People who graduated from the University of Texas at Austin in the early 1990s all have a variation of the same story: they know someone or they were that someone who quit a job at Dell Computer in pursuit of allegedly greener pastures. In the early part of the 1990s, a job at Dell was seen as easy-to-get, and gave off the impression of an inability to secure better employment in Dallas, Houston, or beyond.
Readers of course know the punch line, or end result. Around 1996, Dell shares went on the mother of all runs. Memory says six splits. The company that so many left, the company that for all-too-many represented the proverbial “safety school” in the job sense, eventually made a lot of rather young people rather rich rather fast. Austin, TX itself is littered with early retirees who achieved that designation all because inertia, a lack of creativity, a sense of undiscovered greatness at Dell HQ or all three caused them to stay at a company that so many “successfully” and eagerly departed.
Notable about Dell is that while some no doubt stay awake at night to this day marveling at what would have been had they just stayed put, others no doubt sold shares they owned in “Amazon.org” back in the late 1990s and early 2000s in favor of General Electric. That is so because in the late ‘90s and early 2000s GE was the world’s most valuable and revered company. Away from GE, Enron for instance had the smartest employees, Tyco was the next GE, and AOL was expected to define internet connectivity now and seemingly forever. You wanna bet that more than a few investors cashed out Amazon and – yes - Apple shares in favor of those once impeccable blue chips?
These odd and/or mistaken - only in retrospect – moves have come to mind a lot in recent weeks as more than a few have celebrated the thinking of the late economist Daniel Kahneman. His alleged discovery that humans don’t always act rationally or in their self interest gave the impression of not much of a discovery. Of course individuals don’t always act rationally or in self-interested fashion. Markets themselves teach us this all the time. Again, more than a few people surely cashed out of Apple and Amazon in the late 90s and early 2000s for GE, Enron, Yahoo, Lucent, and countless other afterthoughts. If everyone were rational there would be no markets.
Seemingly missed by those promoting the notion that individuals can be irrational is that in order for them to act on it, someone must match their irrationality with rational decisions. Yet even there, there’s no way of knowing which side of the trade is rational. Think about it. When the 20th century dawned, Tyco was once again seen as the next GE. As for Apple and Amazon, the former was limping out of near bankruptcy while the latter was seen as a bit of a joke.
Notable about Amazon is that its shares routinely corrected to reflect extraordinary uncertainty about the company’s future. People irrationally sold no doubt, and buyers matched their sales, but as evidenced by ongoing liquidity in Amazon shares, there was all sorts of seemingly irrational behavior for many years among those in the marketplace moving in and out of ownership of a company that no one was quite sure about. In my case, while at Goldman Sachs I would occasionally take a call from a Pakistani investor who would buy and sell 10,000 Amazon share blocks with great regularity. Did he ultimately hold on? Just think if he did, or didn’t.
Which is the point. Naturally people are irrational, rational, and somewhere in between, and naturally people sometimes realize gains when they shouldn't and don't take losses when they should. This is just markets, but there’s no way of knowing the good or bad of decisions until much later in the future. Kahneman didn’t discover irrationality or lack of it, because if he had he would have been a billionaire in addition to a Nobel laureate.
What he discovered is that markets are defined by infinite decisions made every millisecond. Thank goodness for them, and even better, thank goodness for the crucial information gained from the relentless collision of different opinions. Indeed, while individuals may occasionally be irrational in the hindsight sense, the collective wisdom of individuals that we call markets is genius personified.
