Mass Public Once Again Proves Itself Completely Unable to Judge Investments Properly

Should you invest in copper? I have no idea. But one thing I can tell you is that all else being equal, if the price of copper has surged in the past month that means it’s a worse investment today than it was a month ago. The idea is to buy low and sell high. But as the poll results above from Jed Kolko at Trulia show, this is not how regular people think. Houses and stocks are much more expensive today than they were the last time this survey was conducted, and so now people are more enthusiastic about houses and stocks as investment vehicles. Gold has done down, so people have become less enthusiastic.

And this right here more than any big picture policy framework is why you get bubbles. The typical middle class investor suffers from an egregious herd mentality problem and acts like an idiot. The higher prices go, the more he wants to buy! As Robert Shiller likes to point out, people’s thinking is dominated by narratives and stories. When prices have risen in the recent past, we hear a lot of stories of people who make money. That makes us more inclined to buy in the near future, when in fact it should make us less inclined.

This is a particularly egregious problem in the market for residential real estate since unlike the market for copper futures, it’s actually dominated by middle class purchasers. Entire nationwide bubbles in residential land prices turn out to be quite rare (which is why naive models said they were impossible) but regional bubbles are quite common, and in some ways I think the greater nationalization of the media is going to make them more likely. The old cliché about monetary policy is that the central bank’s job is to take away the punch bowl just as the party is getting started. In the modern world, that more likely applies to mortgage industry regulation than to monetary policy. As prices rise, more and more people will want to get into the market and banks will want to devise more and more aggressive loan products to put them there. The pressure—from banks, from homebuilders, and from would-be homebuyers—to encourage “innovation” will be intense. But policy actually ought to lean in the other direction, knowing that people make this mistake even just a few years after a massive price decline.