Why this site? Or why is it called Selective Rationality?

I started this site because I wanted somewhere I could talk about stocks – mostly in Japan and Asia – and related issues in a less constrained fashion than I can during my day job. I am a full time sell side analyst and have been for nearly two decades. There was a time when being a sell side analyst in Japan was all about going out there and discovering new stories and ideas for investors.

That sense of exploration and excitement has been squeezed out of the industry and it is now largely maintenance research conducted by analysts walled off in their own silos. (Heads of research may argue differently, but then they would, wouldn’t they?)  Given the lack of fresh and interesting content out there, I’m not surprised many clients struggle to appreciate the value of sell side research. So I want a little more freedom to express myself and that’s why I plan to remain anonymous, for now.

As for “selective rationality”, this reflects my view that that people seldom behave in ways that are either totally rational or irrational in a classical economic sense, but instead choose (usually subconsciously) points on a continuum of rationality. Put more succinctly, people are mostly sensible but often do stupid things that are hard to explain.

The name of the site is also a reference to the work of Harvey Leibenstein who, as part of his theory of “X-efficiency” argued (and I’m paraphrasing here) that typical behaviour is not necessarily rational. “Rationality does not imply perpetual and tenacious tight calculation in one’s decisionmaking (or other) behavior” as he put it. Too right.

As far as I know Leibenstein was not much concerned with the financial markets, but my view is that market participants are also selectively rational. They are rational at certain critical points – perhaps during a monthly portfolio review – but at other times may display behaviour that is hard to reconcile with the assumption that market participants are dispassionate, thoughtful and rational individuals. Put another way, sometimes even professional and intelligent people just wing it and hope for the best.

Cognitive bias has become a well and truly mainstream field of study. What still amuses and scares me is that although most people are aware of cognitive bias, most seem to think it isn’t something that happens to them, but rather to other people. A very readable and well-researched treatment of this is “Mistakes Were Made (But Not by Me)” which can be found here. Presumably I am a victim of this just like my colleagues, but I too prefer not to think about that in day to day life – just as the book predicts!