Investing and the “Tragedy of the Commons”

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On Economics, Investing and Behavioral Finance

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[By Dr. David E. Marcinko MBA]

Although I did not fall asleep during my psychiatry rotations, or psychology classes, in medical school; the concept of ToC was not known to me until my first economics class while in B-School.

What it is!

The tragedy of the commons is a term, originally used by Garrett Hardin, to denote a situation where individuals acting independently and rationally according to each’s self-interest behave contrary to the best interests of the whole group by depleting some common resource.

The term is taken from the title of an article written by Hardin in 1968, which is in turn based upon an essay by a Victorian economist on the effects of unregulated grazing on common land.

Commons” in this sense has come to mean such resources as atmosphere, oceans, rivers, fish stocks, the office refrigerator, energy or any other shared resource which is not formally regulated; not common land in its agricultural sense.

The tragedy of the commons concept is often cited in connection with sustainable development, meshing economic growth and environmental protection, as well as in the debate over global warming. It has also been used in analyzing behavior in the fields of economics, evolutionary psychology, anthropology, game theory, politics, taxation, and sociology.

However the concept, as originally developed, has also received criticism for not taking into account the many other factors operating to enforce or agree on regulation in this scenario.

Example: UMD ‘tragedy of the commons‘ tweet goes viral – Baltimore Sun

Investing Behavior?

Today, some financial advisors, wealth managers, doctors and behavioral psychologists believe the ToC is an increasingly important concept in investing.

Source: https://en.wikipedia.org/wiki/Tragedy_of_the_commons

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confirmation-bias

Greed is still trumping fear, and that’s bad for stocks …

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Assessment

So what does all this have to do with investing? Are we experiencing this phenomenon in the markets, today?

Read the article thru the link above; fear and greed.

More:

Conclusion

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One Response

  1. Agreeing to Disagree

    “You can have comfort, or you can have value. You cannot have both.”
    Jim Grant on CNBC

    It is very comfortable and enjoyable to own a company everyone loves. You can brag about it to your neighbor, bring it up at social gatherings. But there is usually a significant price to pay for that comfort – the stock is fully valued. This is why value (cheap) stocks have historically beaten the bejesus out of growth stocks. The reason is very simple: Both love and discomfort are priced into stocks. Love is priced into fancy valuations, and the hated ones are cheap.

    This instinctive comfort-seeking doesn’t stop with stocks; it spills over to the people we choose to share ideas with. As investors, we tend to look for people who share our views, but we should do the opposite. During the 2012 Berkshire Hathaway annual meeting, Warren Buffett said something that really resonated with me while answering a question about his political views’ impact on Berkshire: “If you are going to choose your friends and your investments by if they agree with you, you are going to have a very peculiar life.”

    Let me tell you a true story (as opposed to just lying to you). I have a dentist friend who was born in Russia and lived in Israel and Germany before moving to Denver about 13 years ago. He is extremely smart, very well-read and a thoughtful person. However, I have yet to meet anyone with whom I have disagreed more about politics. His arguments with me are passionate but also well thought-out and backed up with facts and his own theories. In the past, I used to get angry at him. After one of our regular debates, I’d sometimes go into avoidance mode for several months.

    Three years ago my friend invited me to go skiing. Overall, he is a pleasant person, but I was a bit hesitant. It is a two-hour drive each direction from Denver to the mountains, and I did not think I could take four hours of arguing. But that day I felt extra masochistic, and I went along.

    Instead of debating with him, I started to listen. I made an effort to keep emotions to a minimum; I tried to identify the specifics of our disagreements, what assumptions both of us were making. And then I attempted to focus the discussion on these more precise points of difference. In the end, we each learned from the other. Our views have not changed much (political views, like religious beliefs, are nearly impossible to shift). But we’ve been skiing almost every winter weekend since, and in the summer we bicycle together. Now I always look forward to our disagreements – and we are much closer friends than ever.

    This lesson applies to investing. When you are long a stock, you are naturally trying to seek out investors who share your opinion, and you naturally stay away from those who have contrary views. This is the comfortable thing to do. Instead, we should try to do the opposite, to look for smart people who, after doing their research – a very important point – come to a different conclusion from ours.

    The idea becomes a bit more nuanced. If I talk to a momentum growth investor about a cheap value stock that has gone nowhere for years, I know exactly why he’ll be avoiding it: There is no momentum in the stock price. His view will bring me very little insight. However, the perspective of a smart fundamental investor who’s done thorough research but arrived at a contrasting assessment might be very valuable.

    When we find someone who disagrees, we need to identify exactly where the differences in opinion lie and then methodically and objectively try to refute those points. If you cannot, maybe you are not as right as you thought you were.

    In Creativity, Inc., Ed Catmull, co-founder and president of Pixar Animation Studios, discussed the process of making movies. He emphasized an important point: All of Pixar’s films – the ones we have come to love – in their early stages of development sucked (his word, not mine). To get them from suck to unsuck took a candid (Catmull stressed the importance of that quality) and collaborative process in which a group of executives and animators not working on the movie provided feedback to the ones intimately involved with it.

    I suppose that if Pixar’s creative team had only been looking for feedback that they agreed with, Toy Story and all the other great movies that followed it would never have seen the silver screen (and my kids’ lives would not be the same).

    It is psychologically difficult to intentionally search out opinions that are contrary to ours, but we need to condition ourselves to realize that a stock doesn’t know who loves it or hates it; in the long run, stock prices will follow fundamentals (earnings and valuations), and that is what contrary opinions may help us figure out.

    Vitaliy N. Katsenelson CFA
    Chief Investment Officer
    [Investment Management Associates]
    Denver, Colo.

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