Irrational Exuberance by Shiller Robert J. J
Author:Shiller, Robert J. J.
Language: eng
Format: epub
Publisher: Princeton University Press
Moral Anchors for the Market
With moral anchoring, the market is tied down by people's comparisons of the intuitive force of stories and reasons to hold their investments against their perceived need to consume the wealth that these investments represent. The market is not prevented from going up to arbitrarily high levels because people have any idea what its intrinsically “right” level is or what level would be too high. Rather, if the market were to get too high, the discrepancy between the wealth many people would then have in the market and their current living standards would, when compared with their reasons for holding stocks, encourage them to sell. One can appreciate the nature of this anchor with an extreme example. Suppose, counterfactually, that the psychology of the market caused the level of the stock market to rise so as to make most holders of stocks multimillionaires—on paper. Then, unless the reason these people have to continue holding every single share is perceived to be extremely strong, they would want to start living a little more like multimillionaires and sell some of their stocks to be able to spend the money. Such selling would obviously bring stock prices down, since there would be no buyers, and obviously there just isn't sufficient current national income available to sustain anything like this many multimillionaires. The stock market can reach fantastic levels only if people think that they have good reasons not to test it by trying to enjoy their newfound wealth.
Underlying this notion of moral anchors is the psychological principle that much of the human thinking that results in action is not quantitative, but instead takes the form of storytelling and justification. That is why, in the case of moral anchors, people are weighing a story, which has no quantitative dimension, against the observed quantity of financial wealth that they have available for consumption. Such reasoning is not well described by the usual kind of economic theory, but there is a large amount of evidence in support of the assertion that investor reasoning does take this form.
Psychologists Nancy Pennington and Reid Hastie have shown the importance of stories in decision making by studying how jurors reached decisions in difficult cases. They found that jurors’ approach to reasoning through the complicated issues of the trial tended to take the form of constructing a story, filling out the details that were provided to them about the case into a coherent narrative of the chain of events. In describing their verdict, they tended not to speak of quantities or probabilities, or of summing up the weight of the evidence, but rather merely to tell a story of the case, typically a chronology of events, and to remark how well their story fit together and how internally consistent it was.6
By analogy, those who sell stocks to the general public often tend to tell a story about the stock, a vivid story describing the history of the company, the nature of the product, and how the public is using the product.
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