The psychology of blind optimism
Crashcow posed an interesting question the other day:
“Most regular posters of this blog understand the dynamics of housing bubbles well. What is also an interesting puzzle is why some people naturally understand these concepts while others don’t?
One reason might be Education – especially in an analytical field. But there are people with no post-secondary training that get it while many analysts, economists, accountants and engineers clearly don’t. It seems that some of these “professionals” are hopeless – no matter how much evidence and explanation you provide them, they just don’t comprehend.
Another reason that comes to mind is: Experience. If you have stuck a hair pin in an electrical socket once, chances are you won’t be doing that bright idea again. But experience still doesn’t explain it. After prices plunged 20% in 2008, everyone was given a hard lesson that housing doesn’t always go up. But many erased that valuable lesson in less than a year and back for the socket they went.
This is a deep question, but what are the psychological factors that lead to blind optimism?”
In hindsight you can see some pretty foolish choices made in the US bubble markets, or in the Vancouver market by people who should know better. What is the difference between someone who decides the play the odds on a bubble or those that choose to sit it out? Does the string of wins that comes from a bubble inflating make some people more willing to stretch their luck with the idea that it’s different this time?
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August 13th, 2010 at 10:05 am
@patriotz:
It’s science all right at the micro level. Supply and demand are for real, marginal pricing is real, etc. Even animals observe them. Bubbles always pop because it’s a mathematical certainty. That’s science.
It’s when you get into macroeconomics that things move away from science and towards alchemy.
So macroeconomics can best be classified as an universalizing of local rules? Does it happen because people see no other choice? Supply and demand I get, because like you said, the math works out. But attempting to use the same models and rules at a vastly different scale seems like pure folly to me.
One of the biggest signs of charlatanism is when errors in the trick are attributed to a failure of the user: E.g.:
- It’s not the psychic’s fault her predictions for you were wrong, it’s YOUR fault because you’re “blocking” or “out of tune”.
- It’s not a god’s fault your prayer wasn’t granted, it’s YOUR fault for not being strong in the faith.
- It’s not Milton Friedman’s fault the effects in the market don’t match the predictions, it’s the GOVERNMENT’S fault for setting up regulations that are “distortions in the signals”.
What is it going to take for a new theory to emerge? How many people have to have their lives ruined by bad ideas before they force the ideas to be discarded?
August 13th, 2010 at 2:50 am
@Supraboy: I’m not sure what you count as subprime or not, but Canadian banks have certainly issued their share of mortgages to people with less than stellar credit, with 0 down, and 40 year amort. I don’t have the stats on how much, but I agree it’s definitely not as bad as the US. I wouldn’t short the the banks just yet, but I’m shorting deep otm long maturity calls on most of them.
August 13th, 2010 at 12:52 am
People view buying real estate as a no lose situation. It has been pounded into everyones heads buying real estate is good. And it has been for many people in the past, but it has also been a disaster for many as well.
Yes buying real estate is good but at a fair price and at a price you can afford. That is the part most people miss.
August 13th, 2010 at 12:25 am
@Best place on meth:
LOL!!!!!!!!!!!!
August 13th, 2010 at 12:18 am
@No Longer Looking:
BEAR NEWS
Grizzlies spotted on Vancouver Island
http://www.vancouversun.com/te…..story.html
oh oh
++++++++++++
Two male Grizzlers on the Island? Unable to reproduce, so you can expect them to follow convention by adopting a cute little orphaned black bear and getting a job with the BC government. Then again they might find themselves in either Nanaimo, Duncan or Courtney, in which case they are very likely to swim back across the straight.
August 13th, 2010 at 12:00 am
Redflagreview, you said what is about to happen is a crash. If you are so smart, why dont you short all the canadian banks? Mortgage rates are at all time lows. If you people think history repeats itself, it will, only if rates go up to 6-8%. Thats how it happened in the US. There is no subprime in canada. You people act like you know it all from looking through a shallow uneducated perspective.
August 12th, 2010 at 11:27 pm
Although many of us are attracted to this website because we know what is about to happen (housing bubble crash), I for one am not finding any satisfaction in this fact. The so called experts had a lie to sell and we believed them. In July 2007 it became obvious to me that there is something happening with stocks. It took a while to really give myself an education in fiat currency fundamentals, look into the history, many past financial crashes, housing bubbles and other bubbles to see the full picture.
