Half a Glass of Water

People are not disturbed by things, but by the view they take of them.
-- Epictetus

My father used to congratulate himself for pulling all his money out of common stocks a month before the 1987 crash, when the market lost nearly a quarter of its value in a single day.  He put his money into tax-free municipal bonds and kept it there until he died 10 years later.  A child of the Great Depression, my father no doubt slept better at night knowing his money was safe.  Meanwhile, the market recovered its losses within a year and went on to quadruple its value over the next decade.  My father died a modestly wealthy man -- but not nearly as wealthy as he might have been if he had put some of his money back into the market.

Economists would have us believe that markets behave rationally, and there is no shortage of analysts to explain their gyrations after the fact.  We would do well to remember, however, that market activity is made up of transactions in which one party believes he is buying low and the other that he is selling high.  Our dry risk and reward calculations mask baser instincts of fear and greed.  Even such inveterate free-marketers as former Federal Reserve Chairman Alan Greenspan have complained of the market’s occasional fits of “irrational exuberance”– to say nothing of the periodic upheavals that see trillions of dollars in market value vanish in panicky selloffs.  No wonder my father, a Harvard-trained economist, ultimately concluded it was better to sleep at night than to get richer.

How much of market behavior can be explained by an investor’s innate temperament?  Those inclined to see the glass half full will naturally focus on the reward rather than the risk, while those who see the glass half empty will shy away from the risk without considering the reward. Each selectively views the same circumstances and draws opposite conclusions.  Both disregard the present in favor of an imaged future based on their hopes or fears.  There are those who always see the glass half full and those who always see it half empty.  But how many are capable of seeing what is actually there: a half a glass of water?       

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