Aw come on! Most people are sensible, rational.
As the Dow Jones industrial average plunged 513 points last Thursday, then gyrated wildly on Friday, all of Wall Street seemed to be asking the same question: What the heck is going on? Evidence that the American economy is bad and growing worse has been piling up for a while now. And it’s not as if we didn’t know Europe had a debt problem. Why, then, all these crazy swings?
One possible answer comes from, all of places, the fields of psychology and neuroscience. In recent years, an area of study called neurofinance has tried to use brain science to explain how our primal circuits can, and often do, override our reason when it comes to investing.
It’s a heretical thought on Wall Street, where most people insist that logic prevails. The economic theory of rational expectations has enshrined the principle that people make judicious economic choices and learn from their mistakes. As a result, our collective expectations about the financial future — from the price of T-bills next week to the earnings of Google next quarter — are, on average, accurate.
Or so the theory goes. In practice, we do stupid things all the time.
Me? I think we should look at the age factor. The longer you've lived, the more ups and downs you've seen/been through. At some point many tend to let go of the constant "will it?/won't it?" cycle and settle down with a portfolio that's managed to get through earlier storms.
John Maynard Keynes, in his famous 1936 work, “The General Theory of Employment, Interest and Money,” likened the stock market to a beauty contest that ran in the newspapers of his day. Readers were asked to pick which would be voted the prettiest face. The key to selecting the winner, Keynes argued, wasn’t choosing the face you think is the most beautiful, but rather anticipating the face that others will pick.
