Why do we keep on believing in things we want to be true and delude ourselves rather than to face what really is? Tom Stevenson gives us three reasons why people make bad investments and blames wishful thinking to cause them. I will focus on one aspect.
2006. Although data predicts a downturn in 2007, people are still talking positive about a decrease in interest rates saying this is good for equities. However this could be true, it is also known that low interest rates have a bad effect on the GDP and reinforce a downturn. Why do investors still put their bets into markets while knowing their value will go down?
It’s because markets don’t immediately feel the effect of changes in interest rates. The first months after the decrease shares are likely to rise, making investors optimistic about the future. This optimism is misplaced. Eventually the consequences will come and profits will decline, making people who, based on this optimism, invested at a wrong time lose their money.
Although history gives us enough evidence to conclude interest rates are linked with profits, wishful thinking still makes people deny or underestimate the consequences of changing interest rates.
Sander Van Ouytsel
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