If you are a regular reader of this column, you know that I put forth that the financial press can be the most destructive force to most investors, as I argue that the media’s objective is not to provide us with necessarily accurate reporting and valuable advice. In its place, their primary mission is to serve the agendas of their advertisers. That is why the financial press regularly reaches into their bag of tricks to employ their weapons of mass manipulation with the goal of attracting viewers. The higher ups at the media companies understand and cleverly take advantage of the fact that calamity and catastrophe attract eyeballs. The sad truth is they are spot on, as most of us cannot get enough of the bad news. We are addicted to it, much as we are hooked on rubbernecking at a car accident.
Like clockwork, it is only a matter of time before the talking heads begin hyperventilating about the inevitable collapse of the stock market and the impending recession/depression. They know this kind of rhetoric catches eyeballs and subsequently, sells advertising space. It then becomes a vicious cycle, as folks begin to act on the repetitive Armageddon hype. Then, more worrywarts, naysayers and the pouting pundits of pessimism come out in droves, revealing their same-o-lame-o gloom and doom story.
This herd mentality begs the questions, why do so many of us believe in the doom and gloom scenarios? Researchers from the relatively new field of behavioral finance refer to this situation as “availability bias,” which means that we give more weight to information that is “top-of-mind.” Three well-known bean counters (economists) – William N. Goetzmann, Dasol Kim, and Robert J. Shiller – argue that the prevalence of attention in financial media to adverse market outcomes directly correlates with investor “crash” beliefs. Goetzmann, Kim and Shiller point to their survey, Crash Belief, to support their hypothesis. For example, when asked about the probability of a crash similar to that on Black Tuesday (Oct. 29, 1929) or Black Monday (Oct. 19, 1987) occurring in the next six months, the median response was a probability of 10 percent. Historical data from 1929 to 1988, however, indicate that the likelihood of such a crash is only 1.7 percent.
Another example is that investors are fretting about the possibility of a massive stock-market crash, on par with 1987’s Black Monday. The statistical odds that such an event will occur within the next six months are about 1-in-60, according to historical data from 1929 to 1988. However, when surveys between 1989 and 2015 asked investors to estimate the odds of such a crash in the coming months, the typical response was 1-in-10. The results are consistent with investors exhibiting “availability bias,” as those investors assign greater weight to “top-of-mind” information.
To underscore their position further, the authors state that since Sept. 11, 2001, fewer than 100 people have died in jihadist attacks in the United States, according to the New America Foundation, a think tank. That is about the same number of deaths from motor-vehicle accidents every day. Nevertheless, terrorism feels menacing and personal in a way that even a six-car-pileup does not, and so it receives disproportionate coverage.
Is it really the media’s fault that many of us are so negative about the economy in general and the stock market in particular? Let us not be so fast with the finger pointing, Eager Beavers! Wait, is this columnist defending the press? Perhaps, but I am just trying to present a balanced argument. I suggest this blame game scenario is akin to the chicken or the egg dilemma. Stated differently, is it the media’s mistake for continuously reporting negative news, or should we, the audience, be the wrongdoer for watching, listening, reading and more importantly, acting on the real or potential train wrecks?
Maybe the press should not be the scapegoat, as it is said, “a poor workman blames his tools.” In other words, do not blame the crystal ball pundits, when the blame should arguably sit squarely on our shoulders. We must fight our instinct to follow the herd and/or fall prey to the voices of doom. I encourage you – nope, I beg you – not to do what comes naturally to you: making decisions based on fear and greed, as that movie generally does not end well. The behavioral demons (fear and greed) remain a remarkably powerful force that often wreaks havoc in our portfolios. The primary culprit for the demise of many investment portfolios is the inability to numb our emotions when making important financial decisions. Of course, none of us would dare admit that we react irrationally to fear and greed, or would we? My therapist repeatedly tells me that recognizing that I have a problem is the first step in the healing process. Hmmm...a thought-provoking notion...
Harry Pappas Jr., CFP®
Certified Estate and Trust Specialist™
Certified Divorce Financial Analyst®
Pappas Wealth Management Group of Wells Fargo Advisors
818 A1A N, Ste. 200
Ponte Vedra, Florida 32082
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