Professor Richard Thaler won this year’s Nobel Prize for Economics, in part, for research confirming that we (humans) believe we are smarter and more rational than we actually are. Asked how he plans to spend the $1.1 million prize money, Thaler replied, “I will try to spend it as irrationally as possible.” [Should he call, please let him know I stand ready to help.]

Reading Thaler’s research raises issues relevant to investing. We may believe we have superior insight into the value of an asset or the wisdom of a strategy, and that this belief in our own insight – as opposed to subjecting the insight to a suitable gauntlet of tests – gives license to act and a means to profit. This encourages us to overweight our assessment of values and market plays, while discounting the reality that hundreds or thousands of other (humans) are looking at the same data at the same time and coming to similar conclusions.

When too much capital chases too few assets, it creates its own momentum. And this momentum of the institutional conscious can lead to overvaluing assets. So when we prophylactically ask whether any asset is priced above or below its intrinsic values, we should assume the icy logic and rationality of Dr. Spock and look to the math.

Click here for a longer post that applies this thinking to timberland investments.