Over the weekend, Jason Zweig had a very interesting column about how susceptible people are to even minor things influencing them, such as colors. The investor decision-making process can be subconsciously manipulated, without us even knowing what is impacting our thinking:
“In a series of experiments, finance scholars William Bazley and Henrik Cronqvist of the University of Miami, along with marketing professor Milica Mormann of Southern Methodist University, have found that seeing red has a drastic effect on how people view investments.
The researchers offered basic choices like these: Would you rather have a 70% chance of winning $2 and a 30% chance of losing $1.50, or a 70% chance of winning $4 and a 30% chance of losing $5? Merely by displaying the potential losses in red rather than black, the researchers could make people about 25% more risk averse (preferring the first gamble to the second, even though the latter has a higher expected value).
Likewise, investors viewed charts of stocks in the S&P 500 index with falling prices and predicted how the shares would perform in the next six months. Those who saw charts in red, rather than black, projected significantly lower returns.”
If you read the full column, you will get a flavor of just how little free will we as investors have — at least relative to how much control we believe we have over our own decision-making.
Which reminds me of a story from much earlier in my career. Warning: war story / rosy nostalgia ahead:
In late 2000 (or early 2001?), I joined a small but storied sell side firm — Ehrenkrantz, King & Nusbaum (they were a branch office of another firm that also closed post-9/11, and EKN is now also defunct) — as their market strategist. I worked with Barry Hyman (referenced here), an old pro strategist who was a regular on financial television.
It was my job to work with the retail brokers, help them with stock selection, teach them risk management (!), do a daily pre-market meeting (Here’s whats moving; economic releases, etc.).
I taught (some of) these guys what a trend was, how to use stop losses, and how to short a stock — something that most of them had never learned before. I was only there for a year or so when the Maxim Group recruited, me, but thats another story entirely, best saved for a different day.
At the time, the dotcom collapse was nowhere near done, but it was still early enough that the retail brokers’ muscle memory was hoping this whole tech wreck thingie was merely a passing phase. After topping 5000, the Nasdaq had fallen to 3200, then quickly snapped back to near 4250. After that huge Nazz snapback, the trader psychology of BTFD was still a powerful force. I took it as my personal responsibility to explain to those willing to hear it that the major trend had broken, and there was a lot more downside to come. It was TA 101 type stuff, and every technician on the street was screaming it, and mostly being ignored by retail.
Zweig’s column reminded me of what might be one of my first market psychology lessons: When standing in the back of the board room, looking at rows of desks and 100s of ILX terminals — you were overwhelmed by a sea of red screens on all of the ILX machines. Just rows and rows of red all day long.
The default setting was color = day’s +/- ; If it was a down day in the markets, the stock screens were red, an up day was green. From March 2000 forward, it was brutal.
Within the first few weeks of my being there, I changed a few screens default setting to color = last tick’s +/- ; the screens would shift from green to red and back through out the day, based on whatever the last trade was. Eventually, we converted the entire board room to the new default. Since there were often big gaps down and repeated BTFD attempts to bottom pick, the screens looked far less ugly than the original settings. Psychologically, I think it made a big difference in everyone’s attitudes. It allowed them to function as brokers, instead of proverbially hiding under their desks.
Go read Jason’s column . . .
It’s the Little Things That Can Color an Investor’s Outlook
WSJ, July 7, 2017