Economists to discuss irrational market

Economists to discuss irrational market

October 6th, 2011 by Ellis Smith in Business Around the Region


What: Behavioral Finance Symposium

When: Tuesday, 5:30 to 7:45 p.m., and Wednesday, 7 a.m. to 5 p.m.

How: Registration required at

Cost: $100 for Tuesday keynote, $750 for full conference

Where: Chattanoogan Hotel

Source: Finance for the Future Initiative


Dr. Terrance Odean -- Professor of finance at University of California, Berkeley

Jason Zweig -- Investing and personal finance columnist for The Wall Street Journal

LouAnn Lofton -- Managing editor at The Motley Fool, author of Warren Buffett Invests Like A Girl

Tracy Britt -- Financial assistant to the chairman at Berkshire Hathaway

John Schott -- Portfolio manager and director of Steinberg Global Asset Management

Dr. Richard Peterson -- Managing director of MarketPsych, LLC

Gary Belsky -- Editor at large of ESPN The Magazine, and adjunct professor of journalism at New York University

Source: Finance for the Future Initiative

High-school economics teachers are in for a shock.

The male-dominated science is coming under assault by a new generation of financiers who contend that a woman's instincts are needed to smooth out the daily ups and downs of the Dow Jones industrial average.

Though the venerable supply and demand curves aren't going anywhere, advocates of the behavioral finance theory plan to question the widely held assumption that people always make rational choices.

In fact, people are downright irrational, said John Schott, a Harvard-trained medical doctor, portfolio manager and author.

"If you polled the leading economics departments in the U.S., 90 percent believe in efficient-market hypothesis," Schott acknowledged.

But behaviorists don't agree with that hypothesis, which they feel doesn't account for human psychology.

"Truthfully, the market has a manic-depressive component," Schott said.

One solution is to add more diversity to the mix.

When it comes to money, women seem to be a bit more rational than men, holding onto stocks longer and bringing more market stability because of biological differences, researchers have found. They make fewer trades overall and don't fall prey to the herd mentality, said Lauren Templeton, Chattanooga-based investor and executive-in-residence at the university.

The behaviorists will converge for a two-day symposium at UTC next Tuesday and Wednesday that will add practical application to the existing theories and research, Templeton said.

The Galtere Institute's Finance for the Future Initiative at UTC, a new program that benefactors Renee Haugerud and John Murphy say is the first of its kind in the U.S., will host the event.

Analysts and authors of books with names like "Warren Buffett Invests like a Girl" will converge on Chattanooga, armed with research showing that rats injected with estrogen exhibit superior memory skills, and that buying stock activates the same brain hormone as bonding with a child.

Irrational behavior

This emerging brand of economics stems from across-the-board losses many investors experienced in the economic downturn -- losses that weren't supposed to happen in a market economy, said Cynthia Harrington, journalist and founder of Harrington Capital Management.

"We were looking for the next answer," Harrington said. "One of those answers is in the field called behavioral finance, which says 'Oops, I guess humans aren't rational.'"

Most economists dating back to Adam Smith, on the other hand, have held that all human beings tend to evaluate the pros and cons of each choice to the best of their ability, then do what's in their best interest.

But that doesn't explain why euphoric investors buy stocks at peak price points, then later panic and sell at the bottom, said Robert Frick, senior editor for Kiplinger's Personal Finance.

The harmful behavior that led to the loss of trillions in shareholder value can only be explained as irrational, he said.

"You always want to appeal to the most highly evolved part of your brain, which is what separates humans from other mammals," Frick said. "When things get kicked down into the mammalian cortex, you start behaving emotionally, or the reptilian part of the brain, with the eat-survive and fight-or-flight, now you're really talking about making bad decisions."

In fact, when dealing with money, "You want to stay away from emotions," he added.

"Pure baloney"

Though behavioral economics is gaining popularity, critics see it as modern liberal mindset infused with elitism.

The idea that human beings don't behave rationally is "pure baloney," said UTC Economist Bruce Hutchinson, "disguising in different framework that the all-knowing elites will make the decision for everyone else."

No one can judge consumers to be irrational because "they don't know all the details about you and your situation," Hutchinson said.

Furthermore, value isn't something that the behaviorists can calculate and judge in hindsight with a mathematical equation, but is a function of what someone will pay for it at the time of purchase, Hutchinson said.

"It may be that the greatest thing in the world to me is an autographed Willie Mays baseball, and I'll pay $100,000 or whatever it takes to get that ball. Who are they to begin to tell me that's not the true value," Hutchinson said. "They might think a Picasso is the greatest thing in the world, but I might not think it's better than a first-grader's first painting. It's all about the individual."

But the stock market is a unique place, Templeton said, with seemingly different rules from the rest of the world.

"We are talking about the tendency of herd behavior," she said. "When assets go on sale they attract fewer buyers and when assets become more expensive they attract more buyers. This is irrational behavior."