The above is not only one of my favorite phrases, but I chose it for its “dead on balls” accurate description of the subject for the day. On two different occasions I came across articles in which the author makes statements that are alarming, to put it mildly.
I recall, back in 2000, when milquetoast RINO John McCain, said that if Greenspan died he’d have him stuffed and propped up against a wall at the Federal Reserve, where he’d remain chairman. The economy was humming along and Greenspan was the hero as head of the Fed. That sentiment was pretty much shared throughout the halls of Congress as they all patted themselves on the back for their role in the boom.
But as history has shown time and again, a boom is followed by a bust and as soon as that happens all the genius’s scatter and want no part of it. Greenspan left the Fed in 2006, at the height of his glory, and then all hell broke loose in 2008. He was hailed as an individual who steered the US through 2 decades of prosperity, with unparalleled forecasting ability and unusual clarity. Perhaps the crystal ball was not so crystal? Ya think?
Then in 2013, as expected, the Greenspan book comes out. I won’t bore anyone with his theories as to which agency or regulation might have been to blame. The astonishing revelation in the book is that Greenspan, as the head of the most powerful financial arm of our monetary system, states that he failed to take into consideration, the irrational behavior of people during times of stress. Are you kidding?
He actually said that investor behavior falls short of perfect rationality, as if that were new information. Must have been to him since that little tid bit of insight was not a factor in his forecasting or whatever he was doing with the green eyeshades on.
I have a point in all this ranting about Greenspan and the damage caused by his half baked theories. (I was being euphemistic!) Emotions are part of our make-up, whether the smart guys acknowledge them or not. Clearly Greenspan did not and the economy suffered as a result. Was that the sole reason? Of course not but his failure to factor human psychology into the policy making was a huge mistake.
This is no different than the investor who makes decisions to buy or sell based on emotional reactions. When Greenspan makes a statement that humans can be victims of fear and euphoria, as if this is news, there is a clear message to all investors. Never underestimate the influence of emotions. Greenspan did and we have all paid the price.
The second example of how emotions get in the way of good decision making comes to us from Robert Shiller. OK, he’s not a household name but he’s known for his work on market bubbles. In 2004 he was on an advisory panel of the Federal Reserve Bank of NY, where he could have used his “expertise” on bubbles, by insisting that interest rates be raised. Instead he hinted at it and was not adamant. WHY is the obvious question since he was the expert.
You’ll love his response! Well perhaps not! I was amazed at the reason he gave… he was uncomfortable! It was not the consensus! Holy smokes!! Is that like saying you want them to like you? You have a need to “fit in”?? Once again we have a person in a position to use his knowledge and at least attempt to alter the course, but instead he chose to go with the crowd and lead us all off the cliff in unison.
I believe the proper description for this is behavior is “BAAA-BAAA” as in sheep or lemmings!
Don’t forget that sheep get sheared! OK that was a little off track but there’s an important lesson in the two examples I cited.
In both cases we have individuals in positions of power, well educated, highly visible, respected in their respective fields (just ask McCain who never lets a camera get away) and yet, both made mistakes so elementary that you would think they would be embarrassed to admit them.
Human psychology and emotions are an integral part of our behavior patterns. It’s up to investors to acknowledge the role they play, and the consequences of letting them dominate the decision making process.