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Friday 3 April 2009

The Media, Fear and Stockmarket Manias

Breast Cancer

If I were to ask you at what age are women most at risk from breast cancer, what would you answer? Write down what you think. Or, at least remember carefully. We don’t trust our memories around here.

I’ll come back to that later.

Risk and the Eternal Apeman

Dan Gardner’s recent book, entitled ‘Risk’, is an entertaining investigation into the links between fear, human psychology and media projections. At the heart of the book are two propositions.

The first is that each of us contains multiple and separate decision making programs. The one we’re aware of is the careful, calculating and rational person weighing the risks in any situation. Hidden beneath the surface, though, is a more primitive creature reacting instinctively to perceptions of risk. Although we don’t realise it, most of our behaviour is controlled by this inner apeman.

Behind this is brain physiology. MacLean (1990) identifies three separate systems involved in cognitive functions. Basic survival functions evolved first, were followed by adaptations for social behaviour and finally overlaid with higher cognitive capabilities. Interactions between these systems can cause odd and inappropriate reactions in modern environments for which they weren’t designed.

We’re asking the apeman to navigate across Manhattan. In rush hour. Blindfold.

Manipulative Media

Secondly, Gardner contends that the advent of global media – with its focus on the occasional and sensational – overloads our survival functions with perceptions of risk. Events that are actually rare are the ones that attract mass media attention and this focus makes risks associated with them seem more real and frightening than they actually are. It’s the triggering of emotional responses by the apparent immediacy of threats which are actually remote and highly unlikely to affect us which cause behaviour which, frankly, is not in our best interests.

Worse still, the world is full of people and organisations actively seeking to exploit our behavioural biases and the media’s compulsion to focus on the rare but newsworthy event. Fear sells everything from antibacterial wipes to razor wire and from CCTV to DNA databases. All of this when, for most of us, there’s never been a safer time to be alive.

Stockmarkets and Mass Media

If the underlying combination of functions that make up our nervous systems can be fooled into inappropriate emotional responses by mass media and its manipulation then it can also trick itself into dangerously irrational responses to the fear and greed implicit in stockmarkets. There’s increasing evidence that emotional trauma can result in feelings of real physical pain (for instance: Eisenberger, Lieberman and Williams, 2003) and, as anyone who's experienced them knows, losses on the stockmarket can generate such pain – and then some. The end result of this can be the emotionally logical but financially irrational decision to cut and run.

You can see where this goes with stockmarkets and the mass media. Mostly stockmarkets are pretty placid things, gently rising and falling in line with economic activity. When was the last time you saw a news item entitled “stockmarket goes nowhere”? It’s about as likely as a headline screaming “Ten million children not abducted today!” Or, “Politician accepts blame?”

On the other hand, stockmarkets crashing or booming is news. It's reported on with great glee, usually accompanied by pictures of ashen faced dealers and attractive women (somehow the latter manage to find their way into most news stories). Inevitably there’s also some idiot in a suit pointing at a chart with an arrow on it going either straight up or straight down and spouting nonsense.

Unsurprisingly such reporting makes people either feel they’re missing out or start to fear the possible losses. When, for most of us, the only sensible approach to stockmarket investment is to do it slowly and over a long period of time this is likely to trigger our apeman into exactly the wrong response.

Stockmarkets and the Expert Media

Of course, those of us who are knowledgeable in the ways of the stockmarket aren’t going to be worried by a few news reports, are we? We know markets go mad, can stay mad for long periods of time but will always revert to trend growth eventually. We’ll only take notice of properly informed commentary, not mass media hysteria.

Only that’s not the message the expert media peddles either. Opinions that everything will sort itself out eventually, sort of, kind of thing don’t amount to interesting copy. Experts are expected to predict the future and to offer advice and by far the easiest thing to do is go with the trend. Hell, the experts are just as much in the dark as everyone else. Cue more fear and confusion. Me apeman, ugh!

Rational Man versus Apeman

Conquering fear is difficult. We see this in the world around us as we protect ourselves more and more against less and less danger. Sadly it’s even worse than it might seem because even when we recognise that we’re being unrealistic in our assessment of risk we still get it wrong.

Roughly the process works as follows. Some event occurs which triggers a fear reaction and our ancient survival systems immediately assess the risk as high. Then our cognitive functions kick in and realistically reappraise the risk as lower than we initially estimated. So we change our estimates – a bit. Only not enough, not nearly enough.

This happens in lots of cases where media influence has biased our perceptions. Like women’s likelihood of suffering from breast cancer at various ages. So what did you answer? Would you like to change your mind?

Rational Reappraisal is Still Wrong

The simple truth is that the older you are the greater the risk. An eighty year old is significantly more at risk from the disease than a forty year old, but when was the last time you saw a headline “Eighty year old fights breast cancer”? A young and famous woman having cancer is news and gets extensive coverage. This is what biases most peoples’ perception: people without personal experience of aged cancer sufferers will usually answer somewhere between forty and fifty five and tend to adjust upwards as the rationality effect kicks in.

Globalised media bias is pervasive and when coupled to our innate apeman tendency to overreact to fearful events it leads us into all sorts of dangerous behaviour, from the overprotection of our children to the fearful selling of stocks. Even when we adjust our initial emotional perceptions we’re likely to get it wrong.

The Only Rationality is History

Many of the events that have been unfolding through 2008 and 2009 don’t have any corollary in our lifetimes. We can’t rationally baseline our emotions by comparing the situation with others we have experience of. So all that’s left is to learn from the lessons of history.

These lessons aren’t entirely encouraging. After the Wall Street Crash of 1929 it took nearly twenty years for markets to regain their previous highs in any real sense. People were shocked out of the stockmarket and although earnings recovered slowly the willingness of investors to bear the risks of equities was significantly reduced, resulting in lower prices and higher yields.

Nonetheless, markets did recover and anyone brave and rational enough to invest in obviously undervalued stocks and take a long term view was fully rewarded. These were, of course, the few investors who were able to overcome the fear and aversion caused by the scary events of 1929 and 1931.

In a sense being rational at times like these is all about having a grasp of history. Without it we can’t judge the opportunities or the risks so hiding under the bedcovers can seem as sensible an approach as any other. Just don’t expect to make any money while you’re there.

Related Posts: Darwin's Stockmarkets, Technical Analysis, Killed By Popularity, Bulletin Boards Are Bad For Your Wealth

1 comment:

  1. Regarding the bear market falls, I read an article by Chris Dillow in the Investor's Chronicle around January time saying that the falls of 2008 weren't actually that shocking at all, if looked at from a standard deviation point of view. But of course we tend to look at things from "How much money have I got this week?" point of view...