Reasons For ‘Aurophobia’

A slightly different and brief Best of the Web for today, courtesy of Ronald Stoeferle and Mark J. Valek who produced the fantastic ‘In Gold We Trust Report‘.

Very often on this site we are rude about the ‘gold bears’, this is because we are frustrated that they fail to understand (or choose to ignore) the reasons for gold investment. They are particularly against it when the gold price is behaving as it currently is.

For many gold commentators much of the reason behind why so many institutions and those running them fail to understand the importance of investing in gold bullion is down to one of many conspiracy ideas. However, the following article, taken from the previously mentioned report, shines a slightly different perspective on this issue, namely a psychologist’s one.

I personally feel that the last two phenomena are the most apt for today’s current gold bear mindset.

It appears as though there are only two camps: people who love gold (a.k.a. ‘gold bugs’) or people who hate it. Between those two extremes there appear to be very few shades of gray, and people are only very slowly moving from one camp to the other. It appears as though there existed – especially in the financial sector – an ‘aurophobia’. In our opinion there are a number of phenomena of behavioral psychology (behavioral economics) that explain the extreme emotions attached to gold.

- Mental accounting: People always categorize financial transactions in terms of ‘mental accounts’ and evaluate them differently. Interest income is for instance booked in different accounts than price gains. Dividends are therefore regarded as a permanent addition to income, while capital gains are not booked as permanent, even though both have the exact same financial utility. That also explains why the phrase ‘gold pays no interest’ appears to be such a central counter-argument to owning gold.

- Normalcy bias: This describes the mental state of distorted perception people enter when facing a disaster.

- Cognitive dissonance: it emerges if one’s stable and positive conception of oneself is endangered, if someone receives information that makes him look stupid, immoral or irrational. This appears to be the reason for the fact that the first ever purchase of gold costs many people an enormous mental effort.

- Availability heuristic and selective perception of information: Human beings tend to overestimate the importance of events of the recent past relative to events that have happened a long time ago. The recent past is therefore extrapolated into the future.