Image credit: Joost Ammann, “The Printing Shop,” ca. 1568, Wikipedia Creative Commons
By Jason Zweig
So far as I can tell, I was the first journalist to highlight the work of cognitive psychologist Paul Andreassen, whose innovative experiments in the late 1980s had shown that paying close attention to financial news can lead investors to trade too much and to earn lower returns than those who tune out the news.
It can’t be coincidence that online brokerage sites have prominently featured news feeds since the 1990s. The faster the news streams in and the closer the attention you pay to it, the more likely you are to trade on it more often — certainly profiting the online brokerage, but probably making yourself poorer.
Financial journalism is in the change business: focusing on whatever has just changed, and focusing most intently on whatever has just changed the most and the fastest. If you are a trader, change is just about the only thing that matters: Your results come from properly anticipating short-term change. But if you are an investor, change is likely to matter very little: Your results should come not from anticipating changes in the financial markets, but from avoiding changes in your own plan.
As a result, being an intelligent consumer of financial news is harder than it sounds. You must remain well-informed, but you must also resist the temptation to respond to every twitch and tic the markets make. That temptation can become overpowering during market crashes, when you will feel you have no control over the chaos and almost any noise in the data will feel like a “trend.”
The more closely you focus on the short-term movements of the market, the more they will seem to fluctuate and the more convinced you will become that you can predict what will happen next. If you stare constantly at a moving object, it will appear to bounce around even more than it actually is. As recently as the 1970s, most investors could observe how stock prices had changed only once a day — on the evening network TV news or in the following day’s newspaper. Today, the Internet and social media enable us to observe the financial markets in continuous motion, with prices changing hundreds of times a minute. That almost certainly explains why so many investors believe that the stock market has become more volatile — even though stock prices have been fluctuating less severely in the past few years than they have done historically.
It takes as few as two or three repetitions of a stimulus for the human brain to form an expectation that a predictable streak has developed, and dopamine neurons situated deep in the brain above the base of the spinal cord calculate a kind of moving average of past outcomes, placing most of the weight on the past five to eight results and nearly all of that on the most recent three or four. Decades ago, when news arrived more slowly, that meant investors were focused on the past five to eight trading days — a period that spanned nearly two weeks. Today, as news arrives instantaneously, anyone following it closely will end up fixating on whatever has happened in the past few seconds.
And the financial media’s habit of describing the stock market as if it were a living thing plays with the prediction circuits in the human brain. Seemingly slight changes in how reporters describe a rise or fall in the market can make a big difference in investors’ expectations. When investors looking at a rising price chart are told that an investment “climbed” today, they are about 10% more likely to predict that it will go up tomorrow than people who are told that it “increased” by an identical amount. Conversely, someone who sees that a stock “dove” is almost 20% more inclined to predict it will drop tomorrow than somebody who is informed that its price “decreased” by the same amount. That’s because words like “climbed” and “dove” imply that the market is alive — that it knows what it is doing, that it will keep doing it, and that its future course is therefore predictable.
Furthermore, the tendency of Twitter and Facebook to aggregate the views of like-minded people can create emotional flash-mobs among investors, as those with similar opinions and shared emotions whip each other into a frenzy of positive or negative feeling. Even a critical mass of descriptive language about the mood of traders appears to be enough to move stock prices in the short run.
Under these circumstances, the challenge for all investors is to consume the news without being consumed by it. Probably the single most important step you can take is to filter it wisely, taking in the news through intermediaries whose judgment you can trust.
A few resources that might help:
For further reading:
Benjamin Graham, The Intelligent Investor
Jason Zweig, The Devil’s Financial Dictionary
Jason Zweig, Your Money and Your Brain
Jason Zweig, The Little Book of Safe Money