Money Illusion

Sleep Soundly

Money illusion is just about the most venerable of all of the behavioural biases that afflict people’s financial good sense. It was recognised back in the early part of the twentieth century, was an integral part of financial theories from thereon and spawned a range of measures that are more or usually less useful to us in everyday life.

Then economists decided that money illusion was … illusory. Which led to various predictable, albeit unpleasant, consequences such as believing “you can’t go wrong with property” or that storing cash in your mattress equates to sensible financial planning. Being poor is one thing, but not being able to get a good night’s sleep is entirely another …

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Why Markets Crash

An Unsteady Aim

Oddly there’s little agreement amongst the experts about why markets crash. Although given that experts in fields without objective measures of success are generally less accurate than a drunk in a ship’s urinal during a storm that’s not really surprising. Still, if the best that the world of investment has to offer doesn’t know when stuff’s overvalued then how can we possibly hope for an end to boom and bust?

There’s no getting away from the reality that the inability of analysts to know whether markets are overvalued or not leads to serious problems. Pundits, who have a record of prediction that makes amateur astrologers look like geniuses, are delighted to proclaim the inadequacies of regulators and analysts but, frankly, have nothing better to offer. Sadly, history doesn’t offer much in the way of solace: it’s only hindsight that gives us superior knowledge.

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