Love Your Kids, Not Your Stocks

That Love Thing

Psychologists have about as many theories about love as economists have about investing, and they have about the same success in making predictions based on their ideas. Still, both sets of social scientists plod on regardless, presumably on the basis that if there’s a market for oddball ideas they might as well try and serve it. Or maybe they’re just hoping for a date.

There are plenty of cases, though, in which it appears that investors fall in love with their investments and regardless of how fickle or downright untrustworthy their squeeze's behaviour is they’ll stick with them through thick and thin. Mostly thin. So maybe the psychology of love can tell us something about the psychology of investors?

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Risk, Stone Age Economics and the Affect Heuristic

Real Risk Management

Meet Grunt, a Stone Age economist. Grunt spends his time assessing risks. Usually these involve delicate decisions that may end up having quite important consequences – like whether he’s alive at the end of the day or not. Whether it’s attempting to impress a potential mate or ingratiating himself with the alpha males or simply choosing not to eat that odd smelling fruit he’s constantly having to weight risks and probabilities.

Grunt, however, isn’t blessed with modern economic theory and probability analysis is unknown to him. Although his grasp of number theory that doesn’t run much beyond one, two, err … a whole load he has a mechanism that’s been honed over hundreds of generations. Rather than rationality Grunt relies on the Affect Heuristic.

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