LOS ANGELES (CBS.MW) -- "I do not know Farrell, but I do not like him," said James K. Glassman recently in his nationally syndicated Washington Post column.
How strange! Why would Glassman personally go after me? At first I was going to ignore Glassman's attack by being nice, even making excuses for him (like he really meant to say "I don't like Farrell's ideas.") But the more I thought about it I realized that his attack underscores an incredibly important message.
Glassman's behavior offers a fascinating and disturbing lesson for investors: About today's renewal of irrational exuberance and the extreme dangers inherent in the extreme optimism that's infecting American markets and culture.
In the column of mine that Glassman took issue with, I predicted a market crash this year coinciding with a domestic terrorist attack, probably during some high-profile political event like the Fourth of July, one of the political conventions or the presidential elections. But as you will see, events like market crashes and domestic terrorism must be downplayed or totally ignored in the minds of extreme optimists.
Glassman's political ideology is critical to understanding his investment ideology. Not only is Glassman a well-respected national columnist, he is also a fellow at the American Enterprise Institute (AEI), a conservative Washington think tank. AEI is an advocate for big business policies and has been referred to as "one of the leading architects of the Bush administration's foreign policy," which its critics say is the ultimate in extreme optimism.
Brilliant mind of 'optimism bias'
Glassman co-authored "Dow 36,000," which had the embarrassing misfortune of being published as the market peaked in late 1999, shortly before the publication of Robert Shiller's "Irrational Exuberance."
The message of my column was that in today's world too many people appear trapped in what behavioral finance experts now identify as "optimism bias," a dangerous self-sabotaging trait that can seriously undermine an investor's decision-making. Glassman reinforces my point.
After lumping me in with "fear-mongers ... stock touts and charlatans of all varieties" Glassman then feigns humility as he tells readers he's protecting them from the likes of me by giving investors "a context in which to judge proclamations ...which are all made with the extreme confidence that the rest of us mortals lack."
In his research Glassman missed my follow-up column offering concrete solutions to help investors prepare for the coming crash. But of course that is just one more example of the overall pattern on an individual controlled by an extreme form of optimism.
An optimism bias makes an investor discount (or completely deny) negatives and exaggerate the positives.
Glassman's optimism bias is so extreme that at the height of the bull market he was telling investors that stocks were actually "undervalued," recommending that they not bail out. Then in the depths of the crash he was still arguing that his Dow 36,000 prediction was "a good bet" even as the market continued down for many more months.
While Glassman may not like me, I could get along with him just fine. Two years ago I wrote a favorable review of his book, "The Secret Code of the Superior Investor: How To Be a Long-Term Winner in a Short-Term World." In fact, my opening line was: "Every now and then I run across a book I wish I had written."
Glassman is a brilliant writer. But he is also a textbook example of the extreme optimism bias infecting and misleading America today. His personal attacks on me for daring to connect the dots and raise the possibility of domestic terrorist attacks is a symptom of that bias. That scenario simply does not fit into his political ideology.
Optimism is one of the most admired traits in the American character; it's what makes us such a great nation. But extreme optimism can be extremely dangerous.
