Entertained By Deception

When you watch a movie and see dinosaurs chasing people across a field, do you think to yourself "That's pretty amazing!", or do you think to yourself "This isn't real."?

When you watch a magician perform on stage and step out from a tiny little box that could not possibly fit the magician's body, do you think to yourself "That's pretty amazing!", or do you think to yourself "This isn't real."?

When a movie showcases special effects, or a magician performs on stage, the deception of the senses leads to amazing entertainment. If we later learn how the movie's special effects were created, or we wrap our brains around figuring out just how did that magician appear out of that tiny little box, the amazement subsides. We may be impressed by the special effects methods, or impressed by our own explanation of the magician's work, but we are no longer nearly as amazed or entertained. We arrive at "This isn't real."

Behaviorally, we suspend disbelief and allow the deception to amaze us and entertain us, and it can be a thrilling experience. Knowing that we can be thrilled in this way, this may explain why we suspend disbelief when we invest in and follow the financial and housing markets. We all want that thrill, so we suspend disbelief: we don't learn how the investments are being made, how the investments are constructed, who is constructing them, or even wrap our brains around figuring out just how did house prices rise 10% during the year. We are happy just to allow the deception of sharp upward market movements to amaze us and provide us with a thrill.

But after the movie, or after the magic show, if someone came up to us and said "Hey, that wasn't real, you know.", we would respond "Yeah, so?" without feeling like we were suddenly slapped back into reality. So then why in 2008, when someone came up to us and said about the financial and housing markets "Hey, that wasn't real, you know.", we feel like we've been slapped?

The next time you watch the financial and housing markets climb so quickly and steeply that they lead to record highs in record time, will you still think to yourself "That's pretty amazing!", or will you think to yourself "This isn't real."?