I’ve posted Entry #243 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Human Brain Is Not So Much “Wired for Stories,” As Shiller Claims, But Wired for Paradigms.
Juicy Excerpt: So I like his story idea a great deal. Still, I believe that it can be refined. I believe that a better way of stating the case is to say that “the human brain is wired for paradigms.” If it were just that we were impressed by stories, I have a hard time understanding why insane levels of undervaluation that apply for long periods of time would be as much a market reality as insane levels of overvaluation that apply for long periods of time. Yes, we tell ourselves stories to justify the folly that we engage in during bull markets. But why do we punish ourselves when our bull market follies come to an end? Why don’t we continue telling ourselves happy stories that support insane price levels? Why do bull markets always end in tears?
Our brains are wired for paradigms. Stories support paradigms. So storytelling is an important part of what is going on. But the key to understanding why investors destroy themselves over and over again is understanding how the human mind is attracted to paradigms. It is by learning how paradigms form and how paradigms are broken that we learn how to reduce the risk of stock investing dramatically.
A paradigm is a collection of beliefs that all support an overall belief system. We form them in our thinking about all issues. The human brain is a paradigm-producing (and paradigm-breaking) machine.