Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level

Chapter 22

It can’t happen (normalcy)

History is littered with examples of catastrophes where those affected seemed to freeze, rather than to take immediate action to save themselves. Examples include the eruption of Mount Vesuvius in AD 79, the Holocaust in Europe in the 1930s through 1945 and the Victorian bushfires in February 2009 known as Black Saturday. The threat was real and clear, yet many of those in danger went about their normal lives right up until the end.

The same phenomenon is frequently seen in the stock market. We saw it as the bear market unfolded in 1974. People appeared dazed and uncomprehending when the crash came in 1987. More recently, most investors watched almost dumbstruck as the global financial crisis unfolded in 2008 and their stockholding wealth fell relentlessly month after month. It is also played out in the stock market on a micro level as individual stocks that have been market favourites start to fall and then plunge to oblivion, taking most stockholders’ wealth with them.

The common terms for this phenomenon include ‘a state of denial’, ‘analysis paralysis’ and ‘behaving like an ostrich’, a bird that supposedly buries its head in the sand in the face of impending danger. Its scientific name, however, is normalcy bias.

When we face impending danger, we easily and naturally fall into a mental state in which we tend to do several things:

• We ...