12 Thoughts About Investing and the Economy

By Markets Fool.com

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Here's some stuff I've learned recently.

Optimism, according to psychologist Tali Sharot, is basically an efficient form of ignorance."It protects us from accurately perceiving the pain and difficulties the future undoubtedly holds, and it may defend us from viewing our options in life as somewhat limited. As a result, stress and anxiety are reduced, physical and mental health are improved, and the motivation to act and be productive is enhanced," she writes.

Daniel Kahneman's book Thinking, Fast and Slow, begins: "The premise of this book is that it is easier to recognize other people's mistakes than your own." I was in New York a few months ago, and a car honked at a stoplight. A nearby construction worker turned around and yelled, "Be quiet!" He then resumed using his jackhammer.Criticizing less and self-reflecting more is important, especially in an emotional field such as investing.

Warren Buffett recently commented on how to improve in life. "The best way you can improve yourself is to learn to communicate better," he said. "Your results in life will be magnified if you can communicate them better. The only diploma I hang in my office is the communications diploma I got from Dale Carnegie in 1952. ... Without good communication skills you won't be able to convince people to follow you even though you see over the mountain and they don't."

Nobody rang a bell when the economy recovered. It happened slowly over six years. Since it developed slowly, few people noticed. There wasn't a moment when the bears who predicted doom from 2010 to 2013 were proven wrong; they just kind of faded into obscurity as people lost interest. People are so caught up in irrelevant short-term news that they miss the important long-term trends. That's unfortunate.

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The population of Americans age 30 to 44-- who buy lots of homes and cars, and start lots of new businesses -- declined by 4.6 million from 1999 to 2010. That cohort is now growing again, and is expected to rise by 2.3 million over the next five years. I think this is the most overlooked tailwind the economy has right now.

The CEO of Charles Shaw wine (two-buck Chuck) was once asked how he can sell wine for less than the cost of bottled water. "They're overcharging for the water. Don't you get it?" he said. There is a business model based around fooling people into overpayingfor a product, and another based around shocking people with reasonable prices. Both can be successful.

2012 was one of the biggest years for economic pessimism. 2013 was the best year for stocks since 1997. 2014 was the best year for jobs since 1999. It works this way all the time.

Economist Russ Roberts recently told a story about a paper showing that regions where the LoJack anti-car theft system is popular have low rates of car theft, because thieves don't want to take the risk of stealing a car that cops can track. A separate paper showed regions where guns are popular have lower crime rates, because criminals don't want to take the risk of mugging someone who is armed. The author of the LoJack study fiercely disagrees with the gun study, even though it's based on the same theory. "This made me realize how people view data through a lens of their own biases," Roberts said.

I don't think anyone can be unemotional about money. It's like saying you'll be unemotional about your kids. If you kid gets arrested, you'll get emotional. And if you lose half your money in the stock market, you'll be emotional. That doesn't mean you'll act on those emotions, but no one should pretend like he or she has total control over emotions when the market is going wild. It's biology.

Some of the biggest news stories of 2014 involved commercial plane crashes.But 2014 actually had the fewest number of crashes since the commercial aviation industry began in 1949. This is a good example of the "attentional bias," in which you falsely believe events are happening more frequently just because you're paying more attention to them.

The Congressional Budget Office's 2003 prediction of government debt in the year 2013 was off by $10 trillion. But when a new 10-year forecast came out this week, people took it as gospel. "Humans don't want accuracy; they want reassurance," Jason Zweig recently wrote. Economist Kenneth Arrow was a weather forecaster during World War II. He told his superiors that the forecast models weren't accurate. They responded: "The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes." People laugh at the story, but I think most of us fall for the same flaw.

According to The Economist, "A battery-powered car recharged with electricity generated by coal-fired power stations ... is likely to cause more than three times as many deaths from pollution as a conventional petrol-driven vehicle." The shock of this is a great example of most people's inability to think past the first layer of a problem. It also shows why so many trends that look promising end up disappointing when the full story is unraveled.

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The article 12 Thoughts About Investing and the Economy originally appeared on Fool.com.

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.