Tuesday, February 19, 2008

That's a Downer

LONDON (Reuters) - It's no fun at parties, but when it comes to investing being depressed just might help.

Fund managers, like so many of us, consistently think they are smarter than they are and that their ideas are of an unusually high quality. And to keep thinking these reassuring thoughts, they ignore evidence that contradicts their beliefs while paying rapt attention to data or news that confirms their own biases.

But not the depressed, whom multiple research studies have shown to have a more accurate and realistic view of their own abilities and insights, according to James Montier, a strategist at Societe Generale who specializes in behavioral finance, the study of how emotion and thinking patterns influence economics and investment.

If they have "more accurate and realistic views" of themselves and they're depressed...well maybe they have reason to be depressed? I guess that isn't the point, but I found this idea interesting. I think they've got the wrong emotion though. Why couldn't one have a realistic and skeptical view and also be happy? I've spent a lifetime as a skeptic and I'm generally happy with my life. I'd like a flatter belly...hell a six pack...but that would involve working out which isn't at the top of my list of favorite activities. But I'm happy anyway. I have a realistic view of the likelihood that I will work out regularly. And I'm skeptical that if I start a workout program that I will stick with it. I'd like to think I'm a pretty good investor too... or is that just my unrealistic view of my own capabilities? Damn, I hope not. Now that would be depressing.

The emotion that best describes a good investor I think is...well...actually a good investor is emotionless - at least when it comes to investing. Investing shouldn't have anything to do with emotion except to determine when other investors are acting emotionally so one can take advantage them. Otherwise, it is best to maintain a passion only for knowledge and information. The information is only useful if one has the knowledge to interpret it and act without emotion or bias. I'm not sure why Societe Generale needed a behavioural economist to tell them that. Maybe their money would have been better spent on a decent trade surveillance system.

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