Commentary: Why millions of Main Street investors cannot see they're destroying capitalism
By Paul B. Farrell, MarketWatch
ARROYO GRANDE, Calif. (MarketWatch) -- On Lake Wobegon "all the women are strong, all the men are good-looking and all the children are above average" says the great American satirist Garrison Keillor in his "Prairie Home Companion" world.
But doesn't that also describe all the too-greedy-to-fail fatheads running Wall Street? And, unfortunately, Main Street America's 95 million irrational and self-sabotaging investors?
Yes, all of us! We're Americans. Don't confuse us with the facts, with reality. We're the greatest in history, a legend in our own minds. And a rapidly mutating virus is spreading this lethal pandemic far beyond the shores of Lake Wobegon. Yes, folks, the "Lake Wobegon Effect" is hard-wired in America's brain, an illusion of superiority, a smug arrogance where each knows we are the best, the chosen ones.
Warning: The Lake Wobegon Effect is the single best summary of today's stock market psychology, high-frequency trading, behavioral economics theories and the new science of irrationality ... and it's sucking the life out of America's soul. Here, listen to more of these arrogant musings surfacing everywhere from deep in our collective brains:
All Wall Street bankers are worth 100 times any Main Street investor
All Corporate American CEOs deserve to make 400 times their workers
All children of all Forbes 400 billionaires deserve to inherit tax-free
All lobbyists deserve millions when winning billions for special interests
All taxpayers should pay for catastrophic mistakes of Wall Street Fat Cats
All rich hedge fund managers deserve to be taxed at capital gains rates
All senators deserve to become millionaire lobbyists when they retire
And Goldman Sachs CEO Lloyd Blankfein deserves a $100 million bonus
This is America's collective brain buzzing along at hyperspeed. This is the toxic irrationality driving America in the 21st Century ... and it really is destroying our soul from within. Seriously, look outside the isolation bubble you live in. Ask why so many other American brains are on autopilot, guided by what Yale psychologist Dr. Paul Bloom humorously calls the Lake Wobegon Effect in his New York Times review of "The Invisible Gorilla" by psychologists Christopher Chabris and Daniel Simon:
The Invisible Gorilla is "one of the most famous psychological demos ever. Subjects are shown a video, about a minute long, of two teams, one in white shirts, the other in black shirts, moving around and passing basketballs to one another. They are asked to count the number of aerial and bounce passes made by the team wearing white, a seemingly simple task."
Stop. Test yourself before you read on. What does "The Invisible Gorilla" study tell you about the brains of folks gambling in Wall Street's casinos? Where billions of shares, trillions of dollars, stocks, bonds, derivatives trade daily? What's "invisible" to you?
Stop again. Look closely: Not just in the brains of Main Street's 95 million investors. We know we're irrational and easily manipulated. But our leaders too? All our Wall Street CEOs, brokers, high-frequency traders ... all our government bureaucrats, policy wonks, congressional committee heads ... all our pension fund bosses, mortgage lenders, central banks policy makers ... and all the other global players playing games with derivatives in the $670 trillion unregulated global shadow banking casino that's avoiding real reform?
Years ago America's leading behavioral economist, Richard Thaler warned: "Think of the human brain as a personal computer with a very slow processor and a memory system that is small and unreliable ... the PC I carry between my ears has more disk failures than I care to think about." And it ages badly.
Factor the Lake Wobegon Effect and the Invisible Gorilla into your computer. What do they tell you about the impact of billions of irrational decisions made by all gamblers betting at Wall Street's 24/7 global casino?
Here are four irrational clues: Remember, between 2000 and 2010 Wall Street lost 20% of your retirement playing the stock market ... Still Wall Street pocketed hundreds of billions for themselves ... Still those fat cats off-loaded trillions of debt on taxpayers when in de facto bankruptcy in 2008 ... and yet our brains let them get away with it.
