Investing and Politics

Last year, I listed several “deep truths” about the stock market and investing. More than a few were controversial, but one, “The market doesn’t care about politics,” caused a lot of arguments.

The market does care about policy, but it doesn’t much care for partisan politics. It’s also a gross misunderstanding of how America works to think that a change in public officeholders causes a large and immediate shift in the economy. I would estimate that no matter who is elected president, more than 95% of the budget will look the same — and the federal budget is still a small minority of the national economy.

In yesterday’s Washington Post, Barry Ritholtz carries the same argument. Here’s a sample:

To neurophysiologists, who research cognitive functions, the emotionally driven appear to suffer from cognitive deficits that mimic certain types of brain injuries. Not just partisan political junkies, but ardent sports fans, the devout, even hobbyists. Anyone with an intense emotional interest in a subject loses the ability to observe it objectively: You selectively perceive events. You ignore data and facts that disagree with your main philosophy. Even your memory works to fool you, as you selectively retain what you believe in, and subtly mask any memories that might conflict.

Studies have shown that we are actually biased in our visual perception – literally, how we see the world – because of our belief systems.

This cognitive bias is not an occasional problem – it is a systematic source of errors. It’s not you, it’s just how you are built. And it is the reason most people are terrible investors.

Posted by on February 7th, 2011 at 9:49 am


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