Monday, July 29, 1996
The Battle Between Emotion and Reason
by THECONEKC

Sometimes the irony of [the Iomega] board is a bit overwhelming. The Foolish approach has much to say about market inefficiency and how thorough discussion, the trading of disparate opinions and good analysis and information can lead to market-beating returns. However, if you ever need examples of why the market is inefficient and how difficult it is to overcome, you need look no further than this board.

I think the behaviorist school of finance is right: the greatest source of inefficiency in the market is human emotion and its effects on consistent, rational analysis. Now, I'm not against human emotion. In fact, it is a powerful force that does much good. We owe much of our great art, literature and culture to this aspect of the human condition.

Nevertheless, when it comes to investing, human emotion is the archenemy of rational analysis. It's ironic, isn't it, that this board had great information, good discussion and much analysis, yet a review of the historical posts show how carried away this "rational" discussion became? It also shows how quickly the discussion turned irrational. Hopes and dreams turned to fear and distress in a matter of days.

Now there's suddenly a cry on this board for limits to be placed on any additional "rational" analysis posted here. Let's face it; there is no place to run and hide from the influence emotion has on investors' reason. I think there is much evidence to prove these fundamental facts: a) when things are going well, humans overestimate how long the situation will continue, and b) when things are going poorly, humans overestimate how long the situation will continue.

Market-beating returns await those who can be rational in emotional times. The only trick seems to be how actually to achieve this on a consistent basis.

[Editor's note: this Fribble was taken from the Iomega message folder.]

Transmitted: 7/29/96