Your Words are Not Your Actions: The Negativity Bias Series 1.2

by | Dec 6, 2023

It’s no secret that people say one thing and often do another. We can see it routinely in published economic statistics that tell us that people say they feel badly about the economy and at the same moment are spending like there’s no tomorrow. This contradiction in expressed sentiment versus apparent economic behavior is imbedded in our collective financial mindset.

In my 2023 White Paper on Negativity Bias in Financial Behavior I explored some of our tendencies to express negative emotions regarding our collective present state. A link for the White paper is found below:

Why do so many people express a pronounced and sometimes exaggerated negativity about the economy and the world in general in their rhetoric and social media posts while engaging in a far more optimistic behavior in what they actually do? A recent look at retail spending on restaurants, travel and leisure (check out hotel occupancy rates in Las Vegas for example) demonstrates a willingness to pay up for pleasurable experiences consistent with economic confidence and not pessimism. Perhaps people are ordering the surf and turf at $150 per plate because they think the world will be ending sometime soon, but it’s probably more likely that the willingness to spend is based on a generally strong economic environment for a significant portion of the population than any immediate expectation of impending doom.

To be sure, there has always been a sizable portion of the population which continues to struggle economically, and there is reason for this group to express pessimism about their economic and social prospects. CNBC recently estimated that some 40% of US households live paycheck to paycheck. But many of the voices of negativity in recent times usually originate in the middle class and often the upper middle classes where negative rhetoric seems to be something of a fashion accessory. Expressing outrage and anger at various social and economic factors while enjoying good incomes, rising home values and full employment appears not to be a contradiction to the voices of negativity. For them, it is simply another form of free self-expression. That same self-expression demonstrates a fundamental contempt for truth.

Expressions of overall negativity by a plurality if not a majority of the public regarding the state of affairs is nothing new. Newspaper editors going back to the late 17th century have known bad news sells and good news is often ignored. “If it bleeds, it leads” is the mantra of the modern news media, as editors and journalists are operating under the assumption that news consumers prefer stories that incite irrational fear and anger. This assumption may in fact be wildly incorrect but try dissuading news editors from their current negativity at-any-cost mindset.

We like to have our cake and eat it too. Enjoying a higher standard of living than at any time in human history, we continue to complain bitterly about the current state of affairs. Social media has a significant role in amplifying negativity, but there is no going back, that genie is out of the bottle. Gains in home values, stock prices and interest income has increased gross household net worth significantly in recent years, though the same people who benefit from all these advances are among the most fearful and angry among the chorus of expressed negativity. Yet these same angry voices chase real estate, crypto tokens and stock prices in the hope of becoming even more prosperous, an unmistakable sign of actual, but not expressed economic optimism.

Why do we like to grumble so much about our economic state? There are several psychological theories that can be cited, but for investors we need only recognize that at any given moment there is an installed negativity bias in asset prices that varies from levels from near zero when markets are up and to extreme levels when markets are down. How to quantify and apply Negativity Bias factors (“Nb”) as part of an investment strategy is the focus of the research I am continuing to conduct. More on this important subject will follow.





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