Behavioral Finance

A Perverse Fantasy Life

By, 04/27/2007

Most of life is fantasy. The imagination is just as large a component of the mind as reason. Here's a mind-blowing example: half your vision is imagined, not seen. The eyes are only able to focus in on a very small locus of space at any given moment and take in just that image. What makes up the totality of your purview are partly images the eyes see, but also what the brain "fills in" by using past data and its expectations of general surroundings. That is, half of what you think you see is imagined.

The point is, our brains are highly susceptible to making bad assumptions and creating false beliefs. Over the course of history, we've developed a grand number of inane fantasies that we use as beliefs. One of the most pervasive fantasies of the modern mind is the doomsday scenario.

Just about all conceptions of the future, from sci-fi books and films to the ancient religions of the world, feature dystopia and a catastrophic ending to humanity. First and foremost, we tend to believe heaven doesn't happen except through the fall of man.

The byproduct is persistent sin, shame, fear, dread. These are the things we collectively live with. And it makes sense—the brain was wired long ago to use fear as an aid to survival. But those evolutionary tactics often hinder us more than help us in today's world. These forever fearing beliefs spring strange and perverse perspectives. Today's reaction to US GDP numbers bear the familiar taint of doomsday-mongering.

Economic Growth Slows in First Quarter
By Jeannine Aversa and The Associated Press via US News
http://hosted.ap.org/dynamic/stories/E/ECONOMY?SITE=DCUSN&SECTION=HOME&TEMPLATE=DEFAULT

Here is article's opening line, unedited: "Economic growth slowed to a near crawl of 1.3 percent in the first three months of 2007, the worst performance in four years."

Light on facts; heavy on fear. For one thing, GDP ex-housing is booming and the US is on one of the great runs of economic prosperity in its history. Also, the last time growth was at this level (2003) it was a blockbuster year for world equities (+30%). And might we add, we're still talking about growth. No doomsdays here.

But the big point is markets didn't care about today's news. US indexes are flat to up slightly today. The markets don't care about fear, and they especially don't care about backward-looking data.

Another example:

15 Ways Stores Trick You into Spending
By Trent Hamm, MSN Money
http://articles.moneycentral.msn.com/SavingandDebt/FindDealsOnline/15WaysStoresTrickYouIntoSpending.aspx?page=all

Most will read this headline and not even think twice about its perversity. What a strange bent! Companies evilly "make" us buy more by providing—eek!—convenient shopping carts! Here was our favorite message board comment about this piece: "12 ways candy tricks you into eating it, including ‘tasting good' and ‘being candy.'"

It's apparently axiomatic that companies are evil and consumers are lemmings. Yet, there is little basis for such belief. Through the course of history individuals have (without government prodding) figured out to invest and build their wealth in a private ownership society, use leverage to buy homes and cars and get education, and to build new industries and create vast wealth and higher standards of living. Most of that prosperity was built via corporations.

These headlines scare us and "feel" right because they're in tune with our natural propensity for fear, but the markets won't buy it for long. In the knowledge of the collective lies the wisdom of markets—far greater than any individual or government, and ultimately transcendent of fear.

Ditch the fantasy life and see the facts. That's the Elysium of good stock investing.

Have a great weekend.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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