing in the face of such fear. The opinion among most media and finance bloggers, in contrast, is that the system will explode unless there’s some ‘grand solution’ that will somehow solve all Europe’s problems for the next 20 years out at a stroke.
In response, I’ll quote a poet:
“The best lack all conviction, while the worst are full of passionate intensity.”
– William Butler Yeats, The Second Coming
Further reading
- You probably can’t pick stocks better than the market, so buy a tracker [4].
- Read Fooled by Randomness [5]
by The Black Swan [6]
author Nassim Taleb.
- Tim Harford’s new book Adapt [7]
is about how success begins with failure.