The American Association of Individual Investors (AAII) Journal had an interview with Daniel Crosby, a behavioral finance expert and author of “The Behavioral Investor.” Crosby was asked, “What if somebody just finds themselves being nervous? Maybe they turn on CNBC and get spooked by the news of the day. Any suggestions on how to cope?”
His answer was:
The first thing is to avoid them. You would not counsel an alcoholic to spend a bunch of time in bars. The research shows pretty consistently that our willpower is a much worse predictor of our behavior than our environment. We tend to overrate our own willpower and think that because we know something, that we’ll do it. There’s a huge gap between knowing and doing. For example, lots of doctors smoke even though they know better. So, the biggest thing you can do is to control your environment. That’s absolutely number one: to just not engage.
This is deep wisdom. There is a great benefit in building a positive environment so that we don’t have to rely on our willpower. Willpower is necessary to accomplish many of the goals of our lives, but our willpower is limited. Using willpower on something that could have been automated squanders that willpower and risks jeopardizing meeting our life goals.
Surrounding yourself with dozens of donuts works against your efforts to eat healthy. You should not have to rely on your willpower. It would be better to fill your house with healthy things to eat so that the default environment works for your goals, not against them.
Many investors would think that financial news is part of a positive environment, but it is not. The financial news machine gets paid for your attention. It is mostly noise, and it is best to ignore it and do nothing. If you can’t ignore, you may want to do the opposite of what the crowd suggests.
Many of the news stories succumb to the narrative fallacy, mistaking a cause and effect relationship between two things that happened. Major news organizations don’t understand asset allocation, fee-only financial planning, or even how to get the facts straight on a story. Investment Newsletters lie. Annuity advertisements fraudulently mislead. Also, a lot of content tries to attract attention by predicting dire market crashes.
As Crosby suggests, the best idea is to avoid the news entirely. Useless articles abound on the Internet. If you do see or hear troubling financial news, it is best to do nothing in response. Slow down and evaluate how the news may be pushing you to do the exact opposite of what you should.
Here is a section of the advice from Crosby’s book:
Becoming an Informed Consumer of Investment Media
As news outlets become more and more specialized, the value of information can become so diminished that it’s harmful. What’s more, the coming glut of information means that we will all be compelled to rely more and more heavily on heuristics (mental shortcuts). To help combat this, Crosby suggests the following for evaluating what you hear or read:
- Evaluate the Source: Ask whether this individual has the appropriate credentials to speak to this matter or were they chosen for superfluous reasons such as appearance, charisma or bombast?
- Question the Melodrama: While volatility can be the enemy of good investing, chaos and uncertainty are a boon to media outlets hungry for clicks and views.
- Examine the Tone: Does the report use loaded images or make ad hominem attacks? These are more indicative of an agenda than an actual story.
- Consider Motive: News outlets are not charitable organizations and are just as profit-driven as any other business. How might the tenor of this report benefit their needs over yours as a decision-maker?
- Check the Facts: Are things being presented consistent with best academic practices and the opinions of other experts in the field? Are facts or opinions being expressed and in what research are they grounded?
Adapted from “The Behavioral Investor” by Daniel Crosby (Harriman House, 2018).
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