Negativity Bias and the Financial Markets

Heard any bad financial news lately? Of course you have! But what if I told you the U.S. stock market recently enjoyed its best 50-day rally on record, ever?

If you missed the positive financial news, it might be because your brain is tricking you into being pessimistic.

Over the past decade, a wealth of psychological research has exposed an inherent negativity bias in humans. Negativity bias is the tendency for the brain to give excess focus to negative events while simultaneously downplaying the more frequent positive occurrences.

The prevailing theory explaining this phenomenon points to our primitive ancestors. Hunter-gatherer societies had to focus on negative, potentially dangerous situations, as a bad outcome could end your existence. The result of a positive outcome, on the other hand, may only sustain your existence for a while longer. Put bluntly, life must win every day; death only has to win once.

During the stress of uncertainty and faced with the possibility of loss, fear takes over our body and transitions into fight-or-flight mode. Our brain gets hijacked and survival becomes paramount, often at the cost of our higher-functioning, logical processes. This instinct served prehistoric humans well, as acting quickly in the face of a dangerous situation might mean the difference between life and death… if volition determined the outcome.

Therein lies the problem. In modernity, not only are most stress-inducing incidences no longer life-threatening, but they are often completely out of our control.

Enter the stock market.

Seeing a downturn in the financial market creates a fear response similar to what our ancestors felt when encountering a predator. Our blood rushes, our pupils dilate, and our predetermined behaviors take over. While these physiological changes might aid in overcoming obstacles we can influence, they are wasted—and even harmful—when used against a foe that is indifferent to our actions, like, say, the immediate direction of global market economies.

Obstacles that have not been overcome get stuck in our minds, even as the surrounding circumstances change. It feels like big news when we are told that the US stock market suffered its worst downturn in a decade this past March. But we hardly notice the aforementioned news that since then, the US market (as measured by the S&P 500 index) enjoyed its best 50-day rally on record! We have been so focused on the things going bump in the night that we haven’t noticed the sun beginning to rise.

Negativity makes us short-sighted when it comes to the financial market. We become obsessed with this exact time and place, not seeing the forest for the trees. Yes, the past 6 months have been turbulent, but if we step back to take an objective look, we find that the negative events we find so impactful are but bumps on a road that has a positive trend. Over the past 10 years, the broadly diversified global financial market has produced a 9.5% annualized return and that includes recent volatility (as measured by the MSCI global index*).

This is right in line with the expected returns from any 10-year period with all the fluctuations baked in.

Once we become aware that our brains have a tendency to focus on the bad news (the media knows this too, by the way) and acknowledge that while natural, it’s not necessarily healthy or logical, how do we go about creating more balance in the quality of information we spend our energy on?

In general, seek out and celebrate the positives in life. The positives are there, but they may take more active searching to uncover as you are bombarded with the fatalistic.

If it is the uncertainty in the world of financial investing that is activating this fear response, speaking with a quality financial advisor can provide perspective, reaffirming our higher reasoning while mitigating the pitfalls of our baser instincts.

*Graph provided by MSCI Developed Markets Indexes: https://www.msci.com/developed-markets