The Positive Use Of Negativity Bias
July 28, 2015
by Daniel Solin
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
In an article last week, I discussed how an understanding of three behavioral biases (in-group, confirmation and illusion-of-control bias) can help you gather more assets. Today, I will tackle another prevalent bias – negativity bias – and provide suggestions for how to use knowledge of its effects to your advantage.
Before examining negativity bias, it is important to revisit a fundamental misunderstanding of the decision-making process used by many advisors.
Decisions are most commonly made emotionally, not rationally. Numerous studies have demonstrated that most people rely on gut instinct rather than objective analysis when making important decisions.
When I was an advisor trying to gather AUM, I frequently ran into this issue. I have always been an advocate of evidence-based investing, but most of my prospects invested actively (by which I mean that they attempted to pick outperforming stocks, time the market or select the next “hot” fund manager). At the time, I was unaware of the role that emotions play in the decision-making process.
My approach was to inundate prospects with the overwhelming academic data and research supporting my investment philosophy. I couldn’t understand why logic and reason didn’t carry the day. I was rarely able to change the minds of prospects coming into the meeting with an active-management mindset, even though they couldn’t articulate any effective rebuttal to the points I was making.
Don’t fall into this trap.
Negativity bias reflects our inclination to pay more attention to bad news than good news. It manifests itself in a variety of ways. According to psychologists who have studied this bias, we tend to remember insults more than praise. We also recall negative experiences more than positive ones. We are programmed to be “vigilant and wary.”
It’s not difficult to understand the prevalence of this bias among investors. The stock market is volatile. The financial news is filled with predictions of doom and gloom. Terrorist attacks, both in the United States and abroad, appear to be a constant threat. Global instability seems everywhere. Our trade deficit with China recently reached an all-time high.
Negativety bias causes us to ignore or minimize good news. By some estimates, instances of crime, violence and war are actually declining, but you would never know it from the media. Surveys have shown we are interested in war, weather, disaster, money and crime. The media is just giving us massive doses of what we want.
Remember, if you have a question or comment, send it to firstname.lastname@example.org.