Emotions continue to play a large part in investing and real estate prices. There is little doubt that what is happening to cause the current elevated value of stock prices and home prices is being caused by emotions. As long as people can make a profit – or believe that they can – it is apt to continue. At some point, however, normalization will appear.
Many Things Can Affect Emotions
Emotions can be raised by single events or by a combination of events. Basically, people want to continue to believe that they can make money and, to a degree, predict the rise and fall of stocks or housing values. Unfortunately, losses of the past prove that it is not always possible to foresee these events.
Sometimes, there is no rational explanation for the increase in value that would make any sense. Robert Shiller, a Nobel laureate who recently wrote Narrative Economics, reveals that what is happening now may be similar to what happened just before the Great Depression of 1929. He compared it to what happens at a football game.
Football games are known for fan commitment and excitement – excitement that often goes beyond what is rational. In 1929, a lot of stories were circulating about making money investing in stocks. People had heard from family and friends, etc., that a lot of money could be made in the stock market. The stories went viral and money was poured into buying stock – inflating it way beyond its actual value. Then, a cyclical adjustment came and investors lost lots of money.
For many people, Shiller says, buying a home may also be influenced by the same type of emotions. It is thought by many to be the American dream and also a symbol of some wealth. The emotions enter into the picture because people may mistakenly believe that a home will increase in value – which does not always happen.
After doing his research, Shiller’s book reveals that home prices have really only increased in value as much as inflation. He says this amount is a mere 0.26 percent per year in real terms. While home-buying is again occurring at a rapid pace today, it likely is because people are once again listening to the stories that are circulating. Interestingly, he mentions that prior to the 1990’s people did not view houses as evidence of wealth. Instead, they were merely seen as something that goes out of style and that they are a lot of work to maintain – eventually needing to be torn down.
When investing, any investor may be overcome by a sense of greed. Spotting what may seem to be that perfect opportunity to make lots of money is hard to resist. It can affect even the most seasoned investor. Of course, many people may sense the same potential and inflate a stock’s value. Eventually, the correction will occur and money will be lost.
There is a way to reduce your susceptibility to emotionally making investment decisions. Investopedia says that you need to be aware that you may be susceptible to those kinds of decisions. They also say it is a good idea to avoid buying what everyone else is rushing to buy – the current trend.
Politics can also have a part in inflating the economy. President Trump likely has had a part in raising the national perception of the economy. He is optimistic about reducing taxes for corporations and removing red tape. He also continues to talk about the possibility of re-election and how wrong the impeachment proceedings are.
While some degree of emotions will always have a part in investing, investors should investigate their current investments to see which ones are really profitable. Checking for emotional attachment to a particular stock – or home – may help you avoid an unnecessary slow but long-term loss.