Bin Laden and behavioral finance

By now the world has heard the good news about the execution of Usama bin Laden in Pakistan and the disposal of his body at sea, so there’s not much left to say about it here other than to pile on some more credit where credit is due — with the people who carried out the mission (not just the final operation that ultimately killed bin Laden, but the entire mission, including the relentless search that put Americans in harm’s way in some of the most inhospitable places in the world for the better part of a decade), the President who initiated it almost ten years ago, and the President who ultimately saw it through to completion this week.

In addition to all of the obvious upsides, continuing coverage of this story finally refocused the world on something important in the wake of the big costume party in London last Friday (I hope the princes return those shirts and gloves to Michael Jackson’s family in good condition by the way).  It of course has also pushed Lindsay Lohan’s supposed plea negotiations and pretty much all other Lawpsyc news to the back burner, more like the back burner of a stove several blocks away, so with little else to report on that front…

Remember several weeks ago when I wrote about “behavioral finance” — the concept that people’s financial decisions are actually part rational and part emotional?  Many of the world’s major financial institutions employ analysts who have both financial and psychological expertise to predict opportunities to take advantage of emotion-driven fluctuations in financial markets.  As both an M.B.A. and a Ph.D., I’ve dabbled in this a little, and while I still have more interest than experience in it, I did make a contrarian call in the hours immediately following the bin Laden news that proved correct in Monday’s trading.  (I know, I’m patting myself on the back again, and I really do try to space that out, but sometimes, if I don’t point out when I’m right about something, here or on the air, nobody else will.)

In the early hours of Monday morning, some in the major international financial media, based in part on early movements in Asian markets (which were actively trading at the time), predicted that general exuberance about bin Laden’s demise would translate into irrational exuberance in the American stock market in Monday’s trading.  I have to admit, in the hours between the bin Laden news and Monday’s opening bell, I almost deviated from my rather conservative, “dollar-cost-averaging” investment strategy to pump more money into stocks.  The more I thought about it, though, the more I felt that American investors, individual and institutional alike, had been through enough in the past few years that they’d end up comparmentalizing their exuberance, expressing it in the streets and at bars and around office water coolers but not necessarily in the markets.

And…rationality did, in fact, triumph over emotion in Monday’s trading.  Bin Laden’s demise, while good news for the country generally, didn’t really change any economic fundamentals (if anything, it may actually have increased the chance of a potentially-disruptive attempted terrorist attack in the days/weeks ahead — hope not of course), and investors appear to have recognized that.  It really didn’t make sense for Americans to run right out and buy more stocks, and if a rally had happened on that basis, while exciting in the short term, it likely would’ve been followed fairly quickly by an offsetting correction when cooler heads prevailed.  So, it was probably fortuitous that my fellow American investors and I had a span of hours in which to digest the good news about bin Laden before we started placing trades Monday morning.

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