Excellent thought piece, Tom and Jason.
There's one effect of the Cult of Emotion that has been particularly damaging to investors, especially the largest (and supposedly most sophisticated) institutional investors: that's the growth of high-cost investing in private equity, private real estate, and hedge funds. The attraction of illiquid investments is that they're Level 3 assets whose values cannot be measured accurately on the basis of frequent transactions in liquid markets, so instead they are measured inaccurately by managers in a way that systematically understates their volatility, their correlations with other assets, and their other risks. In effect, investors have paid an enormous cost--in fees, in underperformance, and in hidden risks--for the legal right to understate the risks to which they've exposed themselves.
The real shame is that the cost of this accuracy-avoiding behavior is borne not by the investment decision-makers (pension fund managers, endowment managers, foundation managers) but by those people who are supposed to be the beneficiaries of the investment decisions: retirees, financial aid recipients, people who might otherwise have benefited from foundation grants, etc. (not to mention taxpayers who must make up the difference).