The conclusion is obvious: The average investor's brain is so irrational it is totally inadequate as a tool in evaluating market trends, cycles and patterns, in picking stocks, and in judging the value of so-called expert advice we get from self-interested bankers, advisers and cable pundits ... and yet, paradoxically, like alcoholics, coke addicts and gamblers, we cannot stop. Crazy but true. Listen as Dr. Bloom continues:
"Halfway through the video, a woman wearing a full-body gorilla suit walks slowly to the middle of the screen, pounds her chest, and then walks out of the frame. If you are just watching the video, it's the most obvious thing in the world. But when asked to count the passes, about half the people miss it." (Translation: Same happens when you're counting passes in the stock market; you miss not only the obvious but the secret stuff Wall Street's Invisible Gorillas are purposely hiding)
Only half? No, my friends, it's far worse. In Bloom's own studies "63% of Americans consider themselves more intelligent than the average American, a statistical impossibility. In a different survey, 70% of Canadians said they considered themselves smarter than the average Canadian." But when it comes to financial markets, its closer to 100%, for both little "gamblers" and the big "casino owners."
Wall Street's Invisible Gorillas really are stealing America blind
Want more proof? Remember the studies by University of California behavioral finance professors Terrance Odean and Brad Barber: They researched the trading behavior of 65,000 American investors. Also all investors trading on the Taiwan Stock Exchange. Their conclusion: "The more you trade the less you earn." 77% of Americans were losers. 82% of Chinese investors were losers. And still: Their brains are so irrational, so addicted, they can't stop, just keep going back.
Yes, investors are stuck with addictive Loser Brains. Even confronted with the facts investors continue in denial, victims of the Lake Wobegon Effect, refusing to learn the lessons of the Invisible Gorilla. Bloom concludes:
"When you direct your mental spotlight to the basketball passes, it leaves the rest of the world in darkness ... Even when you are looking straight at the gorilla (and other experiments find that people who miss it often have their eyes fully on it) you frequently don't see it, because it's not what you're looking for."
Get it? Your brain is wired to make bad decisions. Wired to make them over and over. Wired to miss crucial data. And this has a cumulative and collective effect that drives markets to the edge of a precipice with such powerful momentum that we're blinded by euphoria, never see the Invisible Gorilla, the Black Swan, the WMD ... never see the risks until it's too late, a catastrophe happens and the invisible becomes painfully visible, tragically blowing up in our faces
Sound familiar? It did happen in 2008 forcing former Fed Chairman Alan Greenspan to admit to a congressional committee: "I found a flaw ... I made a mistake." Actually Mr. Greenspan you were a miserable maestro. For 18 years the mistakes your irrational brain made blinded you to an invisible Reaganomics Gorilla that's still destroying America.
Treasury Secretary Henry Paulson was even worse, later reluctantly admitted he should "have seen the subprime crisis coming earlier." But it turns out he's a liar and con man. Yes, later Bloomberg News reported Paulson not only saw the Invisible Gorilla, he warned Bush's staff at Camp David in 2006, two years before the meltdown. But then the Lake Wobegon Effect kicked in, our leaders all ignored the warnings until the 2008 crash.
Wall Street has no soul, is drowning America in Lake Wobegon
The irrational brains of our leaders are so self-destructive they let bubbles blow and blow ... they will always fail to act early enough ... they are trapped in their greedy brains in denial ... trapped in their narrow ideologies ... trapped, making endless stupid decisions ... ignoring the obvious ... they will let risks become increasing more deadly till minor pops becomes colossal WMD-category meltdowns, crashes, collapses of epic catastrophic proportions, worse than the estimated $23.7 trillion aftermath of the 2008 meltdown ... and another is dead ahead.
Yes, tragically many more are coming because Wall Street is morally dead, it has no conscience, no soul, no ethics, no moral values other than getting as rich as possible, as fast as possible. Tragically, Wall Street is now the Invisible Hand of Capitalism 4.0. Tragically, Wall Street's believes the best economy is an unregulated free-market system where the collective greed of the biggest players best serves the public good.
Yes, tragically for future generations of Americans the guidance system of capitalism's Invisible Hand has been replaced by the guiding hand of Wall Street: With no public conscience, no soul, no ethics, no moral values, nothing other than the addict's obsession to get as rich as possible, fast as possible.
And tragically, Main Street America is trapped with them in the Lake Wobegon Effect. Tragically, the Invisible Gorilla will strike again, soon, and again, and again exploding into visibility ... until our rude awakening.
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