Comments on: The Economics Of An Alcoholic http://weakonomics.com/2009/08/13/the-economics-of-an-alcoholic/ Everything That's Wrong With You And Your Money Wed, 08 Feb 2012 22:32:00 +0000 hourly 1 http://wordpress.org/?v=3.0.3 By: Rob Bennett http://weakonomics.com/2009/08/13/the-economics-of-an-alcoholic/comment-page-1/#comment-2810 Rob Bennett Thu, 13 Aug 2009 22:35:40 +0000 http://weakonomics.com/?p=2775#comment-2810 I titled an entire section of my web site "Stock Drunk" because I think the failure of economists to consider the implications of alcoholism in the investing field is the biggest cause of our investing and economic troubles of today. The dominant model for understanding stock investing is the "Passive Investing" model. The model is rooted in the Efficient Market Theory, the idea that investors are as a whole acting in their self-interest. If only it were so! Do alcoholics act in their self-interest? They lose their spouses, their families, their jobs, their homes, their money, their health, and their self-respect. And they often end up not enjoying the drink that much. Many alcoholics are plenty smart. They are just not capable of acting in their self-interest. So it is with stock investors. The historical data has been warning us that investing passively (not changing your stock allocation in response to price changes) always ends in financial ruin. But do we act in in our self-interest and avoid Passive Investing? By no stretch. We pay "experts" million-dollar salaries to <i>encourage</i> us to invest passively! We want to destroy ourselves. That's the bottom-line reality. I believe that we can be trained to overcome our temptation to become stock drunks. But we cannot do it without agreeing to explore these questions in depth. Alcoholism is a counter-intuitive phenomenon and so is the urge to invest passively. Rob I titled an entire section of my web site “Stock Drunk” because I think the failure of economists to consider the implications of alcoholism in the investing field is the biggest cause of our investing and economic troubles of today.

The dominant model for understanding stock investing is the “Passive Investing” model. The model is rooted in the Efficient Market Theory, the idea that investors are as a whole acting in their self-interest. If only it were so!

Do alcoholics act in their self-interest? They lose their spouses, their families, their jobs, their homes, their money, their health, and their self-respect. And they often end up not enjoying the drink that much. Many alcoholics are plenty smart. They are just not capable of acting in their self-interest.

So it is with stock investors. The historical data has been warning us that investing passively (not changing your stock allocation in response to price changes) always ends in financial ruin. But do we act in in our self-interest and avoid Passive Investing? By no stretch. We pay “experts” million-dollar salaries to encourage us to invest passively!

We want to destroy ourselves. That’s the bottom-line reality. I believe that we can be trained to overcome our temptation to become stock drunks. But we cannot do it without agreeing to explore these questions in depth. Alcoholism is a counter-intuitive phenomenon and so is the urge to invest passively.

Rob

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