Wall Street Amnesia

James Surowiecki explores the phenomenon of investor amnesia: Despite numerous examples of dishonesty and untrustworthiness, investors continue to trust Wall Street firms with their money. “It’s like what Hegel supposedly said: The only thing we learn from history is that we learn nothing from history,” says Barry Ritholtz, who’s quoted in the piece. Surowiecki thinks factors like simple greed and cognitive dissonance are to blame. [%comments]


It isn't that investors always lose money in the market. Plenty of people make money in the market. Moreover, even if you know the markets are manipulated you can still come out ahead if you play the cards right. In some ways it is like playing 'chicken'. When the market is rapidly rising and you know there is a fall ahead, you hold on as far as you think the market will rise and quit. If you quit too early, you lose some money you may have potentially made, if you quit at the right time (even if by pure luck or insider info), you made a nice amount of money, if you held on too long and the market crashed on you, you lost.


First of all, let me thank you for making economics easier to understand. Your books and blogs make a great lens to view the world through.

This post in particular really spoke to me. I've only been in the workforce and therefore in stocks for about five years. Despite all the evidence that the next 30 years worth of 401k contributions will be wiped out in a day, I stay in the stock market because I hope I can get out before then.

The promise of what could be is too powerful to resist. Besides, the value of our regular savings is lost on inflation, right?

Martin Doonan

But this time it will be different.

Eric M. Jones

Amnesia...!? How about scotoma? It seems people are capable of doing the same thing over and over (and expecting different results...said Rita Mae Brown).

Here's a taste:

1) Childbirth. I suspect men would not have a second child if they had to give birth.
2) War. Oh yeh...but this time it's justified...
3) The Church. Oh yeh, we don't molest your children anymore. And that Inquisition thing.... Let's not mention it.
4) Gambling...wanna bet?
5) Etc.


Problem is, if we want to retire some day with a decent income, what choice do we have? So we ignore the risk, those of us unable or unwilling to do the hard work of managing our own investments, researching companies, determining price points and risk, all things I do not enjoy and certainly don't want to spend my time doing. My only option, then, if I want to invest is to hire a professional. Now sensibly, all of them should be required to publish vital statistics such as their real rate of return for clients of various income levels, their commissions and fees in a way that is easy to understand, their transaction costs and so forth. That way we could make an informed decision about who to use rather than trusting Aunt Sally's report that Joe-Bob made her a bunch of money.


It's not that people have forgotten. It that there are not too many alternatives for the ordinary folk.

Dr J

I know people who got out of the market in 2001 and never went back - but on a deeper level, there are several reasons why people keep dumping money in the market 1) 401ks are tax free, you can loose a considerable amount of money in your 401k and still come out ahead vs. paying taxes on it 2) there are very few non-stock choices in most 401ks 3) we have a secular religion focued on free enterprise and the stock market, perplexingly news show devote a considerable amount of time to the markets even though most people don't own stocks - finally and perhaps most importantly money is funneled to the market through pension funds and other intermediaries, god knows who is getting paid off to invest other peoples money in worthless junk, managers ride high on short term returns and then bug out when everything hits the fan - that is our current management culture....


Around 2/3 of the equity market is directly controlled by institutional investors. Not too many Wall Street firms are going to make an issue about the behavior of other Wall Street firms


I have to agree with the sentiment that we have no other choice as investors...The key word there is "investors."

The problem is that we "investors", who have long-term consistent strategies, are stuck in the game with gamblers/speculators who are looking to rig/manipulate the game to their advantage. The question is, how can investors be protected from gamblers.

Been There

Wall Street can't print money, they have to take it from all of us. Even if we try to avoid risky investments and protect our nest eggs, our pension/401k plan, our insurance company and our bank/credit union/savings and loans won't. With the myopic tactics you eschew, American business is doomed to forever play the sucker's game. PT Barnham was an optimist.


Ever been to Vegas twice? We all lose, but hopefully I win.

Thanks for the blog, BTW.

hilzoy fangirl

Most people think they'll beat the odds. Otherwise they wouldn't invest in anything more risky than an index fund.


Maybe because investing is very hard and as much as Wall Street firms lose money, many people are scared they would do worse on their own.
Even people that "invest their own money" largely depend on Walls Street for the products they buy (Index ETFs, futures, etc.)


The latest scandal reminds me of Michael Lewis' book Liars Poker. As a Wall Street salesman, his job was to convince customers to buy the lousy bonds that the firm didn't want. They kept the good stuff for themselves. They called it ripping the customer's face off. 'Born to be a customer' was what they called a sucker.

My advice: If someone calls you on the phone and tries to convince you to buy an investment security - short it. That investment is going to crash hard or they wouldn't be selling it.

Free Marketeer

So, does James Surowiecki actually invest in anything other than his personal checking or savings account?

And what of the role of GOVERNMENT in this mess?


Every time a stock is bought, there must be a seller and vice versa. It's like betting on a race that you don't know is fixed. Some bettors will pick the right horse, without that knowledge