The 5-Laws Of Human Stupidity & How To Be A “Non-Stupid” Investor
This past weekend, I was digging through some old articles and ran across one that needed to be readdressed on“human stupidity” as it relates to investing.
The background was a study done in 1976 by a professor of economic history at the University of California, Berkeley. Carol M. Cipolla published an essay outlining the fundamental laws of a force he perceived as humanity’s greatest existential threat: Stupidity.
Stupid people, according to Cipolla, share several identifying traits:
- they are abundant,
- they are irrational, and;
- they cause problems for others without apparent benefit to themselves
The result is that “stupidity” lowers society’s total well-being and there are no defenses against stupidity. According to Cipolla:
“The only way a society can avoid being crushed by the burden of its idiots is if the non-stupid work even harder to offset the losses of their stupid brethren.”
Of course, if we look at the world around us today, watch or read the diatribe produced by financial and news outlets, or pay attention to politics, it certainly seems that since the advent of the “smartphone” and “social media”the percentage of “stupidity” has clearly risen. (Either that, or we are just more aware of the massive amount of “stupidity” around us. Thankfully, it seems to be contained primarily in Florida.)
We can’t really do much about the seemingly rising level of “general stupidity,” however, we can apply Cipolla’s five basic laws of human stupidity to investing and the mistakes investors repeatedly make over time.
Law 1: Always and inevitably everyone underestimates the number of stupid individuals in circulation.
“No matter how many idiots you suspect yourself surrounded by you are invariably low-balling the total.” – Cipolla
In investing, the problem of investor “stupidity” is compounded by a variety of biased assumptions that are made. Individuals assume that when the media publishes something, the superficial factors like the commentator’s job, education level, or other traits suggest they can’t possibly be stupid. We, therefore, attach credibility to their opinion as long as it confirms our own.
This is called “confirmation bias.”