Unconventional Wisdom: A Talking Blog by Steve Saenz

Charts, Cliffs and Cavemen...

1/4/2013

People in the financial services industry LOVE charts, especially ones with upward sloping lines. Charts, replete with disclaimers basically saying that you should not pay any attention to charts, have been the go-to-sales-tool for financial professionals since I can remember. For all I know, our great great great ancestors drew charts on their cave walls in an effort to persuade (er, advise) their cave mates.

However, this is not a history lesson about charts, per se. Rather, it is a non-academic (caveman's) look at what we can learn from going over a cliff. The series of charts below tell a rather interesting, albeit anecdotal, story. The moral of that story is that our perceptions (and resulting decisions) are often influenced by our current reality.

Illustration by Andertoons

Those who study behavioral finance sometimes refer to this as extrapolation bias. It's damn hard to see a 6,000-point rally coming when you have just witnessed (suffered) a 7,000-point blood letting. The paradox is that, the closer you are to action, the more difficult it is to see around the bend.

Speaking of seeing around the bend, I had the good fortune of meeting and interviewing a man by the name of Verne Wheelwright several years ago. Verne wrote a terrific book called, It's Your Future: Make It A Good One. According to the World Future Society, an organization to which Verne and I both belong, FORESIGHT, is the most important skill one can develop for the 21st Century. I could not agree more, which is why I included this as a category in my new Wealth Management Bookstore.

In any event, the purpose of this slog post (as always) is to get you thinking. Hope you find this helpful.

Click on images to enlarge...