It seems investors have made a sudden and drastic shift into one commodity: toilet paper. This seems irrational. Yet there are enough people doing it that we cannot help but notice the impact. So what is really going on?
Actually, people are neither rational nor irrational, they are human. So are you and I. We use a series of heuristics in decision-making, especially when under pressure. Two of them are wants and cognitive errors.
Wants come in three dimensions: utilitarian, expressive, and emotional. Utilitarian wants are for things that have practical uses. Expressive wants are for things that display who we are or what we have accomplished. Emotional wants are for things that give us emotional rewards: usually pride or joy. All three wants can also be satisfied by avoiding the loss or perceived loss of what we want. In a perfectly balanced human, these three dimensions would be perfectly balanced. In a normal human, they get off-kilter depending on the situation. In this case, all three are on display in the ways people are responding to current events, including you and me.
Cognitive errors come in many flavors. I will only mention two: confirmation bias and shortcuts. Confirmation bias is ignoring non-confirming information when investigating a conclusion you have already reached. We do this so much that it’s almost impossible to self-diagnose. Shortcuts are best understood in example. A stock trader tends to think of trading like playing tennis against a wall, when it is actually more like playing tennis against Roger Federer. We tend to think of government-level finances as a bigger version of our household finances when it is actually more like moving tens of thousands of financial pieces at once.
With these human traits, it is difficult to invest prudently and with purpose. This creates pain and cultivates fear of the future. My stand for you and your family is that you remain disciplined and prudent investors over a lifetime, that you shift your personal experience of money from scarcity to abundance.