When Comfort Blankets Go Bad: Risk, Perception and Investing Theater

Investing as Performance Art

The security analyst Bruce Schneier describes many of the security measures on public display as  “security theater”: a meaningless set of rituals designed to provide a comfort blanket. He argues that these measures provide no useful protection and mainly serve to make our lives more difficult, increasing the risks we have to take while simultaneously restricting our freedoms.

I’d argue that much of the performance art we see around investing serves much the same purpose – and with much the same outcome. Box ticking regulations don't actually do much for investors other than make their lives more confusing and difficult; but with a lot of thought, and a bit of investing theater, we might be able to better align real risk and perception to everyone's benefit.

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Trading On The Titanic Effect

Scary Tactics

If you’re sailing icy seas you’d generally want to keep a watchful eye open for icebergs. Unless, of course, you’re in an allegedly unsinkable ship, in which case you’d probably prefer to opt for a spot of partying and an early snooze on the poop deck instead. The craft’s designers will likely not have bothered with wasteful luxury items like lifebelts, emergency flares or lifeboats either: what would be the point?

You have, of course, just fallen foul of the Titanic Effect, one of a number of self-fulfilling behavioural biases where your expectations bias your behaviour and make it more likely that you’ll fall foul of the very problems you think you’ve overcome. Oddly, though, the problem suggests the solution: scare the living daylights out of the crew before you cast off.

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