One of the most revealing books, among many I read, was The Unified Cycle Theory by Stephen J. Puetz. You cannot argue with the charts. I read charts. I don’t need to go through the verbal explanation of a very clear pictures that chart show.
Understanding how money gets created and what happens to any fiat currency with time also makes your head clear.
It is amazing that people did not look for a root cause of what happened in 2008/2009 and are doing it again, such a short time later. I tried hard to stop a young couple living next to us in a rental place we moved into, not to buy in July 2009. There was no way to explain to the couple what they were about to do. Their friend realtor told them it was the best time to buy, so they did. When this bubble bursts, there will be a lot of pain. I am not finding any joy in knowing that, however many here are absolutely right, this is happening so many will get the experience of a lifetime.
The prices will have to go back to the mean. If the average house price expressed in gold, as suggested, should be around 100 oz, let’s say 200 oz of gold in Vancouver, it is clear that there will be huge adjustments perhaps in both, the price of gold and the price of real estate, to get there.
Make no mistake, when this happens, it will hurt us all in my view. Peace.
August 12th, 2010 at 10:44 pm
oh yeh nutslaps! look like crashcow have crystal ball! to bad looking at miami instead of vancouvers! remember you may find crystal ball but you will not find
“a land making machine”
August 12th, 2010 at 10:39 pm
@Anonymouse: Thanks for your support.
And I agree about the 20% drop: for the properties and in the areas I was looking at, there just wasn’t that kind of retreat. And if there was, it lasted a week or two!
August 12th, 2010 at 10:36 pm
This comment is a case in point. First, I’m no bull. I am a renter; my marriage ended at least in part because I refused to buy the last few years; and I’ll probably move away if prices don’t come down in the next few years. If that doesn’t qualify me, I don’t know what does.
Full of bull? I’m only relating what I know about the people I know and work with. They’re simply not a bunch of idiots who can’t afford their mortgage payments. They may have bought when their homes were overpriced, and I argued the bear case with some before they bought, but it’s not like they’re going to be in dire financial trouble if prices retreat or even fall off a cliff: these are well paid professionals who made the decision to buy for reasons other than maximizing their profit over the next few years.
Again, I’m hoping for a correction. I’m hoping for a crash. I think it will happen. But it didn’t happen in 2008, and so far, prices have not retreated that much this year, and the sell-list ratio seems to be in the middle range.
Try not to be religious about this; it’s an interesting topic and we don’t know for certain what will happen–or at very least when it will happen.
August 12th, 2010 at 10:34 pm
I thought this for sale ad was funny.
-I DO NOT WISH TO GIVE HALF MY HOUSE TO MY COMMON LAW HUSBAND.
http://vancouver.en.craigslist.....66019.html
August 12th, 2010 at 9:52 pm
@Best place on meth:
Bwah! So fortunate to share a bathroom with your landlord! How do you find these ads? They’re comic gold. I didn’t think you could top the mandatory cat and beehive rentals. I do appreciate this landlord’s use of double explanation points and odd capitalization to highlight the excitement and value of this one-of-a-kind rental.
I always wonder: who rents these basement dumps? For a couple hundred more you can rent a decent above ground suite that won’t induce thoughts of suicide.
Chris, take heart. There are a few of us here who are “cautiously optimistic” bears. We just don’t post too often for fear of a beatdown like you are receiving today. I only post when I’m feeling up for a fight.
I also agree about not seeing the 20% decline in prices during the 2008 downturn. I’m not going to argue with the statistics since my observations are anecdotal and therefore worth nothing. However, at the price point I was looking at, which was admittedly low, I didn’t see anywhere near 20% drops. My belief, based on nothing other than my keen intellect (sarcasm), is that there were greater declines at the higher price points and also greater declines in properties with poor locations or properties that had some negatives associated with it. The type of property I was looking at (lower price points in desirable locations) maybe saw around 10% drops. Again, just anecdotal.
August 12th, 2010 at 9:41 pm
Hey Stu, fixie here. Bulls are stronger than you know. Magically strong. Soon you’ll watch them perform one of history’s greatest feats of alchemy, transmuting en masse into pussies. They’ll scratch and bite for bail-out kibble, mewl victimization and hiss ‘not fair’. Don’t let the cat door hit your ass when it happens.
