Rewind back in time to 1944. The long drawn World War II was nearing its end. With massive forces of the Western Allies pushing from the West and Soviet armies closing in unrelentingly from the East, Hitler's defeat was a certainty. But would he accept the reality? No chance. He continued to delude himself with the idea that he could strike a counter-attack with his two reserve armies and win the war. Similar was the case with Japan around that time. It had lost terribly in the Pacific against the Americans. Yet it lived under the illusion that the enemy would not be able to invade its homeland. We obviously know what the end result was in both the cases.
What is the reason for this kind of irrational behaviour? A certain gentleman by the name of Mr Christopher Mahoney offers an insightful explanation. He opines that it is very difficult to accept defeat in a long war. The human mind refuses to accept the brutality of defeat and suffering. In its own defence, the mind tends to delude itself in an alternative reality.
But is this tendency only specific to wars? Certainly not! Take the eurozone crisis for instance. The actual crisis is much bigger than what most policymakers are willing to believe. They still think that through policy intervention, they can save the euro from disaster. The President of the European Central Bank (ECB) Mr Mario Draghi recently declared that he would do "whatever it takes" to save the euro. To point the truth, nothing that the ECB has done so far has solved the crisis any bit. There is no tangible rescue plan so far that is likely to lessen the Eurozone's woes. The fact of the matter is that the euro is an inherently flawed financial instrument. Secondly, the Eurozone economies afflicted by the sovereign debt crisis have little choice but to face the consequences of their past excesses. There is no quick pill to escape pain.
Forget the Eurozone. Even many investors behave in this irrational manner when faced with massive losses in their stock market investments. Of course, stock price volatility owing to prevailing market sentiments must be certainly ignored. But there is strong reluctance among investors in accepting investment mistakes and booking losses on stocks whose fundamentals have turned sour. Even after facing huge losses on them, they continue to hold on. The vain hope being that the stock price will reverse and they will recover their losses. This, they believe not because the fundamentals say so. But because the alternative reality is very difficult to accept.