Fear and Greed
There was a time, I admit, when I was an investment banker. And the one lesson I took away from there is that the world of money is controlled by two emotions – Fear and Greed. Economic models are all very well, as are the sophisticated financial models that predict markets that only rocket scientists could understand. (By the way, it is true, the myth that rocket scientists have contributed to financial market models). But every trader at our desk knew, that whatever the models said, the only way to predict which way the market would go was to be an astute judge of emotions.
So, how did they get it right all the time? They did not. Nobody can be a perfect judge of emotions, even their own, let alone an entire markets’. Ever been in a relationship? Yup, see what I mean? As long as you win more than you lose, you are doing well. If you win more than 80% of the time, you are one of the greats. If you win all the time, you are a star for now, but every star falls sometime.
Is that what was happening in the markets? Were our billions being traded, nay gambled, on somebody’s opinion of whether fear would rule the day or greed?
I believe so. And I do not disapprove at all. For years, when things were going our way, neither did we. Now, now, gotta be fair.
What is really important here and now is to realize this and build it into our future. We cannot let this happen to us again. If we do not know what went right and what went wrong, we will never be able to make things go right for us. Economic rationality is not all, which is why economists came up with bounded rationality. (more on that later, if anybody is interested).
We need to be able to build emotions into financial decision making models – like impulse, inertia, temptation, greed, peer pressure. All of these have played a role in our financial decision making at some time or the other. The big question is how.
Watch this space, I’ll think of something(!)