A MONKEY ECONOMY AS IRRATIONAL AS OURS
by ilene - August 25th, 2010 5:40 pm
A MONKEY ECONOMY AS IRRATIONAL AS OURS
Courtesy of The Pragmatic Capitalist
As
“The investment world is the civilized version of natural selection. It cuts to the core of every emotion imaginable. When Joe Schmo goes to work for 25 years straight in an attempt to create a better life for his family and suddenly sees his life’s savings going down the tube because Lehman Bros went bankrupt you can’t possibly expect him to react rationally in such an environment. This is no different than the man whose family is attacked in the middle of the night. Do you expect that man to react rationally when everything he lives for is suddenly in harms way? Do human beings make rational and efficient decisions in chaotic scenarios? Even more important, will 1 million humans working in tandem make efficient decisions all within the same system? No, the majority of them will make highly inefficient decisions. “Mistakes” as we like to call them. We all make them.
If we have learned anything over the course of the greatest mean reversion in stock
market history over the last 24 months it is that markets are HIGHLY inefficient. Why? Because the humans that write the algorithms are using flawed theories and the emotions upon which these trades are placed are not psychologically efficient.”
Despite our evolutionary leaps and bounds I believe we are not so far removed from our animal brethren when it comes to survival instincts. When confronted with complex decisions we make mistakes, we panic, we turn to our animal instincts which scream: SURVIVE AT ANY COST. And nowhere is this more apparent than it is in the most complex facets of our lives. Markets are highly complex systems and have become directly tied to important facets of our lives. In many regards it is the last place most human beings should be residing. …