When words become wisdom
Mitchell Barr, Client Associate
This year will see the largest stock market crash in history. Donald Trump and his campaign colluded with the Russians to influence the presidential election. A nuclear war with North Korea is on the horizon. These current concerns for many investors do not yet have clear answers, and despite the lack of clarity, you probably formed an opinion about them as you skimmed over the words. You didn’t have to consciously make an effort to form the opinion, either. Your brain just digested the statements and used relevant information in your memory to make a judgement.
A stock market crash, a political scandal, and a war are all events that would have a dramatic impact on investment decisions if they were to come to fruition, which is why they receive so much media coverage. Everyone has different ways of obtaining information. Some people are voracious readers. Others prefer to watch the news. The medium is not important, but the quality of the content is. You may do extensive research on current events, but many others will not. We read one story from one publication or maybe just a snippet of another article. Most likely, the small bits of information you gathered from that one story are what your brain was drawing on to influence your viewpoint.
Subconsciously you just used a few lines of information to form a judgement about a critically important topic. This shortcut can lead to some big mistakes. How reputable was the source that produced the story? Are there other dimensions to the story that you are not considering? These are the kinds of questions that can only be answered with thoughtful consideration. However, our brain is working against us in this regard. The brain is lazy and the default mechanism for making judgements is to retrieve the information that is most readily available in memory1. This shortcut is known as the availability heuristic and can be destructive to thoughtful decision making about investments and political issues alike. Laziness also drives us to confirm what we already believe instead of seeking a counterpoint because confirmation takes less mental strain. Therefore, fragments of articles and one-sided dialogue often form most of our opinions.
The mechanics of how we form judgments is important to know as an investor, but it’s also critical to the recent rise of fake news. The stories are often appealing to the uninformed, one-sided nature of our psyches. If you already believe that the Trump campaign colluded with the Russians, you are more susceptible to retweet a story that confirms your conclusion, even if the source’s credibility is questionable. You can start to see why controlling the media and generating propaganda are core drivers of many authoritarian regimes. In this country freedom of speech is pertinent to keeping the public adequately informed. It is our responsibility as citizens to sift through the opinions of others and fact-find to form our own judgments. Our brains will object to the considerable effort that’s required, but it’s the only way we can find the truth.
- Tversky, A., & Kahneman, D. (1973). Availability: A heuristic for judging frequency and probability. Cognitive psychology, 5(2), 207-232.
Mitch writes the popular blog, The Money Monkey, where he focuses on common mental mistakes made by investors, how to avoid being your own worst financial enemy, and thinking about investing in new ways.