Give Me Your Money

I promise not to make you wealthy.

How many people are willing to tell you that? The subject is stupidity. So, let’s get started with a couple of quotations.

It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong. – Thomas Sowell, one of the less discerning economists. Perhaps the only thing he ever got right.

Against stupidity; God Himself is helpless. – Yiddish Proverb

I was recently surprised to receive an email from Ed, one of our habitués. I wasn’t surprised because he sent me an email. It included a link to an article I want to share with you. The surprise was that Ed had felt the need to go beyond the generous repast I provide here.

The article is by Paul Farrell of Marketwatch and was posted on MSNBC.com. I present it unedited but with a few of my comments, demurrals and elaborations interspersed.

American investors: Predictably stupid

Not only are our brains irrational, but our behavior is easily predicted by wolves on Wall Street, who are only too eager to lead us sheep to the slaughterhouse.

By Paul B. Farrell, MarketWatch

Yes, I am mad as hell again. Wall Street’s soulless, immoral, greedy bankers really believe that the vast majority of America’s 95 million investors are not only predictably irrational but stupid, words Forbes use to sum up the views of a JP Morgan Chase investment officer a while back.

Worse, Main Street investors are losers for continuing to trust Wall Street after it lost 20% of our retirement money in the last decade.
Now, worst of all, Wall Street’s traders have profiled Main Street investors in their algorithms: Yes, investors are predictably stupid losers, what con artists call a “mark,” a dumb gambler who can be easily coaxed out of his money.

Why so blunt? Listen: Recently I explained why the Wall Street banks must kill financial reform to preserve their multi-billion dollar bonus pool. One reader commented: “I worked at the Bear Stearns . . . every word written here is true. Fact is, bankers regard themselves as wolves and the public as prey, and speak about it openly among themselves.” Then he added a sucker punch: “What is extraordinary to me is how willingly the sheep submit to this.”

Yes, folks, Wall Street is certain that America’s 95 million investors are clueless sheep headed for the slaughterhouse.

I have been calling the financial parasites the Wall Street casinos. It is accurate, as far as it goes, but sounds too light. It sounds as though they were places of entertainment. Slaughterhouses provide a truer feel for their activities. I may steal that terminology on occasion.

But wait, that’s not news. Twenty years ago, former bond trader Michael Lewis’ Liar’s Poker described the insanity of our addiction to gambling in a few memorable lines: “Men on the trading floor may not have been to school but they have Ph.D.s in man’s ignorance.” They know that “in any market, as in any poker game, there is a fool. The astute investor Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market.”

And, as we now know, in the stock market, the vast majority of America’s 95 million investors are fools — predictably stupid losers.

If someone you know took his entire retirement savings and his kids college funds to Atlantic City you would be justified in raising an eyebrow. If that person started play Blackjack for high stakes, your concern might become a bit sharper. But, instead of making use of his own judgment, he lets the dealer decide whether he should take a hit or stand. Then you realize, this casino has publicly admitted that it cheated and scammed its clients.

This may be your best friend, someone you really like. Or, it may be your brother-in-law. That retirement belongs to your sister too. Regardless of how you feel about that person, is there any description that better fits him than stupid; perhaps fool?

I don’t have to draw a picture. Is there really any difference in the two scenarios beyond the location, the name of the game and the relative entertainment values of the two activities?

Lewis says traders instinctively know that the more people chasing a trend “the easier it was for them to delude themselves that what they were doing must be smart. The first thing you learn on the trading floor is that when large numbers of people are after the same commodity, be it a stock, a bond or a job, the commodity quickly becomes overvalued,” making it easy for traders to generate hundred-million-dollar-profit days.

Sorry, but that’s exactly how Wall Street sees you: predictably stupid losers. What else could a rational person conclude?

So you ask: What triggered this rant? Simple: A new book, The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely, the brilliant Duke University behavioral economist who earlier wrote the one book whose title alone tells you all you’ll ever need to know about behavioral economics. Answer: You are “Predictably Irrational.” Period.

I feel sorry for the people who read books on behavioral economics. Why? Because most are written by brilliant academicians and top journalists, not callous, greedy Wall Street traders who’d never divulge their secrets. But that’s no excuse. These books are all filled with misleading pop-psychology nonsense based on a simple premise: If you just buy these books and apply their advice, you can change the way you think, become less irrational and be a better investor, even beat Wall Street. Wrong.

Never read another behavioral economics book . . . ever. They’re based on the same misleading assumption that you can make your brain less irrational and win at Wall Street’s casino. Never happen in a million years. Never.

Ed, do you see the danger of trying to understand economics without a guru? You lucked out this time but you may not be so lucky the next time.

Has Wall Street changed?

Wall Street’s already programmed your psychological profile into their trading algorithms. They’re light-years ahead of you, misleading you into their slaughterhouses and casinos.

Why such a strong warning? Remember, these books were built on the original research of Daniel Kahneman, who won the 2002 Nobel Economics Prize for his work in behavioral economics. Moreover, most of them were published before Wall Street’s meltdown a couple years ago. And still Main Street investors lost trillions of retirement money.

Get it? Reading books on behavioral economics not only didn’t help, it probably gave you a false sense of security that made you even more vulnerable to Wall Street’s con game — and given its current $400 million lobbying effort to kill financial reforms, you can bet another meltdown is destined to happen again, soon.

Admit it, investors are sheep, fools, predictably stupid losers.

So what’s the only thing you need to know about behavioral economics? Begin with the fact that you are predictably irrational. You can be manipulated without ever knowing it. Wall Street knows your brain is your worst enemy, that much of your behavior is driven by the subconscious biases you cannot change. The fact is, Wall Street does not want intelligent investors who think.

So read all you want, see all the shrinks you want, trade all you want, nothing will save you. Wall Street’s wolves already have your profile in their trading algorithms. They’ll always be light-years ahead of you.

And finally, in spite of all their claims of professionalism, neuroeconomists, perhaps more than other economists, are political animals. As BusinessWeek put it, “the rap on economists, only somewhat exaggerated, is that they are overconfident, unrealistic and political. They claim a precision that neither their raw material nor their skill warrants. Too many assume that people behave like the mythical homo economicus, who is hyperrational and omniscient.”

The fact is, neuroeconomists are political mercenaries who can “prove” any scenario.

Worse, our political leaders are also becoming predictably stupid losers.

Reminds me of former Federal Reserve chief Alan Greenspan’s congressional testimony admitting that free market, trickle-down Reaganomics failed America: Greenspan admitted he made a “mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and equity.”

There was “a flaw in the model . . . that defines how the world works,” Greenspan said. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told Congress. Unregulated markets “held sway for decades” . . . then “the whole intellectual edifice, however, collapsed.”

And it’ll get worse, thanks to current Fed chief Ben Bernanke, President Barack Obama and Goldman Sachs’ lobbyists. Greenspan’s deeply flawed Reaganomics remains anchored deep in America’s brain and DNA. So every promise made in every behavioral economics book ever written about the principles originally defined by Kahneman will continue to mislead America’s 95 million Main Street investors . . . and fail.

Why? Because the insatiable greed driving the Goldman Conspiracy of Wall Street banks is so addictive, so powerful, so overwhelming, so much in control of the political process that nothing, absolutely nothing, can change the next inevitable mega-crash dead ahead.

Thanks for giving me a heads up on this article, Ed, although the writer does exceed the limit on the number of ellipses allowed per article.

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