August 12th, 2010 at 9:19 pm
@cariboo_kid:
I bought a triple inverse financial ETF two weeks ago.
I’m betting on another meltdown. Even meltier than the last.
August 12th, 2010 at 9:19 pm
@cariboo_kid
the problem with US bears that most of us have no conviction in our thoughts…
You’re saying that…based on what? You have NO idea who hangs out here. Please
don’t make general comments about bears. Thanks in advance.
August 12th, 2010 at 9:11 pm
the problem with US bears that most of us have no conviction in our thoughts. there are other ways to make money other than .5% gic’s and money markets. i was short and had puts on the US banks before th meltdown and made some good money but unfortunately closed them out before the real meltdown…
if you think things are going down the tubes, do something about it… i for one have some puts on the canadian banks and regionals like canadian western bank. if there is a major correction do you think these stocks will do well???
August 12th, 2010 at 9:05 pm
@Stu
Bears generally are weak people. Bulls can be risk takers to their detriment, but a bear will never live life to the fullest…
Ha..that’s a good one…smear all people who have an opinion on the market that is different than yours with the same brush. I hate to break it to you pal, but have you ever heard of short sellers? They are risk takers. They are contrarians. That doesn’t mean they’re weak. In fact, they might even be stronger because they have to go against the crowd.
August 12th, 2010 at 9:01 pm
errr.. arrogant…
August 12th, 2010 at 9:00 pm
Crashcow, you blog is written under the presumption of being correct. But it isn’t possible to prove something that has yet to happen. Kind of arrogent, no?
August 12th, 2010 at 8:59 pm
Looks even uglier on the sell side.
http://www.mls.ca/map.aspx?&am.....curStyle:r
August 12th, 2010 at 8:55 pm
Coal Harbour is a specuvestor disaster zone.
So many rentals hitting Craigslist, so overpriced, and sitting so empty.
Check out the nondescript catbox of 1100 sqft: asking $4900.
http://vancouver.en.craigslist.....;bedrooms=
August 12th, 2010 at 8:38 pm
Hey crew, Stu here. Talking about psychology you have to remember usually bears think about what they could lose. Bears generally are weak people. Bulls can be risk takers to their detriment, but a bear will never live life to the fullest. Well remember, the authorities have a printing press. All the wealthy people i know stretched their comfort zone and realized the folly of not using leverage.
August 12th, 2010 at 8:37 pm
@GB:
It gets funnier.
6 days prior to that ad they wrote: “Place is available but we are still working on the bathroom”
http://vancouver.en.craigslist.....74352.html
I can’t believe they gave up on it so soon, now the new tenant has to finish the job.
August 12th, 2010 at 8:34 pm
@GB:
Bears have been wrong for 9 years out of 10. Bulls are rich. Spain win Fifa hifi. How that for fact x 3.
August 12th, 2010 at 8:30 pm
@Chris
but they don’t spend their time worrying and berating others and, yes, commenting on blogs; they live their lives.
….bunch of crap…you’re a bull….or more accurately, you’re full of bull.
They’re spending lots of time here, and commenting too. One of them is you!
August 12th, 2010 at 8:23 pm
@Chris:
Chris, stop your fucking whining.
We’re here to enjoy the crash.
Thank you.
August 12th, 2010 at 8:20 pm
@Best place on meth: That’s nice that the toilet is working fine… LOL
August 12th, 2010 at 8:17 pm
@Best place on meth: The shithole was avail “immediately” as of July 5th when he started his posts. He has lost 1.5 months rent so far playing his games. I am guessing he is looking at losing 6 months rent…
August 12th, 2010 at 8:14 pm
@Chris: I actually find the bulls on here to be far more hateful. Also their comments generally lack factual evidence.
BTW – “past performance is not indicative of future performance…”
August 12th, 2010 at 8:12 pm
@GB:
Wow, a total shithole for only $2000. Or is it $1750? Or $1975? or $1823.25? I’m confused, but I do love the amateur landlords in this town because they are incredibly entertaining.
I wouldn’t rent from them in a million years, but they do make me laugh.
