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Statman sees a few other impulses at work. One is a habit of thinking that selects an event and uses it as the basis for understanding everything else. "We look at something and ask,
'What is this similar to?' Statman explains. In good times, this leads to the folly of "return chasing" -- expecting an investment, sports team or pickup line to be successful simply because it proved successful in the past. People usually do this kind of extrapolation from recent events. But Statman suspects many are using the more distant memory of 2008 because it feels closer. "I think that what's vivid in people's minds is not last year but 2008," he says. As a result, they respond to events as if it were September 2008 and Lehman Brothers were about to collapse all over again. In this case, Statman says it's not fear that's driving people but an error of reasoning. Last summer, for instance, a fight over raising the federal government's debt limit led Standard & Poor's to strip the United States of its top-flight AAA rating. The markets went wild. For the month of August, the Dow swung an average of nearly 2 percent every day. Harvey Rowen, chief investment officer at Starmont Asset Management in San Francisco, says clients called and wanted to cash everything out. "I'd tell them,
'You're going to take a loss,'" he says. "And they'd say,
'I don't care. I want out.'" One client called with a demand to sell all his investments. He wanted Starmont to use the cash to buy gold bars, silver bars and Swiss francs and then cart them to his house. "We managed to talk him out of it," Rowen says. Another habit that Statman sees at play is the confirmation bias. It's often used as a way to help explain the widening political divide in the U.S. between Democrats and Republicans. Say you believe that the federal government's debts will cause the U.S. to go the way of Greece. Instead of looking for information that challenges this view, you stick to news reports that confirm your opinions. "If you have evidence that goes against your beliefs, you dismiss it," he says. Statman says it seems some people are looking to confirm a "doom and gloom" view of the U.S. economy. Point out that the economy grew at a 3 percent rate in the last quarter of 2011 and they'll change the subject. Their view, he says, is: "This country is going down the tubes."
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