Fisher Investments Editorial Staff
Behavioral Finance

A Not So Trivial Quiz

By, 06/13/2011

Story Highlights:

  • Behaviorally, humans tend to focus on the negative.
  • Economically, this can manifest itself in comparisons to historically negative periods—an often unwarranted comparison.
  • Fluctuating growth rates are entirely normal.
  • Focusing solely on fear-inducing comparisons can easily blind investors to facts that don’t agree.

Quick quiz! Without searching the Internet, what was the date the Berlin Wall fell? Not sure? Here’s another one: What was the date of VJ day? Still don’t know? Try a third: What was the date the Japanese bombed Pearl Harbor?

Most Americans can easily answer the third but struggle to come up with either of the first two. In other words, dates living in infamy are easy to recall, while those living in virtue…not so much. Humans tend to anchor to the negative. Behaviorally, we're conditioned to fear danger more than appreciate the lack of it—a trait helping to keep our far-distant ancestors alive. But this frequently means even equally as important (if not more important) positives are overlooked. Seen this way, one might think history and society are just a quick jaunt from crisis to crisis, disaster to disaster and tragedy to tragedy. But more often than not, the world is getting faster and better with improving standards of living—proving there are significant positive events between those crises.

Economically, the same is true—and often, these anchors appeared in a flow of historical comparisons following the 2007-2009 recession. Through the two years since the recession’s end, we’ve seen myriad media-driven comparisons to historical economic malaise. First, it was the Great Depression. Then Japan’s Lost Decade. Next, a double-dip recession. And don’t forget 1937-1938. And so on, occasionally spinning back to the start and through again. Still today these comparisons persist, despite the fact the US economy is bigger than it’s ever been before and growing.

To be clear, it’s possible a recession could occur. But that’s universally true. Right now, current economic conditions globally continue to indicate expansion, albeit with some data showing some slowing growth (which is still growth). But fluctuating growth rates are common historically during ongoing expansions. In fact, cross-referencing NBER recession and expansion dates with quarter-over-quarter real GDP growth statistics shows in purely growing periods (quarters not containing a month or months of recession), GDP has decelerated 90 times since quarterly data collection began in 1947. That’s 90 times, folks. Sure, some of those are followed closely by recession. But consider: In that same timeframe there were 11 recessions, four of which weren’t preceded by quarter-over-quarter GDP deceleration. That means 83 of 90 decelerating growth periods (or 92%) reaccelerated later. So despite common interpretations, decelerating GDP is far from a sure-fire predictor of recession ahead—implying deeper digging is needed. But a hypothetical headline reading, “GDP Growth Decelerates for 90thTime—Doesn’t Mean Recession” probably wouldn’t sell many newspapers.

Saying our present economy resembles some terrible past period like 1937 strongly resonates with investors—the idea we’re heading into another prolonged downturn can be frightening. But something being scary and something being likely are two entirely different things. Comparisons to solely the bleak times (so much a part of common vernacular) just exacerbate the fear. It can, in some ways, be instructive to compare two time periods. But one can’t simply look at a single data point and ignore others to reach a conclusion. For example, many argue government spending cuts would spell disaster for the economy—as they did in 1937. But this ignores, among other things, the significant role monetary contraction played back then. (And for those who fear QE2 ending represents that, read here.)

It’s very easy to focus exclusively on the negative. But as an investing approach, this fairly ingrained behavioral response can lead to serious errors. So while knowing the dates of the Berlin Wall’s demise and Japan’s WWII surrender might be trivial, the behavioral phenomenon our quiz illustrates isn’t.

(Oh, and for the answers: The Berlin Wall fell November 9, 1989, and VJ day was August 14, 1945.)

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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