Here’s a great little basement for only $700. Sure, it may have a low “cilling” and very small bedroom. And you have to use the shower upstairs because this one is broken.
But if you can build a shower and fix the washroom they’ll give you $100 bucks off!
Not sure if that’s every month or just the first one.
http://vancouver.en.craigslist.....71416.html
Oh yeah, must have good references. Preferably from a construction company.
August 12th, 2010 at 8:02 pm
Thanks for your responses to today’s topic, everyone.
Each person’s view of the housing market has three main pieces: education, experience, emotions. For bulls, the emotion piece simply overwhelms the other two. Imagine a stove turned on high with a nice orange glow. Education tells us to check the dial first – if it reads a high number, stay away. Experience reminds us that when someone touched a bright stove in the past, they got burnt. But if emotions overpower these two voices of reason, there is simply no hope…
Some of the types of emotional biases are:
- Greed
- Social Pressure
- Herd Instinct, Bandwagon Effect
- Media Influence / Confirmation Bias
- Overconfidence Effect
- Selection Bias
- Recency Effect
More on physcological biases here:
http://www.scribd.com/doc/3054.....tudy-Guide
August 12th, 2010 at 8:01 pm
I really have to wonder about the superior, condescending, hateful, and sometimes bitter tone of many of the comments here. We’re not talking about war and peace.
The fact is, and so far remains, that us bears have been wrong, wrong, wrong. We couldn’t have been much more wrong, in fact, over the last five years or so. So I’m guessing the tone probably springs from defensiveness.
It’s important to note that the people I know who bought in the last few years are not “fools” or “idiots.” They decided to buy, they looked at their finances, they bought, and they’re getting on with their lives. They may be “underwater” for a few years (or not, or not much–the story won’t be written for decades) but they don’t spend their time worrying and berating others and, yes, commenting on blogs; they live their lives.
I’m hoping that prices come down. I think they will. In many ways, I’m depending on it. But I’m not unrealistic enough to think it’s a certainty.
August 12th, 2010 at 7:59 pm
@SuperSmartBull: poor bull. spend so much time writing on blog when no one listen. dont worry bull, i listen:) i also wonder, why spend more time writing on blog these days? realtor? business slow? dont panic. if good at selling condos then should also be good at selling things like vacuum cleaner & cranteeny holder. turn that frown upside down.
August 12th, 2010 at 7:54 pm
People that bought with zero down are having a tough time re-qualifying, suffer through the commercial, the videos worth it.
the 0 down mortgage of death
August 12th, 2010 at 7:46 pm
August Projections for month totals
Days elapsed so far 8
Days remaining 13
Average Sales this month 109
Average Listings this month 209
Projected Sales 2279
Projected New Listings 4389
Projected sell/list 51.9%
August 12th, 2010 at 7:44 pm
What game is this guy playing?…the dump on Laurier again…
http://vancouver.en.craigslist.....p;hasPic=1
August 12th, 2010 at 7:40 pm
Fonyo drank less
August 12th, 2010 at 7:38 pm
@patriotz:
I hope your right, it’s not something I want to see. As per my previous post, I just brought it up as something the gov could do, whether it makes sense is a different opinion where IMO the answer is No as it would just move the burden around. A localized bust is the best situation.
August 12th, 2010 at 6:53 pm
@Boombust:
Steve Fonyo is waaay smarter.
August 12th, 2010 at 6:44 pm
istn’t it ironic that people aren’t buying cause they are busy “doing yard work”, but the only people I know that di yard work already own their homes. All the people I know that rent either don’t have a yard to work in or they let the owner do the yard work…hmmm
August 12th, 2010 at 6:42 pm
I see Rob Chimpman is beginning to change his tune just in time to look smart.
I guess the “Case for Fundamentals” he laboured on a couple of years ago is now passe.
No wonder the guy has fallen out of favour; he reminds me of Steve Fonyo.
August 12th, 2010 at 6:16 pm
Correction:
Market cold, prices falling: “It’s a great time to buy.”
August 12th, 2010 at 6:15 pm
@Jimmy:
Allow me clarify Dch. Muir’s position on real estate.
Market hot, prices rising: “It’s a great time to buy.”
Market cold, prices rising: “It’s a great time to buy.”
It’s no wonder the local media outlets look to him for sage advice.