Human beings are wired to be more attracted to negative news than positive. This well-known tendency, termed negativity bias, is our propensity to not only register negative stimuli more readily but also to dwell on these events. The financial media is well aware of this psychological trait and strategically employs it to drive up viewer consumption.
This deep-rooted human has evolutionary roots, programmed into us for survival. The ability to swiftly detect potential threats has been crucial throughout history, ensuring our attention is captured and prompting us to confront the uneasy feelings associated with potential dangers.
With financial markets, this negativity bias gets reinforced when big corrections occur such as the Great Financial Crisis of 2008 or the short lived COVID lockdown panic in March of 2020. These events are memorable, they are statistically rare. Since 1900, there have been 16 market crashes illustrated by Kiplinger.
The psychology here is important to know because negativity bias creates more of an emotional response to investors. Controlling this knee jerk reaction about what could happen next is paramount to a long-term financial plan.
Dalbar, a financial services market research firm, conducted a study over the last 30 years of the average stock investor return vs the S&P 500.
Over each period analyzed, the average stock investor underperformed the market by a large gap. We believe the main reason for this is due to our human wiring of biases that try to protect us. The media plays on this to drive viewership but ultimately at the cost of investors. Being mindful of these biases can empower you to stay committed to your investment strategy, allowing you to navigate through surrounding noise with resilience.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.
