Beware Social Media's Influence!
“A bias recognized is a bias sterilized” – Benjamin Haydon
A 2021 study by Pew Research Center¹ highlights the growing uses of social media among U.S. adults. 69% of adults utilize Facebook and a growing percentage (40% and rising) use Instagram. Social media has been blamed as the cause for many different frictions and problems in society, but it also can have a dramatic impact on your investment strategy and how you view risk and your portfolio.
Combating these impacts can be difficult, but being aware of how social media and news can impact your perception of the markets is a good first step towards combating an unintended impact on your portfolio.
Let’s focus on two described cognitive and emotional biases we possess and how they may impact us and our investment strategies:
1) Loss Aversion:
First described by Kahneman and Tversky² in 1979, this can be summarized as “Losses loom larger than gains.” The larger the stake, the larger the aversion to losses. Drawing this to its conclusion, news headlines surround “Recessions!” or “Danger!” generally weigh more heavily on the investors mind than an equally weighted positive article. It’s important to be aware of this bias we possess and to adapt your portfolio strategy and work to moderate our response to emotionally charged headlines. One very good way to counter this is by developing a financial plan and a long-term investment strategy and adhering to that plan through various news cycles. Another is to always step back and look at history. Even recent market “corrections” such as 2018, 2020 and 2022. Markets go up and down, and so far, have had a long-term trend moving upward.
“If all your friends jumped off a cliff, would you jump too?” Statistically, the answer is probably yes. Humans are hard-wired to herd. In financial markets, we have seen this repeat over and over again. In the dotcom bubble, investors piled onto unprofitable companies to not miss out on the internet investment return opportunity. You see this in our blogs about “Forecasting Follies” where analysts tend to gravitate towards each other’s forecasts. You see this in your life when a friend buys some shares of AAPL and now you feel like you should too.
Be wary of this. Your investment strategy, your financial plan and your life is entirely unique centered around your values, your goals, your risks and your wealth. What is good for someone else may not be right for you. Share ideas but test those ideas against your plan and your needs.
And if you find yourself struggling in a sea of negative headlines or sorting out which advice of your crowd to follow or to listen, it may be worth reaching out to us and letting us help you sort through the noise that we all face every day.
¹Source: https://www.pewresearch.org/internet/2021/04/07/social-media-use-in-2021/
²Source: https://www.jstor.org/stable/1914185
