Whether you’re considering an investment opportunity or simply browsing various media for insights and entertainment, it has become increasingly obvious: You cannot believe everything you see, hear or read. Much of it is “overdramatic.” Too much of the rest is just plain wrong.
Thus it falls on each of us to be positively skeptical in our search for knowledge.
To be positively skeptical, we must continue to think and learn and grow.
But we also must aggressively avoid falling for hoaxes and hype.
Social Media: An Aggravating Allure
Of course, selling proverbial snake oil and falling for falsities is nothing new. As investors, citizens, and individuals, it will always be our task to remain informed purveyors of the truth. But in today’s climate of information overload, this is no easy task. The very features that make online engagement so popular also make it a powerful forum for sowing deceit and confusion.
First, it’s now all too easy to share a claim far and wide, long before it’s been through any sort of reality check. One or two clicks, and it’s on its way.
Second, evidence suggests false online news spreads faster than the truth. In a March 2018 Science report, “The spread of true and false news online,” a team of MIT researchers analyzed approximately 4.5 million tweets from some 3 million people from 2006–2017. They found that “Falsehood diffused significantly farther, faster, deeper, and more broadly than the truth in all categories of information.”
The authors also found that “human behavior contributes more to the differential spread of falsity and truth than automated robots do.”
In other words, we can’t just blame it all on “the bots.” We owe it to ourselves to be vigilant.
A Rigorous, But Rewarding Role
The challenge is, few of us actually enjoy engaging in detailed fact-checking. That’s not entirely our fault. It’s likely due to a multitude of mental shortcuts, or “heuristics,” which we have honed over the millennia to make it through our busy days.
In their landmark 1974 paper, “Judgment under Uncertainty: Heuristics and Biases,” Nobel laureate Daniel Kahneman and the late Amos Tversky are widely credited for having launched the analysis of human heuristics, including when they are most likely to lead us astray.
Essentially, we’re more likely to share and comment on a social media post, than to take the time to substantiate its accuracy. When considering an enticing investment opportunity, we find it easier to skim the marketing materials, than to dig for deeper understanding. Academic research that refutes current assumptions can be dense, and difficult to decipher; if a particular assumption is already widespread, we’re prone to simply accept it as fact.
Unfortunately, there are legions of cunning con artists and slick sales staff who know all this, and have weaponized our behavioral biases against us.
“[T]he challenge for all investors is to consume the news without being consumed by it.”
The Usual Emotions in Unusual Times
As fate would have it, we introduced this series earlier this year, before COVID-19 seized almost every headline around. If anything, current events have made this series even more important. Thoughtful, sober answers to our most pressing questions must now compete against a deluge of the emotional misinformation that can be as virulent as the ailment itself.
First of all, there’s nothing wrong with having emotions – even strong ones.
For example, many of us may be grieving the loss of the “normal” life we used to have just a few months ago. It’s important to acknowledge these feelings. In a recent National Public Radio piece, behavioral counselor Sonya Lott explains how unattended grief can impair “every aspect of our being – physically, cognitively, emotionally spiritually …” and financially, we might add. Lott says, “We can’t heal what we don’t have an awareness of.”
In other words, emotions are not only unavoidable, they’re essential. But remember:
When you put your feelings in the financial driver’s seat, they will steer you toward what your instincts would prefer, rather than what reason might dictate.
Behavioral Finance and Emotional Investing
There is an extensive field of study dedicated to understanding how our instincts and emotions often interfere with our ability to make rational financial decisions. This study is called behavioral finance. Suffice it to say here, every investor faces strong, hardwired temptations to:
- Chase illusory trends
- Fear the very investment risks that are expected to generate our greatest rewards
- Regret even our most sensible decisions in the face of minor setbacks
- Disregard the most durable data
- Overreact to breaking news and emotion-triggering language
On that last point, words alone can create a potent brew of emotions. Guns, abortion, climate change, and immigration probably generate a rise out of you, one way or the other. The same goes for financial catchwords: crashing, soaring, crisis, and opportunity.
Strong feelings, while natural, WILL create cognitive blind spots in your reasoning. Add the speed and omnipresence of the Internet, and it becomes even easier to lead with your emotions.
“There’s no room for facts when our minds are occupied by fear.”
— Hans Rosling, Factfulness
Emotional Marketing for Better and for Worse
The power of people’s emotional response is so strong, academics like Wharton School’s Jonah Berger have written books on how marketing teams can appeal to them – for better or worse.
In his book “Contagious,” Berger describes six triggers companies can use to amplify their marketing messages, including playing to your emotions. In this podcast, he observes: “Companies recognize, ‘Hey, if we can get people to feel emotional, we’ll get them to talk and share.’ … You need to design content that’s like a Trojan horse. There’s an exterior to it that’s really exciting, remarkable and has social currency or practical value. But inside, you hide the brand or the benefit.”
Emotion-triggering communications aren’t inherently wrong or bad. Your favorite causes use them to nudge you into giving more generously. We ourselves use them in messages just like this one, to encourage you to embrace your own best investment interests. You may not realize it, but you probably use them as well, to advance your own heartfelt beliefs.
Unfortunately, not every application is as well-intended. Profit-hungry wolves on Wall Street won’t think twice about preying on your hopes and fears. Popular and social media alike are forever awash in fervent calls to action. Identity thieves are the ultimate masters of emotional trickery in their quest to rob you of your wealth.
Powering Past Your Emotions
So, as an evidence-based investor, how do you navigate past these and many other emotional traps? It can help to have an objective advisor point out your own behavioral blind spots. But you can help yourself as well.
Has something you’ve seen, heard, or read left you “stirred up”? Again, we’re not suggesting you should repress every feeling. But the more aggressively an appeal tugs at your emotions – in fear, anger, excitement, or elation – the more important it is to avoid being consumed by it.
Especially if it involves your financial well-being, we strongly recommend hitting the pause button before making any next move. Take your emotional “temperature.” Wait for the heat to subside. Most importantly, take some time to conduct extra due diligence before taking the bait.
This means it’s as important as ever to sharpen your skeptical lines of defense. Granted, it takes more time to carefully separate fact from fiction. But the upfront due diligence should ultimately save you far more time, money, and personal aggravation than it will ever cost you.
Being positively skeptical should richly reward you in the long run.
If you have any questions about this, please feel free to reach out. We would love to speak with you.
Woodstone Financial, LLC is a fee-only financial advisor, specializing in retirement planning, comprehensive financial planning, and investment management firm located in Asheville, North Carolina. Contact us to learn more about our services.