Illogical Thinking

Sep 2015 //
Behavioral Finance

Logically, there will be future periods of strong economic growth and periods of recession.  Similarly, XYZ Corp. will likely enjoy both good times and bad.  Since these future occurrences are to be expected—and should already be reflected in current stock prices— when temporary good times or bad occur, the current value of XYZ stock shouldn’t necessarily change a lot.  However, human nature tends to project expectations that current conditions will last quite a while—even when that’s not normally the case.  (Although economic expansions can last for several years or more, reces­sions are typically quite short:  The average recession since the mid-1930s has lasted about 11 months.)  If it seems remarkable that some investors who have lived through numerous short-term economic cycles should repeatedly act as if short-term factors will be long lasting, you’re right—it is remarkable.  And illogical.