A Day When Only the Bad News Seemed Significant: Keeping Distance from Negativity Bias [Investing x Psychology]
Even though there must have been good news, I only looked at the bad.
In the past, whenever the market took a slight dip, I would find myself chasing only the bad news.
I went looking for the reason behind the drop, but before I knew it, I was only gathering information that increased my anxiety.
Moreover, at the time, I thought I was "collecting information calmly."
The earnings of the stocks I held weren't that bad.
The premise of their performance hadn't collapsed significantly either.
Looking at the long term, it wasn't a situation to panic over.
Even so, once I saw a sharp drop or an unsettling headline my mind would be filled with that.
Even the good news that I should have been able to see just a moment ago would suddenly seem small.
Looking back now, I think it wasn't so much that I was pessimistic, but rather that I was strongly pulled by bad information.
Today, I want to talk about this "negativity bias."
Bad information is inherently prone to looking a bit larger than it is.
In investing, good news and bad news are often presented side-by-side.
However, we don't always perceive them with the same weight in our hearts.
For example, even if there are several pieces of good news, only one piece of bad news remains strongly in your mind.
Even if you have continuous unrealized gains, you become strangely fixated on a single day's decline.
You become suddenly timid only after seeing unsettling news, even though the price movement wouldn't normally bother you.
Things like this happen quite naturally.
This is because people are more likely to have their attention drawn to "the bad parts that bother them" rather than "how things are overall."
As a result, your own perception can become skewed before the market itself does.
The psychology behind it: Negativity Bias
Negativity bias is a mental inclination where bad information is more likely to remain in the mind and influence judgment more strongly than good information. In psychology, it is sometimes organized such that, all else being equal,
negative events are more likely to have a larger, longer, and broader impact.
I think this is probably also a reaction to ensure we don't overlook danger.
When humanity first emerged, missing one bad thing was worse for survival than missing one good thing.
Thinking about it that way, this mental inclination itself isn't all that unnatural.
However, it is a bit troublesome in investing.
When the market fluctuates, short-term losses and unsettling headlines can seem larger, making it difficult to see the time horizon or premises you originally held.
It's not that being concerned about bad information is bad in itself.
But if you start judging the whole picture based solely on that, your perspective will gradually narrow.
The scary part of negativity bias
The scary part of negativity bias is that it's easier to be pulled away from your axis of judgment than it is to just see the bad information.
Even though you should ideally be looking at
"has the premise collapsed?"
"has the time horizon changed?"
before you know it,
"I don't want to see anything worse than this"
"I just want to reduce my anxiety for now"
can become your criteria.
As a result, you might end up letting go of investments that haven't actually deteriorated, or you might find yourself overreacting to news and trading too frequently.
What makes this tricky is that, in the moment, it feels like you are making a calm and rational decision.
Strategies for Dealing with Negativity Bias
I found it easier to keep my distance once I stopped trying to erase the bad news and started adjusting my perspective instead.
1. When you see bad news, list the good and neutral news alongside it
When you think about it only in your head, the bad news inevitably looms larger.
That is why, especially when concerning bad news emerges, I make it a point to also confirm the things that have not changed.
2. Reframe your time horizon
Are you reacting to today's drop?
Or has the premise for three years from now truly collapsed?
Simply distinguishing between these two can sometimes help calm your mind.
3. Don't overexpose yourself to anxiety-inducing information
If you keep checking the same bad news over and over, it becomes easier to feel like it is bigger than it actually is.
I try to check in with myself from time to time to see if what I think is 'gathering information' has actually become a cycle of reinforcing my own anxiety.
Summary in a Nutshell
Negativity bias is not something that happens because you have a pessimistic personality; it is a mental inclination that makes it easier to take in bad information more intensely.
Therefore, what is important is not to ignore bad information, but rather
not to let it define the whole picture.
Even now, on days when the market drops, I still find that only the bad news seems significant (laughs).
But on those days, I make sure to ask myself, 'Am I looking at the whole picture, or just a part of it?'
I feel that by doing this, I can look at the market with a bit more composure.
To everyone who has read this far
Have you ever suddenly felt bearish after seeing bad news, or had a single market drop stick in your mind in a strange way?
If you would like, I would be happy if you could share in the comments a time when you felt the effects of negativity bias.
I am also still continuing to invest while navigating this psychology (^-^)