Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Overview of Behavioral Finance Concepts

Concepts of behavioral finance are important in understanding how the stock market actually works, how investors actually view their returns, and how to calibrate our reasoning so our biases do not undermine our investing success. I think it also particularly useful for understanding how Congress organizes its activities. This chapter has a brief overview of behavioral finance concepts, followed by how Congress uses these concepts to consolidate its power. We calculate rationally with our rational brain, but we also calculate with an emotional brain. While theories like MPT assume that we are always rational, we clearly are not. Behavioral finance makes explicit the flaws in our reasoning, which typically divide into two kinds of flaws—faulty logic or calculation and the emotional override of logic. Like traditional finance academics, as a nation, or certainly in the dominant media, we embrace a myth of a rational Congress stately sorting out the rational answers for guiding our country. The Senate, for example, likes to think of itself as the world's greatest deliberative body. In reality, neither investors, voters, nor Congress are rational in their approach to our problems. This chapter explores how Congress exploits voter irrationality to stay in power.