I used to play a game with a lot of my older clients: they’d come into the office and tell me how lousy everything was these days, how much worse the world had become. These were people who had lived through the Great Depression, World War 2, the Cuban Missile Crisis, the political and social upheaval of the 1960s, recessions, and oil embargos. But now, the world was somehow worse than it was – or at least scarier. So I would ask them, walking back through what had happened during their lives, to try and identify the magical time when everything in the world was good and there was nothing about which we needed to worry. We never did figure out when that would have been.
As I get older I find myself succumbing to that same mindset – that where we’re going is worse than what we’ve been through, which is dangerous in my line of work. I’ve seen a bit over my career – tech bubbles popping, terrorist attacks, and an existential financial crisis that shook the very foundations of our system. Not to mention a pandemic that seemed right out of Hollywood as it was unfolding. My gut feeling has always been that what lies ahead always seems scarier because what’s behind us couldn’t have been too bad if we lived through it. It’s a trick of the mind.
As it turns out, research now backs this up: Adam Mastroianni and Daniel T. GilberT’s paper published in Nature explains the phenomena in terms of two cognitive biases: first, we tend to pay the most attention to negative information about other people, focusing on the bad stories that dominate our headlines. Second, there’s biased memory: our memory of bad events fades faster than our memories of positive experiences. As Dr. Mastroianni writes in his explanatory piece in the New York Times, “Getting dumped… hurts in the moment, but as you rationalize… and distance yourself from the memory, the sting fades.” When you combine these two tricks of the brain, you get the very human feeling that the nasty headlines we’re reading somehow mean the world is now worse.
Nick and I talk a lot about behavioral finance and how our human brain is not well-adapted to the world of modern money, and this is a great example of how our brain’s wiring may cause us to make mistakes with our portfolios that may cost us dearly down the road. We need to remind ourselves as we read the ever-present news in our lives that we can’t just focus on the negative, and no, the world was just as scary and unpredictable yesterday as it is today. As this chart of market history reminds us, the economy and the market march on, often performing best when things seem the bleakest.
A great example of these cognitive biases at work may be how we think about artificial intelligence. While breakthroughs in AI technology have helped drive the market’s recovery from 2022’s slump, a lot of headlines focus on the potential negative aspects that may accompany these gains. Concerns range from how AI may replace workers with machines to ethical questions and concerns about what it means to produce art or even what it means to be human. In the meantime, AI-related stocks have fueled the rally that brought the markets out of last year’s bear market.
While there is a lot to think about with AI technology, the main benefit of such technologies is that they drive productivity growth, and productivity growth is a necessary ingredient for stable economic growth. Productivity – the ability of the same number of workers to produce more – is what improves the quality of life generation after generation. Disruptive technologies cause upheaval and changes to how our economy operates, but historically, these disruptions, such as the computer revolution or internet commerce, have been what drives growth.
At the same time, when we talk to clients about the markets, there is a tendency to focus on the stocks that appear to be “winning” the AI stock market sweepstakes. The more large-company growth stocks a portfolio held over the last several months, the better that portfolio looks, and everything else was a damper on portfolio returns. It’s easy to have a fear of missing out when you hear that Nvidia stock has taken off while your portfolio of boring index funds, while positive and benefiting from the market recovery, muddles along by comparison.
While focusing on the companies vying for leadership in a new industry is natural, it’s more useful to keep in mind the potential gains that all companies may experience as the new technology matures. While chipmaker Nvidia may be all the rage right now, if AI fulfills its promise of productivity growth, it will be a boon to Proctor and Gamble, Colgate, and other boring old economy stocks, just as internet commerce changed the way those companies interacted with their customers long after the tech bubble and bust sorted out the dot com industry, and the desktop computers that we now take for granted increased productivity in every single segment of the economy. We need to stay diversified and focus on long-term overall growth.