Why We’re Reluctant to Take Advantage of What We Learned from Shiller’s Research

Updated on

Valuation-Informed Indexing #249

by Rob Bennett

Last week I was placing calls to find a place for my family to stay on our vacation this Summer in Ocean City, New Jersey. I found myself asking a question that I realized later reveals something important about how stock investing works in the real world.

I asked the owner of one place in what room the television is and how big the screen is. When I said the words, I felt a need to explain why I was asking the question. I explained to this person that we don’t have television at home (we watch movies and TV shows on the Netflix service but don’t pay cable fees) and so I view it as a treat to be able to watch the Little League World Series before going to bed on the nights that we are on vacation.

It struck me when I was on my walk a few hours later that this is not a question that I would have asked in earlier days. We dropped cable many years ago, years before the Netflix service even existed. I was happy at the time about the decision because it opened up time for my wife and I to run together every morning (we were able to get to bed earlier without television keeping us up). But there were so few people not watching any television in those days that I felt that it made me look weird to tell people. So I made it a practice not to bring the matter up in conversation. Now there are enough people who have dropped television for Netflix or some similar service that it didn’t feel weird to me to tell people the truth.

It’s a small thing. But there’s a huge implication. I had nothing to be ashamed about in not watching television. If anything, I should have been proud of our decision to exercise more rather than to be couch potatoes. But the reality is that I did act as if I was ashamed.

Peer pressure is a powerful force.

Robert Shiller showed in 1981 that valuations affect long-term stock returns. It follows that stock investing risk is not a constant but a variable. That is, we can reduce stock investing risk by adjusting our stock allocations in response to big changes in valuations. Most of us don’t do this. Why not?

Peer pressure.

Bull markets are built on peer pressure. As a society we push stock prices up to dangerous and unsustainable levels. And those of us who see the folly of this keep it zipped for the same reason that for many years I held back from telling people that I didn’t watch television.

I’ll give you another illustration of the phenomenon from my own life. Many years ago my wife and I paid off our mortgage at an early age. We were excited by what we had done. We celebrated. But privately.

We didn’t tell people what we had done. One day we were eating Chinese food with a group of people and someone in the group came up with the idea of each person in the group revealing the interest rate on his or her mortgage. Yikes! When it was my turn, I told the interest rate that applied on our mortgage before we paid it off. Huh? Was I ashamed?

I wasn’t ashamed in my own mind. I was proud that we had paid off the mortgage. But something told me that this was not something that I should let others know about. This was the power of peer pressure. It was the power of the Social Taboo.

Lots of people understand that Buy-and-Hold strategies make no sense. I have had investment advisors call me up on the telephone after finding my web site and talk to me for hours about the ideas they read about there and about how they want to share them with their clients. Then they ask me to please not mention their names. As if they were ashamed of their intent to give their clients good advice.

We cannot invest effectively until we learn how to talk openly about what the research really says. But hearing the realities hurts people’s feelings. There are investors who are counting on their portfolio values being real for them to be able to retire at a reasonable age who suspect that those portfolio values are not real. It hurts them to hear that there is 34 years of peer-reviewed research confirming their fears. So we have developed a Social Taboo that prohibits open and clear discussion of the most important investing realities.

The most powerful demonstration of the phenomenon is the famous research that was done by Solomon Asch in the 1950s. Asch arranged for groups of five to seven confederates to meet in a room with a single real experiment subject and answer questions about the lengths of lines on cards presented to them. Only 24 percent of the real participants gave accurate answers to questions in all circumstances. 75 percent conformed to the social pressures to give inaccurate answers in at least some circumstances. 5 percent conformed every time. The overall conformity rate was 37 percent. In a control group, in which there was no social pressure to give an erroneous answer, only one out of 35 participants gave incorrect answers to the questions asked.

We’re sheep.

Or perhaps not.

Participants were asked to explain why they gave incorrect answers. Many said that they knew that the answers were incorrect when they were giving them. They answered incorrectly to be polite!

We’re not really sheep. We’re just too nice to say what we truly believe when there are lots of our fellow humans expressing confidence in a very different story.

My experiences trying to spread the word about the exciting implications of Shiller’s work support this explanation. I have had many experiences in which people express great enthusiasm over the idea of learning more about how Valuation-Informed Indexing works. Then they hear Buy-and-Holders express emotional pain over Shiller’s findings. Then they get quiet. If I push, they get hostile to me.

People would rather not hurt other people’s feelings even in circumstances in which failing to do so might mean that those people will suffer failed retirements.We all should be talking about this stuff. I believe that this stuff is the future of investing analysis. Even if most of the experts in this field are too polite to say so in public!

Rob Bennett’s bio is here.

Leave a Comment