Human behavior is contagious. If you see someone yawn, you might suddenly feel tired, or start to yawn with them, people even mirror the speaking patterns and body language of those around them. So it’s no surprise that America’s obsession with economic pessimism has been contagious too, and the in last few years, it’s only gotten worse. The unemployment rate is at 3.7% as of early February, close to a 50-year low, but a recent Harris-Gaurdian poll found that 51% of Americans wrongly believe that unemployment is nearing a 50-year high. Two-thirds of Americans also believe that the economy is worse than the media makes it out to be, and more Americans incorrectly believe the U.S. economy is shrinking than believe it is growing. [1]
While some of this can be explained away by the split down political party lines, the fact that Americans see things so negatively is surprising, and difficult to reconcile with the actual state of the economy. A better explanation may be the classic line from James Bond villain Elliot Carver, “There’s no news like bad news.”,
Just look at the comment section of any social media post regarding the economy, and you’ll get an idea of the disconnect. Perhaps that is part of the problem, people living in a negative echo chamber fueled by social media. Twitter personalities who routinely call for an economic crash rack up millions of followers, as their predictions of impending doom surely drive more traffic than optimistic ones would. For example, Robert Kiyosaki, the author of Rich Dad Poor Dad, is constantly blasting out predictions for the next depression on Twitter. The problem? He’s been doing so for the better part of the last decade, all while the S&P 500 has rallied over 215% since 2014 (with dividends reinvested).[2] Yet despite the fact that he’s been wrong on the direction of the economy and the stock market time and time again, while missing out on huge gains in the process, he still has 2.5 million Twitter followers. Nearly ten times that of more bullish Wall Street personalities like Fundstrat’s Tom Lee, and more than sixty times that of notable investment strategists like Ed Yardeni, who have been correct in pushing people the other direction. Why? Because pessimism sells.
Finance author and blogger Morgan Housel wrote, “Pessimism is seductive in a way optimism only wishes it could be. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.”[3] Pessimism sounds much smarter than optimism, because people are hard wired to react to fear. In his book Thinking Fast and Slow, behaviorist Daniel Kahneman outlines his and Amos Tversky’s Nobel Prize winning theory of loss aversion, or the idea that for humans, the response to losses is stronger than the response to corresponding gains. Maybe that’s what is so seductive and contagious about pessimism, it appeals to our base desire to avoid negative outcomes, at the expense of missing out on positive outcomes. Because losses loom larger than gains, we’re always waiting for the next shoe to drop. Whatever the reason, it’s clear there is currently a pandemic of pessimism in the US right now, even as economic data remains strong. In the end, it’s best to avoid the natural tendency to gravitate towards pessimism and fear, because as renowned investor Jim O'Shaughnessy says, “Pessimists sound smart, optimists make money.”[4]
Disclaimer: The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.