I love a market with a happy atmosphere

18th August 2011

With student debt rising, no jobs etc. it means that maybe at least some of today's university students will one day be able to buy a house"? 

Or do you worry about being in negative equity?

If you see a headline that says business leaders warn riots and looting may have serious repercussions on regeneration of London's struggling high streets,

Doo you pay lots of attention to the Lloyds TSB survey released on 7 August that said that business activity in London grew at the fastest rate for 16 months in July.

Or do you think, – that was before the riots, it's all ruined now?

The general atmosphere could be to blame.  Not the atmosphere that is probably warming catastrophically due to human interference, the psychological atmosphere. 

Humans don't tend to deal with complexity very well, and our memory is contextual.

We have difficulty balancing pros with cons – high interest rates are good for savers, bad for borrowers – etc.   Most issues have good and bad sides, but thinking of both sides is confusing.  So we don't do it.  We just go with whatever is the predominant emotional atmosphere, and interpret reality in line with that.

That's why, when you're depressed and somebody says – cheer up, think of something happy – you can't.  And why, when you've just won the cup and feel invincible, you have enormous difficulty remembering how distraught you were the day you were cut from the team.

So when you see a headline like oil prices fell below the psychologically significant $100 a barrel level for the first time in six months, particularly on a day when all else is doom and gloom, you probably don't take much notice. 

If you do notice at all, you probably interpret it as being because commodity prices are down (doom) and everybody is scared (gloom). 

You don't think – hey, it's gone down, that's good it means fuel should be cheaper and since when fuel costs rise so do transport costs and hence food etc,. so falls in oil prices should reduce inflation.

But both interpretations are valid to a degree, we just don't manage to hold them both in our heads simultaneously. 

When things turn round (and they will, eventually) we'll interpret all the news as good.

It's the thing about markets ruled by greed or fear.

And incidentally, a "psychologically significant" barrier is an odd concept. 

It was once common knowledge that petrol couldn't go over £1 a gallon, because they'd have to change all the pumps.  It was said that nobody could run a sub four minute mile.  They are "barriers" in the same way as an agoraphobic might have a barrier until they manage to get out of the house. 

Most of what we believe, be it limitations, laws of nature, truth or interpretations of news are about "psychological barriers" that we erect in our heads and little to do with reality.

 

Kim Stephenson is an occupational psychologist and trained financial adviser.

His website Taming the Pound is aimed at helping people get control of their thinking about money, so they can use their money – and avoid their money using them.

More from Kim on Mindful Money

Sooner or later it's bound to work – isn't it?  

Why a great leader doesn't always make for a great business.

Financial regulation: Why bother at all?

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