The emotional rollercoaster of headlines

18th May 2012

Over the years this has led to the increasing use of more sensationalist or emotive language – and this has inevitably spilled over into the coverage of business and finance.

To take one simple example, consider share prices, which a few years back tended to ‘rise' or ‘fall' but these days are just as likely to ‘soar' or ‘plummet'. Such instances only add to the ‘noise' that, as we have discussed before in articles such as Flight to quality, makes it so hard for people to look at global events and concretely use this information to work out how best to invest.

It is why markets have in recent years been known to fall 3% one day and rise 3% the next and why, if scientists were doing an experiment about investment, they would find a way to compensate for the noise or tune it out completely. Within the actual investment community, however, noise is as likely to be revered as removed and to be used to characterise a debate or drive it forward. That is rarely helpful.

Say, for example, you have identified a promising value investment but the market is falling. In the back of your mind you will be thinking that, unless you chance to buy the shares at the very bottom – which is most improbable – you will lose money on your investment before you start making it.

According to the behavioural finance concept of ‘loss aversion', people feel the pain of loss far more acutely than they enjoy the pleasure of gain – and that perception is only heightened by the emotional language increasingly being used in investment today.

Continue reading…

 

More on Mindful Money:

Market crash: Headlining and tweeting our way to volatility

How healthy is your news diet?

Market crash: The illusion of knowledge

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The Financialist

9 thoughts on “The emotional rollercoaster of headlines”

  1. JW says:

    Hi Shaun

    I think the amount of the public debt now monetised through QE is now about 40%. The BoE will have to vote for some more soon so as to cover all new borrowing requirements. I read in MSM that Osborne is just tinkering around the edges and why doesn’t he do something radical. I wonder when/if the mainstream will ever tell the truth. He is doing something, he is creating inflation in a way that protects the very few. Along with most other western nations.
    Incidentally, the tax anticipated to be taken from pension adjustments is about half the amount he is giving overseas in new ‘green’ aid

    1. DaveS says:

      That 40% is now interest free – the capital will never be repaid and as you said the percentage will keep rising.

      So it makes a mockery of % debt to gdp ratio as we don’t have to service 40% of it with tax revenue or ever pay it back. Really our debt to gdp is more like 40% – happy days we have finally hit Gordon’s golden rule !

      Mervyn has created the ultimate moral hazard – the more QE, the lower the total debt interest – hurrah ! Forget real deficit reduction.

      Now of course we might lose AAA etc when the markets wise-up – but the gilt buyers are primarily Mervyn himself, British government owned banks, the UK operating banks hooked on Mervyn’s welfare subsidies and British pension funds threatened with government raids. I don’t think a Gilt strike is likely – Mervyn/Marc will not allow it.

      If Gilts don’t give, then eventually the pound will and that will in turn trigger full on inflation with wages to follow. Thats the end game.

      1. Hi Dave
        One cautionary note. When Moodys downgraded France her inability to do QE -due to her Euro membership- was quoted as a contributory factor.
        So as we have QE and seem willing to do more could we lose our AAA status because we are AAAA or AAAAA?
        Sometimes you really couldnt make it up…

    2. Hi JW

      After todays very weak numbers in the UK for production I think that more QE and perhaps a base rate cut are ever more likely.
      Just to confirm the numbers QE covers 32% of the UK Gilt market but if we exclude index linkers as it does not buy them we get to 39% as of the latest annual figures (March 2012).

  2. Rods says:

    Hi Shaun,

    Another fiddling while Rome burns budget statement.

    In 1997 the UK government spent £250bn, now it is £744bn. GDP has not tripled in this time period and that is the crux of the problem. Since the ConDems came into office there has been no spending reductions, just slower rates of increase, which relied of the sharing of the proceeds of growth, remember that one when they were in opposition. The problem is that there has been no growth.

    The private sector and consumer has been steadily hammered since 1997 with money through tax increases ending up in the non-productive side of the economy. We know that as government spending increases that growth decreases, until you have below trend or no growth. I firmly believe we are in this zone, where even with strong trade winds behind the UK it cannot produce trend let alone above trend growth. With the economic head winds we have at the moment, we could well be heading for a triple dip recession and at best all we are going to have another year stagflation.

    I have seen in the last week a number of 2013 predictions from various banks and other groups and they read like the year before. I think they have through their own austerity just dusted off last years reports and changed the year. Last year they were promising a squeeze in the first six months of the year followed by green shoots and the beginning of an economic recovery in the second. It is the same for 2013. It is also the same old story with the OBR, slow growth next year, better growth the year after and above trend after that. I know we are now into the pantomime season, so the OBR need to be told “the growth years are behind you” and on their record I find Pinocchio more believable, even when his nose is growing!

    What is unbelievable is that discretionary spending , especially in an area the Government admit has virtually no benefits for UK industry and jobs, has increased. Overseas Aid has increased with an additional £2bn being spent on useless windmills in Africa, you couldn’t make it up. When things like this are happening you realize there is no serious intent to get the UKs very serious financial situation under control, with our country and our way of life being in the biggest danger it has been since 1940.

    The fact the Chancellors previous job experience to qualify him for this job, consists of enter the details of the deceased on an NHS database, and refolding towel in Selfridges shows! Most people that have been in business for any length of time would from experience be handling things very differently, not carry on spending,, like no tomorrow, and kicking the can down the road hoping something will turn up.

    Now, from the Euro austerity experience I’m not one to suggest drastic public sector cuts, to accelerate deficit reduction as we would just be following the route of Greece, Spain and Portugal. If Government spending cuts were seriously targeted in their over £100bn of wasted spending and used to make tax cuts, then the money would not be being taken out of circulation, but spent where there is a greater velocity of money so there would be growth. There is a risk to this, that I acknowledge and that is the extra disposable income is just used to pay down personal debt, then this policy would fail. But if the tax cuts were targeting on the income tax threshold, raising it towards a target £12,000, so people on the minimum wages in full time jobs were taken out of the paying tax, then I think you would find the squeeze at this and on anybody below the 40% tax threshold, and probably quite considerably beyond, would be being spent out of necessity to help make up the 13.2% to date real income drop.

    With the current can kicking and the probable loss of our AAA rating, the resultant Sterling crisis, staved off with lots more QE, which leads to hyperinflation storm is on the horizon. The future for us and the real cuts that will have to be made under IMF supervision, will be much more painful than if the hard decisions were being made and implemented now.

    1. Anonymous says:

      Correct on the spending. I’d note that it was Ken Clarke who balanced the budget in 1997 and I was disappointed that he didn’t get his old job back. Maybe the LibDems vetoed Clarke’s appointment.

    2. Hi Rods
      Todays numbers from the UK (production and inflation expectations) only make all this look worse. Just to add to it we get weak numbers from Germany too. As so often we find reality proving inconvenient for forecasts/fantasies.
      In a more hot off the press effort the US unemployment numbers looked very good initially but the participation rate has fallen (again)…

  3. Anonymous says:

    Shaun,
    Is HMG strategy to let inflation take the strain by an implicit 3% unoffical target but no indexing of tax bands and 1% uprating on welfare payments thereby skewing the automatic stabilisers so more tax in and less benefits paid?

    1. Hi Chris
      Yes I agree. The only way that this would not apply would be if inflation was <1% and we have turned into Japan…
      As for the full effect we will not know that until we see what inflation actually is over these 3 years altho' as I have pointed out in today's post we do know that inflationary expectations are rising

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