Mr. Speculator says that the market is going to go down. It goes up 10%, then down 5%. “Told you so.”
Mr. Speculator lists 10 “must own” stocks. One goes up 50%. “Told you so.”
He is a sales man. He makes selective use of the truth. Being wrong doesn’t bother him as much as others thinking he might be wrong in future. He works to protect the latter. And because those he needs to convince are not robots, it can work. At least for long enough that the speculator has either made enough money or forged a fallback career path.
Mr. Speculator is almost surely not directly accountable for the outcomes. He can tell a story. You might see him as a sales guy at an investment bank. Or maybe you think of an amateur day-trader or someone in the lower echelons of the finance hierarchy. Serious professional investors can see through him. They learn to ignore him. There is no mechanism or incentive to expose him as a charlatan.
The speculator’s option, much like the more conventional puts and calls, captures the fact that the speculator can derive value from the comments that work and ignore (at no additional cost) those that don’t. Usually the holder of an option has to pay for it but speculators can actually get paid to be in this position.
No one should put this guy in charge of money. But it’s not as simple as finding him and tying his hands behind his back so he can’t pick up the phone or punch commands into Bloomberg.
Mr. Speculator exists not as an individual but as a part of the market psyche. Everyone exhibits his traits to some extent. The point is that one first needs to be aware of his existence before working to eliminate his destructive forces, first at the personal level, then within the investment process.
To that end, I would recommend studying (not just reading) books and articles by Daniel Kahneman, Nassim Taleb, Dan Ariely and Michael Mauboussin. Then watch out for Mr. Speculator and make sure he is never in the money.