The 2-Minute Thought Investors: Keep the Negative in Perspective

People naturally pay more attention to negative thoughts and feelings than to positive ones.  It’s the way our brains work, and social scientists call it negativity bias.  It’s all about how bad thoughts and experiences weigh more heavily on us than good ones do. 

There’s a good reason we’ve evolved a negativity bias: It has helped us survive.  When we hear a rustling in the woods, it’s wiser to think the worst – that’s it a tiger or bear – until we know otherwise.  Usually, it will be nothing, but once in a while, thinking the worst will save our lives.

We’re not often chased by lions, tigers, or bears anymore, but our negativity bias has stayed with us all these millennia.  It’s why negative advertising works.  The negative traits we hear about are much easier to remember than the positive ones.  It’s why marketers know that they just need to mention a few negatives about a competitor’s product to get people to switch.  We are ever wary of what could go wrong.

In a recent paper, Zakary Tormala and Aaron Snyder of the Stanford Graduate School of Business found that when we’re trying to make a rational decision and list the “pros” and “cons” around an issue, the cons carry more weight with us – even if the positives and negatives seem equally relevant and compelling.  For example, pointing out a few negatives about a really great job candidate make us much more uncertain about our opinions than the opposite would – pointing out the really good traits of a weaker job candidate. 

That has a lot of implications for how we market products and how we persuade people to make a decision in our favor.  And the implication for investment? Perhaps it’s that it’s important to keep the negatives in perspective.  

Investors think about negatives all the time.  They train themselves to consider all the things that can go wrong because they must.  Doing so is an essential part of being a good investor.  But at the same time, investors also must think carefully about the glaring flaws that others see so readily -- and consider whether they really are so glaring.

It often is easier to see what’s wrong with something than what’s right.  It can be easier to tear apart another person’s investment thesis than to come up with a positive one on your own.  And it very often is easier to run for the hills when bad news hits than it is to stay the course when you should.

No investment is perfect.  If it were, then its price would be too rich to make for a good opportunity.  And if something comes at a bargain price, it almost always is cheap for a reason.  Value investors know that cheap stocks get cheap because they have flaws that have been identified and widely recognized.  The challenge is to understand the flaws you can live with while getting the bigger things right.