- A $1,000 gain doesn’t give us as much happiness as avoiding a $1,000 loss. We’re pre-wired to focus more on bad news.
- A “rational optimist” is someone who maintains a positive outlook on life (and investments), knowing that unfortunate events and results will happen from time to time.
- Some investors haven’t returned to the market since the crisis of 2008. They’ve missed out on a 200 percent return on their money while waiting for the “other shoe to drop.”
*** Click here for more about “rational optimism”
Are you familiar with The Rational Optimist, Matt Ridley’s 2010 book about how prosperity evolves? Going back 60 years, Ridley reviewed how much our society has evolved in a positive way, including a higher standard of living, better health care, increased longevity, etc.
That’s very different from the worldview we get from the newspaper, broadcast news and the Internet.
A recent article published by Information Economics and Policy looked at consumers’ buying habits around newspapers, and it turns out that bad news sells more papers than good news.
Why is that?
We’re prewired to focus more on bad news. For example, people get more happiness from avoiding a $1,000 loss than they do from making a $1,000 gain. The media has picked up on this: that they attract a larger audience (and sell more advertising) by focusing on bad news.
By being a “rational optimist,” you’re aware of what’s happening in the world. You can be proactive about seeking opportunities, but still keep a watchful eye out for bad things that might occur.
Let’s take the stock market for example. Are you familiar with the 2:1 ratio? That means for every two years the market goes up, there is one year when it goes down. You can substitute the word “decade” for “year” and the 2:1 ratio holds. Same for “day,” “week” and “month.” I ask people who’ve been out of the market for a while when they plan to get back in. “Well, not ’til it goes back up,” they tell me.
Unfortunately, they’re betting against their long-term portfolio growth because the market goes up two times for one time down. There are still investors who got out of the market in 2008 and haven’t returned. They’re waiting for the other shoe to drop, while they’ve missed out on a 200 percent gain in stocks.
Yes, we set up our portfolios to avoid losses, but we must understand that more happens on the positive side than happens on the negative side.
It’s human nature to put more emphasis on the disappointment of a loss than on the joy of a gain, but that won’t drive us to make really good, smart decisions about our money.
Ridley really nails the concept of being a rational optimist who takes advantage of opportunities out there, knowing that there’s always the possibility of risk, loss and other bad news taking place.
Here are a couple of links to good news:
Until next time, enjoy. Gary
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