atans1

Losing serious money is easy

In Financial competency, Investments on 07/06/2011 at 8:12 am

In Minding the Markets, the author argues that contemporary economics, with its neat mathematical models and fully rational robot-like decision-makers, fatally under-estimates the importance of emotions.

Tuckett’s insight, based on in-depth interviews with more than 50 investors, each managing more than $1bn, is that stocks, shares and derivatives are a special kind of asset, and decisions about whether to buy and sell them are particularly subject to stories and emotions.

– the value of financial assets is prone to extreme uncertainty: thousands of unpredictable events can affect the profitability of a company, for example, from the collapse of a key supplier to a sudden change in the cost of commodities to a natural disaster many thousands of miles away.

– the owner has nothing they can eat, drink, live in, or even hold in their hands: they have to weave a story, a narrative, even to understand why it’s worth buying the asset in the first place, let alone hanging onto it when its value has soared to once-unthinkable heights.

Given these special characteristics, Tuckett argues, financial assets tend to become what he calls “phantastic objects”, which their owners invest with extraordinary powers and think about in ways that are unavoidably emotional.

Guardian article

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