Hedge Funds Betting on Hollywood Films?

Ask any shrink about dreaming. They'll use movies as a metaphor. Think about it. When dreaming, you have absolute control. You write the script, pick the actors, the plot twists; you're the director, cinematographer, editor. You're the studio, sell popcorn in the theater and the only one in the audience. It's all in your head. And when you wake up, you forget the ending.

Except you never really forget. The drama continues running in your subconscious all day. As with a computer, it's running in the background, a program hardwired in your brain's hard drive. Seriously, go ask those shrinks; they'll tell you that you keep acting out your dreams in daily life, forcing real people to fit into the script in your head.

But during the day, you act with fellow cast members in your dramatic life, in your job, socially, with family, manipulating them to fit your unconscious script playing out the soap opera forever running in your head. Quite a shift: At night you control the "movie," by day it controls you.

This universal phenomenon controls all of us. We're all trying to get everybody else to play by our rules. We resist their rules. We get angry when people deviate from our script.

My old days as a film/TV executive and later as a therapist dealing with all this human drama came rushing back last week when I heard that hedge funds were betting on Hollywood films!

Yikes! Now I'm certain the market's about to tank! Betting on films is dumber than gambling in Vegas. Years ago I was an executive with a TV network and later with a publicly held film-production company. Betting on blockbusters versus bombs is a huge crapshoot.

How quickly Wall Street forgets. They're rerunning the 1999 high-flying horror film. It's only six years since the market's peaked and we're still in negative territory. The market's not a good bet. So hedge funds are getting hard up for better-than-market returns and taking dumb risks chasing them. This time around Hollywood blockbusters are the new dreamland dot-coms.

These hedge fund managers even claim to have sophisticated computer models that can "see into the future" and pick blockbusters. Lot's of luck! Aside from the fact that Hollywood studios have been trying to do that for decades and still don't have a clue, my guess is that an X-box or Ouija board would pick better winners. But what's even scarier, big institutions are bankrolling these funds in their gambling, risking your retirement money on whatever "movie is running in their heads."

So on one hand, we have the average investor controlled by scripts they're not conscious of when sleeping and when sleepwalking through the day. And on the other hand, we also have hotshot hedge-fund managers also controlled by their own unconscious scripts, both chasing the same dream — bigger returns — that forces them to rationalize taking bigger and bigger risks.

We're all driven by these individual and collective movies in our heads that have rather predictable plot points and common character flaws. Indeed, investors and fund managers are like addicts who can't stop until the inevitable crisis, crash and collapse. Remember the irrational exuberance of 1995-99? The deflation in 2000-03?

Ask any behavioral-finance expert, the psychotherapists of the new investment psychology. Take, for example, Dr. John Nofsinger's "Investment Madness," a catalogue of our inner traits, biases and saboteurs. Our inner scripts are powerful, they drive us to success. And often sabotage our moment of glory.

Big Brother Is Watching You

But there's one very real, very big problem for America's 95 million investors. While investors sleepwalk all day, run by the movie in their heads, all the folks on Wall Street, every hedge-fund manager and every mutual fund manager, know the script of the movie running in the heads of the American investor.

And — get this — they are also using that knowledge about your inner scripts, applying sophisticated psychological technologies and packaging the message in clever advertising, all designed to manipulate you.

Here are some common character traits and plot patterns in the unconscious movies running you, and also secretly being used against you:

The Superhero: Most investors believe they can beat the market. We act like we know more than we do. Cable and print ads feed that illusion. So you trade too often, pay lots of commissions, take big risks, get bigger losses.

Smiley Faces: Financial ads focus on upbeat stories, cherry-picking data, hyping good news, hiding bad. They know we love smiley faces, hate bad news. Psychologists call it cognitive dissonance. We downplay new data that conflicts with the movie in our head.

Fatal Attraction: Investors fall in love with romantic comedies and stocks. Like a favorite uncle, we exaggerate virtues, ignore vices, hang on too long. Loyalty kills. Jackpot Winner: The Street knows investors treat winnings as free money, a time to celebrate, have fun. We win, relax, take bigger risks, give all of it back to the casino.

Macho-Macho Man: Nobody wants to admit mistakes. It's un-American to admit defeat, unmanly, you're not perfect, not as smart as you thought. So we don't sell losers.

The Comeback Kid: After a loss we'll take on extra risks to recover and break even. In our dreamland script, we are the hero, now an underdog, the comeback kid. But trying to prove we're not a loser often compounds our losses.

Thrill-Seekers: The recent bear market didn't kill irrational exuberance. Yes, investors have lost faith in the stock market. But they kept the thrill alive by shifting their addiction to blowing a housing bubble. Hedge-fund manager also never forgot the thrill of betting on the next big thing, dot-com IPOs or Hollywood blockbusters. Warning: Thrill-seeking is a bad strategy for your retirement portfolio.

To some degree, all these character traits are part of the movie in your head, the one operating just below the surface, running your life. Wall Street hotshots have them too. So does your mutual fund manager. And that hedge fund manager betting on the next Hollywood blockbuster. They also have a copy of your script, plus they hire the top behavioral-finance experts and the cleverest advertising geniuses, and they have billions to spend every year to manipulate the movies in your head.

And you think you can beat them? You're dreaming!

Copyright (c) 2006 MarketWatch, Inc.