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Are Heuristics The Cause of the Financial Crisis?

Discussion in 'General Investing Discussion' started by Chris C, 20th Feb, 2009.

  1. Chris C

    Chris C Well-Known Member

    2nd Apr, 2008
    Brisbane, QLD
    I was reading this blog post today and it resonated with me so much I thought I'd share.

    THE FINANCIAL PHILOSOPHER: Cause of the Financial Crisis In One Word

    The reason it resonated so much was because I was debating with my mother last night about the prospects and causes of the GFC and I acknowledged the fact that the origins of the crisis may well have been rooted in the fact that my mother's generation, the baby boomers, were operating under the illusion of a succesful investment system that had developed a consistent pattern over the last 30 - 40 years, and as a result few questioned the long term prospects of the model.

    I was in no way blaming her, or the baby boomers, for the crisis rather just helping her understand where the system fell short. The primary pattern being of the baby boomer generation was that house and stock prices always go up in the long run, and often quite rapidly, and that inflation is always present, eroding the burden of debt. So if this pattern is well formed and the people of the day recognise it then it makes sense to borrow money to "speculate" on the price of assets increasing, because that is the likely outcome suggested by the pattern. Yet this growth of belief in this pattern of course created a self fulfilling prophecy and the exuberance required to create the massive credit bubble we now know as the GFC.

    I'd say for the most part people on these forums think I take a pessimistic view of the likely future, but I'd like to think that the sheer fact that I'm young and have little "practical" experience with "investing" puts me in an advantageous position whereby I'm not entrenched in a belief that there is a certain way of investing that has generally yielded success of the last 30, 40, 50 years.

    Of course once you extend your time frame over, 50, 100, 200, 500 years - you appreciate a very different pattern, but seeing as the majority (if not all of us) on these forums have only been investing in the last half a century, the only insight historical investment patterns would have been formed through pursuing such knowledge, but who has time for such things when we are all making a killing without it.

    I think the point of the article was best summarized by this statement:
    Anyway I thought I'd post my opinion. Does anyone have any comments?
  2. AsxBroker

    AsxBroker Well-Known Member

    8th Sep, 2007
    Sydney, NSW
    Interesting statement...

    Is he debunking technical and accounting analysis?

    Sounds like Burton Malkiel...