Being Smart about Greed and Fear
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Warren Buffett summarizes why we will have bubbles for the foreseeable future.This is more complicated than Buffett makes it seems, so pay careful attention.
"I mean people -- people don't get -- they don't get smarter about things that get as basic as greed and you can't stand to see your neighbor getting rich.
You know you're smarter than he is, and he's doing these things, you know, and he's getting rich, and your spouse is getting unhappy with you because you aren't doing -- pretty soon you start doing it.
And so you get what I call the natural progression, the three Is. The innovators, the imitators, and the idiots.
And that's what happens. Everybody just kind of goes along. And you look kind of silly if you disagree.
I mean, you know, you could have these crazy Internet valuations in the late 1990s, but they prove themselves out in the market.
The next day they were selling for more than they were the day before, and people said, you know, you're crazy if you don't get in on this.
So it's very human.
Now, with housing it's something even more dramatic than that, because most people aspire to own their own home.
And if you really think that houses prices are going to go up next year and the year after, you feel if I don't buy it this year, I'm going to have to buy it next year.
That's not true of an Internet stock. But it's true of a home.
And when somebody makes it very easy for you to do it by saying you don't really have to put up my money, you can lie about your income a little, or we'll give you 100 percent mortgage, you're going to do it, because everybody that's done it has been proven right.
You have what they call social tools, and, you know, you're going to feel like an idiot if you didn't do it, because the house cost more.
His partner, Charlie Munger, would have pointed out the 6 or 7 psychological influences all pointing in the wrong direction.
1. First, there is envy. Envy is an odd social failing -it seems to have no beneficial properties. You become envious when your perceived comparative advantage in the workplace doesn't translate into a material advantage.
2. Second, the pressure of meeting perceived or expected family obligations can create a crisis atmosphere.
3. Third, there is the element of regret. What if I don't do what everyone else is doing, and I miss out?
4. Fourth, there is naive induction fallacy. Jumping off the twenty story building, after 10 floors you say "so far, so good". How long can the future look like the past?
5. Fifth, there is the allure of something for nothing - mortgage money for nothing, and your drinks for free.
6. Finally, the overall kicker, since you are going to buy a house, the only question is: today or later. Today is cheaper.
Now, here is the $64 question: why, if these are the right elements, how do these six elements work to bring about a complete loss of reasoned behaviour?
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