Tuesday, April 05, 2005

Hoping to lose 

Joseph Schmoe owns stock in a company. He also has options to buy stock in the same company at a given price, say $20. The price of the stock today is less than $20, say $15. Obviously, those options to buy stock at $20 aren't too useful today, but Mr. Schmoe's lotto dreams have long hinged on the idea of the company's stock soaring to, oh, say $100, and then cashing in those $20 shares and making a quick $80 on each. Unfortunately, after hearing a lot of bad news, Mr. Schmoe has decided the stock is going to only go down from here, not up.

What should he do?

Sell his stock, of course! Make as much money on the shares he owns as he can. And the options? Well, they're basically worthless today, so he does nothing.

Now that he has sold his shares, how does Mr. Schmoe feel each morning when he checks the stock price in the paper? If the price goes down, does he smile at his own wisdom, pump his fist and yell "Yes!"? If the price goes up, does he grumble in embarrassment, feeling like a fool for having sold?

Or does he let go of his emotional investment in the shares he has already cashed in, and focus on the options he still holds, cheering each uptick in price?

I think it is easy to make the mistake of rooting against your own best interests in order to reassure yourself that past decisions were correct. It is easy to imagine Mr. Schmoe making that mistake.

Sometimes the "rooting against your own best interests" can even drift into "acting against your own best interests." Here I'm thinking about all those who decided we shouldn't be in Iraq fighting to free their people, or at least that George Bush shouldn't be the one doing it. When they make that decision, they are basically selling their stock in the idea of freeing Iraq. But they forget, as American citizens (or dare I say, as "World Citizens?"), they still hold options in Iraq's future, and America's role in it.

I think in the old days people were somehow more sensitive to this and managed to really support their troops -- and not just "support the troops" but actually mean it. Not anymore. Too many would rather see their country sink into failure, dragging themselves, their children, family and friends down with it, just to prove they were right.

I'm curious what other scenarios map to a similar psychological choice, and how we're doing in those scenarios these days?

If you really, really liked this -- or even really, really hated it -- there's lots more: