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Financeland is no good at change

Change is painful. That is why we do so little of it, personally or collectively. The snap-back from the crunch to economic nearly normal is a good example of humans doing their best to avoid the necessity of change.

Already the professional wiseacres (the same economists who failed to see the crunch coming) are starting to say that, yes, the economy really is nearly normal and look at that good old business cycle re-emerging. But as any therapist will tell you, the only thing more painful than change is the denial of it. The people who try hardest to appear normal are psychopaths.

Financeland is not good at change (it’s good at creating new products, which is not the same thing) and imagining change is difficult. In his wonderful book, Stumbling on Happiness, Daniel Gilbert convinced me that, like most people, I find it difficult to imagine my future. Rather, I infill – my imagination adds bits to the images I create and leaves other bits out. I am not aware of this process by which I am creating an illusion and as it is very similar to that involved in memory, the images created by imagination are as believable as memories – which themselves are often false.

Because imagining is hard work I make it easier by cheating. I project chunks of the present onto the future but I am not aware of that either – though it is this which explains why all those sci-fi books written in the 1950s imagining life today were such laughable failures. I am also useless at projecting how I will feel when the events I imagine happening in the future do actually happen, so I consistently overor under-estimate how I will react.

That brings me to Gilbert’s solution to poor forecasting. He applies this to a personal context but I think we should adopt it in financeland, too. He recommends that we find someone who has recently had the experience we are trying to imagine and ask them how they feel, because we are likely to end up feeling pretty much as they do. Most people strenuously deny this and refuse to do it because it seems counterintuitive.

So by asking someone who has just eaten a three-star Michelin dinner how they feel, I will have a better understanding of how I will feel after eating it than I will if I imagine how I will feel. That is what the experiments show – and not just for dinners but for heavy stuff such as divorce and bereavement.

I also know that the less stable your state of mind when I ask you to predict how you will feel, the more inaccurate your answer will be. The reason why we should use Gilbert’s trick is that for investors in the grip of the manic-depressive Mr Market, mental instability is the norm.
So, given the growing likelihood of a lost decade of low GDP growth for the UK and Europe, why do we maunder on about how awful it will be and how miserable we will feel? Why don’t we just ask the Japanese, who have been there, what it feels like?

I think we are GDP growth addicts who do not want to believe the answer: low growth does not mean misery and social unrest, it does not mean soaring unemployment and it does not mean shrinking standards of living. In fact it feels…normal.

Financial advisers will tend to think about poor stockmarket performance but this is as significant to the average Briton as it is to the average Japanese, that is, it is scarcely significant at all.

After Japan’s economic crunch in 1990, defensive stocks outperformed the market for a decade. Could you have imagined that?

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. I liked this article. Gilbert obviously provides some thought provoking ideas for his readers, and we can learn from the insight of others, on occasion. It doesn’t make me feel any better about trying to fit in several hundred hours of study to satisfy the RDR however. I still can’t imagine that in my future.

  2. Gareth Horsfall 13th July 2010 at 9:31 am

    Super article. I couldn’t agree more. GDP mania is alive and well in society. Fundamentally we all feel the same and do the same things, maybe some cut backs here and there and for the unfortunate ones, jobs lost. But we are all human and it is out nature to survive, move onwars and upwards. But GDP up GDP down, really does it matter? Once again, great article andthe Japan situation only goes to show that Warren Buffet was right when he said that “the most dangerous thing about investing is not being invested”. (Well I think it was him anyway)

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