Posted by: Bevan | December 28, 2011

This Time Its Different

An interesting article in the Financial Times highlights how some of the concepts of behavioral economics are becoming increasingly mainstream.  The article discusses how financial amnesia among UK-based financial advisors and Investment ‘experts’ might have influenced the development of crashes and panics.  Education about financial history and the causes of past bubbles for fund managers and advisors is being advocated by the Chartered Financial Analyst Society, the article reports. Any additional training in these concepts would of course be valuable.  Many financial advisers in my observation understand little about markets, tending to ‘herd’ people into the same old poorly performing investments such as big funds, property finance companies etc.  They result in gains being lost on expensive fees, poor performance especially in secular bear markets such as we are in now and benefit those in the ‘financial services’ vertical rather than investors and savers.  Of course there are many more participants in the financial industry than investment advisors, although I suppose they are the conduit for many ‘retail level’ investors.

I’m a bit cynical about the benefits of ‘education’ in any case.  The only real knowledge comes from the school of hard knocks rather than classrooms, and the warnings of the effects of bubbles are hardly new.  Crowd behaviour has only temporarily shown any signs of change despite plenty of warnings from history (Extraordinary Popular Delusions and all that) and the idea that the repeated erroneous boom/bust cycle will vanish is constantly contradicted.  There is of course some level of generational knowledge.  Virtually everyone with any sense (excluding most of the Real Estate industry) have disabused themselves of the notion now that property prices ‘only go up’.  The generation who lived through the Great Depression adopted a generally thrifty attitude and minimised debt.  Those lessons were of course forgotten as usual and each wave of boom and bust seems to be exaggerated by ever increasing amounts of central money supply pumping and debt creation, especially in the West.  Perhaps we might now be at a point where some education from the school of hard knocks might start changing behaviour.  There isn’t much reason for that to occur yet though as government and central bank interventions keep on kicking the ball down the road in terms of cleaning out the system.  We just keep seeing massive moral hazard as the risk takers of the financial industry enjoy the gains and socialise the losses.  Additionally the process of learning and education is subverted by the fact that virtually no-one has been held accountable by the justice system for the greed and dishonesty which caused the continuing Global Financial Depression (or Global Financial Crisis as the media prefer to call it).

These continuing market ‘errors’ of course create opportunity.  Whenever emotion, fear and greed are involved the potential for volatility exists which must be hedged by producers, with speculators countering this hedging and acting in aiding price discovery.  There is a great honesty in this market action, in the sense that both of these main participants in the market put their money on the line to back their opinions about price.  This is in complete opposition to politicians and financial pundits who seek short-term glory, power and prominence, and in the case of politicians fund their views about the market with other people’s money.  It is also in opposition to the vast public whose money drives the speculative booms, led to the slaughter by financial advisors and the big boys of the financial industry.

I know which side of the trade I prefer to be on, despite the ups and downs and having to deal with the tangible reality of my decisions on a day-to-day basis.  I’m confident that this time it certainly isn’t different.


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