Investor Irrationality Is Scary – That’s Why We Are So Reluctant to Talk About It

It’s scary.

Irrational exuberance is scary.

We want to invest effectively. Everyone does. Why wouldn’t we?

But this idea that the number on the portfolio statement isn’t real – that’s weird, scary weird. You want to be able to count on some things in this life. The portfolio statement is produced by a big company that hires lots of well-credentialed people and it is presented in a formal and official way; it’s a no-nonsense document. And this Shiller fellow wants us to believe that the numbers are wildly off the mark? What else are we going to discover to make us feel that our society is not as stable as we have been led to believe?

Irrational exuberance is a real thing. Our society is not as stable as we have been led to believe.

Keeping irrational exuberance under control

Here’s the thing. The instability is there whether we pay attention to it or not. Actually, if we paid attention to it, there wouldn’t be much instability. It is the fact that we ignore irrational exuberance that permits it to get so out of control. If we all worked to keep it under control, we could do that with ease. It’s like heart disease. You ignore the fact that your weight has been increasing and that your blood pressure has been increasing and that your cholesterol numbers are up and one day you experience something very scary indeed. But, if you pay attention to the signs all along, heart disease does not need to be nearly as big a worry for you.

Everyone wants to look the other way. Shiller provided us the way out. But even Shiller’s research has added to our fears. Because we have suppressed discussion of Shiller’s research for 42 years, we now have to worry about the role that we played in producing today’s CAPE value. Maybe there was someone in our group of friends who gave voice to skepticism re the Buy-and-Hold dogmas and we made him feel unwelcome because of it. Maybe we told him that he is a fool. You did that. I know you did because I know today’s CAPE number and it wouldn’t be possible for us to have such a CAPE number unless we all called lots of people who were trying to help us out fools for doing so.

We can change. Or we can all have heart attacks and die sooner than we otherwise would because we cannot face up to our human weakness for Buy-and-Hold stock investment strategies. Listen. I like people who do not eat properly or who smoke or who drink too much or whatever. I am not going to take away my affection for you because you vow to never, ever change your stock allocation, no matter what. But I am not going to keep it zipped re the harm that you are doing to yourself and millions of others because of your stubborn foolishness. You do you. And I’ll like you for it. But I am going to do me. And I do not like the idea of watching you destroy yourself. I am going to point out what the research says. If you are going to destroy yourself, I want it to be because that’s a choice you made, not because you never heard about the dangers.

Growing up is scary. It’s scary to drive a car for the first time and to kiss a girl or a boy for the first time and to apply for a job. But ultimately it’s better to face those fears and overcome them than to avoid them and have to face the fear of seeing your life slip away without you having made good use of it. Shiller is telling us how to grow up in a financial sense. Overpricing our stocks is a juvenile mistake, it’s an ignorant, hurtful thing to do. We need to be more responsible. No one says we cannot have fun, Obtaining an annual return of 6.5 percent real is fun. Pushing it beyond that is beneath us, Pushing it turns us into something that we do not want to be.

Rob’s bio is here.