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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shikko
10 years ago

@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… Read more »

Anonymous(GStrader)
Anonymous(GStrader)
10 years ago

@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.

Renting
Renting
10 years ago

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.

chilled
chilled
10 years ago

@Best place on meth:

LOL!!!!!!!!!!!!

chilled
chilled
10 years ago

@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.

Supraboy
Supraboy
10 years ago

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.

redflagreview
redflagreview
10 years ago

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… Read more »

browntown
browntown
10 years ago

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"

Chris
Chris
10 years ago

@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!

Chris
Chris
10 years ago

….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! 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… Read more »

Kim Jong-il buy 3
Kim Jong-il buy 3
10 years ago

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.ca/bnc/reo/1873066

Anonymouse
Anonymouse
10 years ago

@Best place on meth: Bsmt is Private and ready to move in But only You can take a shower every day on the main floor of the house !! 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… Read more »

fixie guy
fixie guy
10 years ago

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.

Best place on meth
Best place on meth
10 years ago

@cariboo_kid:

I bought a triple inverse financial ETF two weeks ago.

I'm betting on another meltdown. Even meltier than the last.

Anonymous
Anonymous
10 years ago

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.

cariboo_kid
cariboo_kid
10 years ago

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???

Anonymous
Anonymous
10 years ago

@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.

Dave
10 years ago

errr.. arrogant…

Dave
10 years ago

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?

Best place on meth
Best place on meth
10 years ago

Looks even uglier on the sell side.

http://www.mls.ca/map.aspx?&SsID=5&Vs=VER

Best place on meth
Best place on meth
10 years ago

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.ca/search/apa/van?…

Stu
Stu
10 years ago

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.

Best place on meth
Best place on meth
10 years ago

@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.ca/van/apa/1884374

I can't believe they gave up on it so soon, now the new tenant has to finish the job.

SuperSmartBull
SuperSmartBull
10 years ago

@GB:

Also their comments generally lack factual evidence.

Bears have been wrong for 9 years out of 10. Bulls are rich. Spain win Fifa hifi. How that for fact x 3.

Anonymous
Anonymous
10 years ago

@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!