Novelty, Unicorns and the Stressed Investor

Bad Hair Days

There’s a Groundhog Day effect in financial markets: wait long enough and another crisis will occur and everyone will be stunned and surprised. In fact they’ll be just as stunned and surprised as they were the last time one occurred. We’ve the attention span of a distracted goldfish when it comes to noticing the disconcerting regularity of market mishaps.

But although market upheavals are frequent they’re not so frequent that we get used to them. The steady state is a constant background hum of noise punctuated by occasional bouts of excitement over some stock or other. When a crisis occurs it’s a novelty – and for most of us our response to novelty is to get stressed, and then run around like our hair is on fire. By and large, I'd observe, this is not optimal investing behavior.

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Beyond the Dismal Science

The Passionate Science

Back in the nineteenth century Thomas Carlyle described economics as “the dismal science”, a term that’s been wheeled out ever since whenever some hackneyed journalist or febrile blogger feels the need to criticise something to do with money. It’s a snappy little phrase, and is all too often justified.

Well, now a couple of behavioral economists have written a book that attempts to refute that label. In the words of John List and Uri Gneezy in The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life economics is a passionate science – one that is:

“Fully engaged with the entire spectrum of the human emotions … and with the capacity to produce results that can change society for the better”.

So if you want to know how to price wine correctly, or to improve the performance of students or get people to donate more money to charity or level the playing field for women at work then this is the place to start. And if you want a tool kit to improve your performance at, say, investing, then you’re in the right place.

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