Are you inclined to have a more positive view of the current state of the markets? If so, according to some researchers, you may be an exception to the norm. They believe that humans are naturally biased to be negative and this has evolved from a critical survival trait. Consider that in prehistoric times, man faced a world filled with predators and danger. The negativity bias in our thinking was adaptive and increased the probability that we would remain part of the gene pool.
As such, it’s not a surprise that the current bull market has been called the “most unloved bull market in history”. The prolonged positive market period has been met with caution and defensive sentiment by many. This, despite recent record-breaking performance by the U.S. indices, solid performance by the Canadian markets since January 2016 (when the price of oil rebounded from its lows) and stronger economic data from both nations.
The field of behavioural economics helps to explain why our perceptions may sometimes be skewed by negative bias, and how emotional factors can affect economic decision making. Pioneers in this area, such as Nobel Prize winner Daniel Kahneman, have determined that individuals make irrational decisions because their fast-thinking capabilities, often driven by emotion, can overtake a slower, more analytical mode in which reason dominates. A simple math problem illustrates how fast thinking works: If a baseball bat and ball cost a total of $1.10, and the bat costs $1.00 more than the ball, how much does the ball cost? Intuition and fast thinking lead most people to answer $0.10, which is incorrect.1 In investing, fast thinking can cause poor decision making. For example, investors may sell low or buy high due to pressure or anchor to a particular price target when it may not be warranted.
Being aware of the influence of emotions and bias on investing can help to better regulate them. This may include sticking to an investment plan during volatile times or avoiding the urge to react to social and media pressure. We can also integrate different techniques into our investing programs, such as regularly rebalancing portfolios, using managed products to put buy/sell decisions in the hands of experts or incorporating systematic investing programs to avoid market timing.
Most important, we are here to help remove the impact of emotions and bias from investing and provide support as you chart the course for longer-term success. While we may need a negative focus to survive, there are merits to having a positive one to thrive.
- Answer: $0.05 ball plus $1.05 bat equals $1.10.