I was watching the CNBC this morning when my jaw dropped in disbelief from a small segment barely receiving a caption on the screen; David Einhorn drafted a letter to his investors stating in part that Brexit (which I wrote about in my last post) was simply too small of an event to have substantial financial implications (see letter here). Given the warnings of impending financial collapse and world doom we all witnessed barely a month ago, this was quite the surprise. As a side note, most US markets have already rebounded from the immediate post-Brexit collapse and have since reached record highs.
Whether it was fate or coincidence, at the same moment my peripheral vision caught this headline, I was reading an article on The Atlantic about the nature of our news media (see article here). I would highly recommend everyone read the entire article, but I do plan on briefly discussing one finding in this post.
The article from The Atlantic quotes an academic paper examining survey data which shows that investors who also regularly keep up with the news predicted a one in ten chance of a market crash in the coming six months, while historical data showed that the chance of such a crash actually being one in sixty (see academic paper here if you want to go straight to the source). The same paper and article also found that news outlets were not nearly as likely to report on moderate market increases as they were crashes or declines.
So, what is going on here? The Atlantic article points to something known as “availability bias” which essentially boils down to a person being more likely to be affected by items that are constantly available to them, to reinforce those views or perceptions. When what you read on the news constantly is talk of market crashes and declines and financial collapses, those tend to stick out more than the slow, boring work of average market returns and moderate gains and declines.
This post is not being written to complain about the news media. They are profit-seeking enterprises like almost every other sizable organization in our society, and, while not perfect, do provide a valuable and necessary public service…for a profit. Which means their short term incentives and motivations are not always perfectly in sync with families looking to plan.
The purpose of this post is actually to help raise the awareness of what information is being funneled to us, and what information isn’t. Because of the speed with which technology allows information to travel now, we have more data and information at our fingertips than ever before. But more doesn’t necessarily mean better. We have to learn what information provides us the most value, and what information creates distractions or don’t allow us to properly understand the world around us. We must learn to separate the signal from the noise.