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Remember the movie Apollo 13 starring Tom Hanks, Kevin Bacon, and the late Bill Paxton? The crew famously called Houston Mission Control after discovering serious mechanical problems on the spacecraft and uttered the phrase “Houston, we have a problem”.
The main problem that all of us share, as humans, is a striking inability to objectively look at data. In Apollo 13, this would have been a fatal error. It certainly can be for us in our financial lives as well.
Think about all the people that you encounter in everyday life. Most of these folks have sharply honed beliefs about many issues ranging from politics to religion and everything in between. For the main, these beliefs are born out of an information filtering system that our brains cleverly disguise. Information that runs directly counter to our beliefs is disregarded before it is fully processed. Instead, we believe mostly as we want to believe, evidence to the contrary.
In the financial world, there are always two sides to every transaction. If you decide to sell an investment because the price is “too high”, someone on the other side of that trade is buying, because they believe the price is “too low”. So, there essentially are “two truths”, two distinct points of view for the same transaction.
We sometimes seek stories and narratives that provide us with a sense of comfort in the face of things we don’t understand. This comfort is often misplaced. The information age has brought with it an overload of financial data and information. The amount of information has increased over the past couple decades, but financial behavior has remained essentially locked in place. This is the ultimate problem.