Carl Richards, Terrance Odean and Emotional Markets

Carl Richards, a financial planner and blogger for the New York Times and at Behaviorgap.com illustrates the connection between the markets and emotion in a recent post.

It starts with one of Richard’s signature doodles (see above) and this lovely anecdote:

MIT finance professor, Andrew Lo recently told a story about Richard Feynman, the Nobel Prize winning physicist. According to Lo, Feynman was speaking to a group at Cal-Tech soon after the 1987 crash and said:

“Can you imagine how hard physics would be if electrons had feelings?”

Think about that for a moment…we often approach investing as if it was some sort of physical science. We often act as if we are dealing with unbreakable laws like gravity when we make our long-term projections about the future, for example, the idea that if I take more risk (invest in stocks) I WILL get more return.

In fact markets are nothing more than the representation of our collective (often irrational) feelings, and that is a far cry from some cold hard spreadsheet that says that 82.375% of the time stocks do better than bonds. So when we say that if you buy and hold stocks you will earn more money over the “long-term” than if you put all your money in CDs, we should end by saying, “We think.” We really don’t know for sure because there are so many variables that impact what will happen in the future including billions of humans and their feelings.

Well, the reality is that investing is NOT physics because markets have feelings.

A compelling way of looking at it.  (“I think.”)

Even if we are not convinced that we are “typical investors” — meaning overconfident, excessive traders, who tend to both go with the crowd and be incredibly stubborn according to Berkeley’s Terrance Odean– we should at least consider the fact that we’re investing in markets with a lot of people who are just that.  And then, presumably, act accordingly.

Your tricks for surfing above the emotional tide would be greatly welcome.  I invite you to add them to the comment stream.

One thought on “Carl Richards, Terrance Odean and Emotional Markets

  1. David Neubert

    Feelings apply to the short run rather than the long run for investing.

    “In the short run the stock market is a voting machine. In the long run it’s a valuation machine.”

    Now the short run can last years as it has during bubbles.

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