Have we learned nothing?

Jason Zweig at the Total Return Blog on the WSJ.com points us to a new academic article that traces investors’ habits as far back as…well, stocks.

How much has investing behavior evolved since earliest days of trading in the financial markets?

A fascinating new research paper analyzes how individual investors built stock portfolios soon after building portfolios first became possible: from 1690 to 1730.

The article goes on to note that:

Three centuries ago, investors:

  • underdiversified, with 86% of them owning shares in only a single stock;
  • chased performance, with rising prices leading to higher trading volume;
  • underperformed the market as a whole, earning lower returns and incurring higher risk.


Investors today are still overconfident about the extent of our own knowledge. We diversify too little and trade too much. We overload our portfolios with the familiar and the comfortable. We want to buy more of whatever goes up in price and get rid of whatever gets cheaper. We view our gains and losses in isolation instead of seeing the big picture. We think we can withstand infinite risks when markets are rising and doubt we can survive any risk at all when they are falling. In short, we are human – just as human as our predecessors were three centuries ago.

For my readers, I don’t think these findings will come as a shock. Technology may have changed, but human nature has not. Our decisions are still driven by fear and greed, various behavioral biases, hubris, etc. The Greek myths can tell you as much about human nature as today’s most astute observers – don’t you wish you had read Antigone in school?

The question then continues to be, “How do we put in place the processes to counteract our very nature?” The smart investor will not deny that she is biased, not try to posit that she is better than average. Instead, she will recognize those limitations and by focusing on the process make herself above average. And so, our goal is to continually seek out cracked markets and avoid investor darlings – to make the hard trade.

For those interested in economic history, see also http://climateerinvest.blogspot.com/2012/02/prop-trading-south-sea-bubble-hoares.html