In its relentless search for new ways to relieve taxpayers of their hard-earned cash, the government has decided to set up a new bureaucracy to educate investors. It will cost an impressive HK$50 million per year.
Oblivious to the failure of previous, cheaper schemes with the same objective, this new wheeze will cover all investment products. But what this scheme will most definitely not do is eradicate investor irrationality, a universal phenomenon.
It is doomed to failure in at least this respect because the entire experience of investment history demonstrates that irrationality or illogical investor behaviour is the norm. Only true believers in rational markets fail to acknowledge this.
The timing for this new government venture into the absurd could hardly be more appropriate as uncertainty looms in investment markets. Investors ponder whether the long-expected double dip in the global economy will really happen, as they agonise over whether burgeoning sovereign debt will propel the markets into a yet deeper mess.
All the while, what the economist John Maynard Keynes described as the ultimate barbarous relic soars to new highs. Keynes was talking about gold, a commodity that reliably gains value when investors scramble to find the least-worst resting place for their funds.
So the time has come to revisit the much discussed but not sufficiently appreciated subject of behavioural finance. Studying this subject gives clues and even some guidance as to why investors tend to be irrational, and shows how it is possible to profit from this irrationality.