Tuesday, January 6, 2015

The Optimism Bias

An excerpt from The Optimism Bias

"[T]hese precise regions — the amygdala and the rACC — show abnormal activity in depressed individuals. While healthy people expect the future to be slightly better than it ends up being, people with severe depression tend to be pessimistically biased: they expect things to be worse than they end up being. People with mild depression are relatively accurate when predicting future events. They see the world as it is. In other words, in the absence of a neural mechanism that generates unrealistic optimism, it is possible all humans would be mildly depressed."
Discussed at the Niederhoffer blog
"It explains also why crashes catch by surprise the optimistic herd, that continues to look positively into the future although all the elements are there to understand that things are very bad. Only a few 'mildly depressed' investors manage to sail macro and micro events maintaining a good understanding of what is going on."

6 comments:

Anonymous said...

Chicken or the egg?

Are they mildly depressed because they see the world for what it actually is?

or did the depression come first, allowing them to not overshoot on expectations because of their more pessimistic outlook?

High Plateau Drifter said...

I am not so sure that "optimism" is the right word. I think that most market perma bulls (stay fully invested at all times) have a sense of entitlement and are unable to see their own self interested greed mixed into their perceptions of value and the future.

They have rationalized their past success as "investors" and feel entitled to have it continue.

Not so terribly different from the residents of Ferguson in Missouri, with the stock market as their EBT card equivalent.

CP said...

Not only do they feel entitled to it, but they expect the money to come from capital gains and not dividends.

Coupon clipping is a distant memory, literally and figuratively.

Amazing that baby boomers in safe enclave neighborhoods think that real estate appreciation has made them rich.

I've had a chance to see firsthand how the gears in their brains jam when they realize that their children (with their grandchildren) can't afford to live nearby.

Those paper real estate profits look nice on the net worth spreadsheet, until you realize that a Chinese embezzler is literally occupying the niche space that your children should be in.

High Plateau Drifter said...

"I've had a chance to see firsthand how the gears in their brains jam when they realize that their children (with their grandchildren) can't afford to live nearby.
"

Just wait till, a few years from now, they all decide to downsize to smaller, less expensive quarters and decide to sell their McMansions, all at the same time!

whydibuy said...

Nonsense.
As Buffett has said, the future was never clear. When he heard investors waiting for a clearer view of future developments they would invest, he puzzled that, to him, the future is always uncertain. Investing is a little blind faith that tomorrow will be better than today and the country and economy will continue to grow.
The perma bears seem to love to fight the odds. What odds? The odds of the market going up 60% of the time and down 40%. That is a BIG advantage to bulls.
Funny to read CP now talking about coupon clipping when I got lambasted a while ago advocating quality names paying 2.5-4% dividends. Way more than treasuries. I know. I'm a silly bull who will get slaughtered in the crash that is coming a week from Tuesday. We know that because there has been another hindenberg omelette in the charts. Whatever.

High Plateau Drifter said...

"Investing is a little blind faith that tomorrow will be better than today and the country and economy will continue to grow."

Actually, for the past 14 years it has been "a little blind faith" that a central bank managed economy confronted by massive demographic headwinds can ensure, despite those headwinds, that the only stocks and bonds increase in price.

Warren is living in his childhood past, or rather wants the rest of us to believe that we are still in good old 1950s America.

Good luck with that as in investment thesis as those deflationary headwinds intensify over the next 10 years.