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Negativity Bias and the Evolution of Growth vs. Value

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August 26, 2012 – Comments (2)

Anyone here ever think much about negativity bias? To clear up what it is, basically negativity bias is what makes us pay more attention to the sticks than the carrots. We tend to weight more towards the negatives than the positives (at least at first) and this can really wreak havoc on our thinking if we don't realize it up front and address it.

So one analogy that works for me in looking at this from a perspective other than investing is golf. If anyone here plays golf then you'll get it I'm sure. When you stand on the teebox on any given hole, do you see the open fairway in front of you or the out of bounds on either side? Most of the time, it seems at least, we focus on the trouble and not the actual opportunity. It's a tough mentality to break for sure. I think as golfers we get hit with that negativity bias very early on so it becomes habit before we ever have the chance to think about breaking it.

But this got me thinking about investing as well. While sticks tend to get our attention before carrots in many ways, do you also invest this way? Looking at downside before upside? It's a legitimate question I think. Many non-investors and/or novices I think do tend to see things this way. All it takes is a couple of quick losses to get you on the negativity bias train. A few saucy headlines and CEOs gone bad and it seems that it can all turn very negative very quickly. And because it's money we're talking about here, many times it can be tough to sack up and try it again. Many just bag it and give up investing altogether because they become convinced the game is rigged against us and there's no way we can win (not entirely unreasonable to at least think). So it's my belief that this is one of the bigger barriers to developing investors for life; overcoming the effects of negativity bias. The easiest way to beat this demon into submission is to start investing as early in life as possible. There are plenty of opportunities to bounce back and there is plenty of time to look ahead. Older investors have it tougher no doubt so it takes some real coaching and encouragement; not to mention some solid winners on which to hang the hat.

Negativity bias also got me thinking about the age old Miller Light argument of the investing world: growth or value? Of course there's no real right answer except for your own. And some investors change over time. I know when I first came to The Fool I had a tough time really understanding what kind of investor I was and wanted to be. Ultimately I like Buffett's old bromide that growth and value are ultimately joined at the hip and I see the world accordingly. However many do not and that's what got me thinking. I have to believe that hardcore value investors are a bit more subject to negativity bias than growth investors. Value investors in my experience are more pessimistic (or at least much less optimistic) than growth investors. And this makes total sense. Growth investors have to be at least a bit "head in the clouds" to be able to see such optimistic growth scenarios. Value investors seem to require that sense of pessimism needed to find those potentially undervalued investments and in most cases they're undervalued because they're less than excellent to begin with.

So which one are you? The growth investor that became jaded and went value? Or the value investor that tired of the skepticism and went growth? Or are you still sticking with your guns whatever they may be? Well, the beauty of investing is that it can all work as long as you know what you are and how to use it. And that's the point really. The most successful investors I know are the ones who know themselves and aren't afraid to change if or when they feel it's right and appropriate for them. Negativity bias be damned.

Foolish best,

Jason

 

2 Comments – Post Your Own

#1) On August 27, 2012 at 7:20 PM, vriguy (71.84) wrote:

"Value investors in my experience are more pessimistic".

Pessimist: what an optimist calls a realist. 

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#2) On August 27, 2012 at 11:23 PM, TMFJMo (69.14) wrote:

@vriguy Very nice...I like that. 

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