I recently had an interesting discussion with one of my colleagues regarding Feng Shui. She is a believer. She told me a story about a business located near Golden Gate Park in San Francisco. For years, businesses located on the spot failed one after the other, until one business owner invited a Feng Shui master to advise him. The master told the business owner that for the business to succeed, he must paint the walls of establishment a deep green. The business owner followed the advice and sure enough the business thrived in the same spot for the next 20 years.
When the owner finally retired, a new business went into the same location. The new owners repainted the walls a different color, and ever since then no business survived in that location for more than a few months. My colleague took the story as proof positive that Feng Shui works... I took the story as proof positive that people will believe anything.
It's not that I am saying that Feng Shui doesn't work, although I certainly don't believe that it does. What I am saying is that there is a serious problem with people drawing far reaching conclusions from anecdotal evidence or from urban myth and using those conclusions for making financial decisions. In this specific case the story was about Feng Shui, but it could just as easily have been about astrology, numerology or about financial tips from a semi-respectable business guru.
In addition, I have a problem in principal with people that are willing to believe that something like the color of their walls is a decisive factor in the success or failure of a business venture. After all, if all it takes to succeed in business is the right coat of paint, why work hard? Why come up with a business plan? Why hire the best employees? Why advertise or focus on customer service? All you need to do is get a brush and three gallons of paint, and voila, problem solved.
This line of thinking extends to personal finance. People invest their hard earned money based upon unproven theories, hot tips and wild speculation. Think I am wrong? Consider "technical stock analysts" - there is not a shred of scientific evidence to show that there is any real basis to this investment strategy, yet there are hoards of people that make buying and selling decisions based on it. Trusting in such fiction gives some people a sense of control in what is essentially a chaotic and unpredictable environment. Personally, I'll take those boring index funds, that have been repeatedly shown to beat a large majority of actively traded funds.