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Is Hatred-Based Investment Rational? June 9, 2010

Scott Adams (of Dilbert fame) has an essay in the Wall Street Journal about investing in companies you hate. His reasoning is that “the company is so powerful it can make you balance your wallet on your nose while you beg for their product.”

Is hatred-based investing rational? Making the usual assumptions (people are rational utility maximizers, etc), and assuming that you gain some utility from seeing a company you hate losing money, and that you lose a commensurate amount of utility from seeing that company make money, then it’s absolutely rational under certain circumstances. Mainly, it would serve as a hedge strategy against emotional distress. In Adams’ example, he’s talking about BP and their recent oil spill. Owning BP provides a hedge against the disutility of watching BP potentially recover and begin to profit again – you get paid an amount that should offset some of your lost utility. Conversely, if you lose money, at least your money loss is offset by a gain in utility.

Obviously, it’s not something to do with all of your money. The optimal hedge ratio will also vary consumer-by-consumer.