Tesla Motors Inc (NASDAQ:TSLA) saw its stock price fall 10 percent at the beginning of the month, in part because of the news that a Model S had caught fire. Now Dan Ariely, the New York Times best-selling author of Predictably Irrational and other books explaining behavioural economics, has written a blog post explaining how public reaction to the fire falls in line with what we know about psychology.
Tesla stock price push
Ariely starts the story back in August when the Tesla Motors Inc (NASDAQ:TSLA) Model S received five stars in every category from the National Highway Traffic Safety Administration, pushing its stock price up 2 percent. Then on October 1 a driver ran over a metal object that punctured the car’s battery, starting a fire and forcing the driver to pull over and flee the vehicle, and stock prices fell 10 percent over the next two days. On October 4, Tesla Motors Inc (NASDAQ:TSLA) CEO Elon Musk explained that the car had alerted the driver that there was a problem, that no one was hurt, and that gas cars also catch fire from time to time, pushing stock prices back up 3 percent.
The bad news had a bigger impact than either positive news story. “From a psychological perspective, this overreaction to one very salient (and very sad) accident is nothing new. It is a consistent way that we react to salient news, and it is perfectly irrational,” writes Ariely.
From an investor’s point of view, a bit of discipline is all it takes to put an accident like this in perspective and start buying when you see a news-related drop that doesn’t really make sense. If you had asked anyone before October 1 if they thought Tesla Motors Inc (NASDAQ:TSLA) cars would ever have accidents, of course they would have said yes. The story received national attention only because Tesla Motors Inc (NASDAQ:TSLA) cars themselves are still a novelty, not because a car fire in which no one got hurt is particularly rare or interesting.
Ariely’s advice for potential car buyers is apt for investors as well. “If you had decided to buy a Tesla Motors Inc (NASDAQ:TSLA) before this accident, get one now—because the event didn’t add much to the information you used to make your original decision.”