What the runaway success of “Chicken’s” Facebook Page can teach you about investing

Chicken’s Facebook Page just hit 4,817 Friends!! …But Facebook limits Personal Profiles to 5,000 Friends! What’s the ever-popular Chicken going to do?

Well, this could be stressful for Chicken – except obviously there’s not REALLY a chicken running this site. But Chicken’s Page is a sweet, beautiful nod to the playful side of human nature. I myself am Chicken’s FB Friend! Go on – post something on her Wall! Feel it for yourself first-hand – that wonderful sense of camaraderie; the pure fun of being in a crowd.

Warm, fuzzy feelings aside, that happy buzz you’re experiencing is what Behavioral Economists more sternly identify as the root cause of “herding”: the natural human impulse to do what others are doing. In short – the sweet pleasure of community; the happy reassurance of being in a crowd.

Herding after Chicken is pure fun: zero harm. But herding in investing is very often dangerous, sometimes devastating. It’s what sweeps people to giddily buy what’s going up, and to panickedly sell what’s going down – even though everybody knows that for their own and their family’s wellbeing – they SHOULD BE DOING THE OPPOSITE!

Here’s a quick, 3 minute video to take you though what’s going on “in da head” as Chicken would say… if in fact she actually spoke English. Or could speak at all… Cluck cluck!!

How Warren Buffet’s Sense of Humour Made Him Rich

In everyday language you’d say someone “can’t see the wood for the trees”. More formally, Behavioral Economists use the term “Confirmation Bias” to describe someone doggedly gathering and focusing on evidence to confirm a view, while somewhat blindly ignoring other information. Whatever we call it, the end mistake is the same: by over-focusing on the details of a side issue, you can miss the bigger picture altogether.

So, test yourself with this quick little video, The Amazing Colour Changing Card Trick. Watch carefully now…..

Good investors like Warren Buffet are successful because they get the big, important decisions right and don’t get bogged down in noise (Buffet, on principle, will not look at daily stock market movements). You’ve also probably noticed that Buffet has a great sense of humour and a sunny, optimistic disposition. This is no accident – studies have clearly shown that optimists are typically much better investors than pessimists. They’re much quicker to spot – and pounce on – opportunities.

Investors who suffer from the double-whammy of Pessimism AND Confirmation Bias (P/CB) get sucked into a stomach-churning moshpit of negativity: while their pessimistic viewpoint conjures up dismal thoughts of gloom and doom, Confirmation Bias ushers them out to collect “proof” that this dreaded end is nigh. And of course the “proof” is easy to find because newspapers like to maintain a ratio of 7 bad news stories to every one of good news.

Aside from the emotional cost of being in this horribly depressing state, P/CB sufferers tend to pessimistically miss opportunities, and invest in the wrong things anyway. So, sadly, their investment returns often turn out just as glumly as they predicted.

Today P/CB sufferers are agonizing over the anaemic state of Europe and the US. And yes, it’s true that the outlook’s not bright for these debt-laden, high unemployment, high tax, ageing economies. Yet P/CB sufferers should be careful that with all this hand-wringing over Europe and the US, they don’t miss a far more magnificent opportunity – the massive demographical shift in the world’s economic centre of gravity… towards of course, Asia and other Emerging markets.

The global middle class today = one billion people. In 2030 it will become TWO billion. That’s twice as many middle class consumers demanding bridges, roads, cars, phones, computers, TVs. All just 20 years from now. And not in Europe and the US.

So get clear on what’s the wood and which the trees: make sure your money’s in the right place – the bright place.

Superman or Homer Simpson?

Behavioral economist Daniel Ariely, the author of ‘Predictably Irrational’, uses a series of (sometimes giggly, sometimes shocking) real life examples to deftly demonstrate how, while we think we’re making conscious choices, our decisions are so often swayed by forces we’re not aware of.

His message: In the physical world, we build around our human limitations because we acknowledge them. If we understood our cognitive limitations in the same way that we understand our physical limitations, we’d fare much better: medically, financially… and even romantically.

Scaremongering headlines: irresponsible financial journalism

I’m usually a fan of the FT’s quality journalism. That’s why today’s headline is disappointing:

“Fresh US recovery fears hit Asian stocks: stockmarkets tumble”

But here’s the reality:

• Nikkei -1.2 %
• Australia -1.0%
• South Korea -0.3%
• New Zealand -0.6 %
• Hong Kong -0.4%

0.4% is a “tumble”? Really?

I know it’s tough for journalists to come up with an exciting new headline every day, but this kind of hyperbole is at best, lazy, and at worst, irresponsible financial journalism.

Of course, the FT are not the only (nor the worst) culprits. Here’s a smattering of similar headlines from across the globe this morning:

From The Associated Press:

“World markets dropped Friday as more dour reports on the U.S. economy renewed concerns about a slowing recovery and sent stock investors packing. The numbers spooked investors around the globe”.

(Even more incredulous: the same article goes on to quote actual index “collapses” in the very same article, just a few sentences below: Germany -0.5%, France -0.5%, UK -0.2%.)

And from The Telegraph: “Gloomy US industrial data rattle worldwide markets”

Come on. Enough sensationalism. Being human, investors have a hard enough time keeping emotions sufficiently in check to make good, rational investment decisions. Inaccurate, scaremongering headlines only needlessly fuel the flames. Let’s see some responsible journalism already.