Investing Caffeine

“Pessimism Porn” Takes a Hit – Emotions of Investing

October 7, 2009 at 2:00 am 3 comments

“Every dark cloud has a silver lining, but lightning kills hundreds of people each year who are trying to find it.”

–Tongue-in-cheek quote from motivational poster.

There’s nothing like a little destructive global financial crisis to boost viewership ratings. CNBC benefitted last fall from all the gloom and doom permeating the media outlets, but unfortunately for the cable business channel, a more constructive market environment over the last six months doesn’t sell as well as what New York Magazine called, “pessimism porn.” Tyler Durden at Zero Hedge recently provided statistics showing the impact of more optimistic financial markets. CNBC experienced total viewer year-over-year declines of -37% as measured in mid-September – worse than Mr. Durden’s late July statistics that illustrated a -28% decline.

Small wonder that we now see discussions developing between Comcast Corp. (CMCSA) and General Electric (GE) over a potential partnership with the NBC-Universal assets. Other potential parties may enter the fray, but GE’s shopping of the traditional media unit is evidence ofthe station’s pessimism over a secularly declining business.

Businesses are not the only ones influenced by pessimism – so are individuals. Behavioral economists Daniel Kahneman and Amos Tversky have provided support to the impact pessimism has on peoples’ psyches. Emotional fears of loss can have a crippling effect in the decision making process. Through their research, Kahneman and Tversky showed the pain of loss is more than twice as painful as the pleasure from gain. How do they prove this? Through various hypothetical gambling scenarios, they highlight how irrational decisions are made. For example, more people choose the scenario of an initial $600 nest egg that grows by $200, rather than starting with $1,000 and losing $200 (despite ending up at the same exact point under either scenario).

Of course investors have short memories from a historical perspective. Whether it’s the 17^th century tulip mania (people paying tens of thousands for tulips – inflation adjusted), the technology bubble of the late 1990s, or the more recent real estate/credit craze, eventually a new bubble forms.

If you are one of those people that get sucked into “pessimism porn” or big bubbles, then I suggest you grab the remote control, turn off CNBC, and then switch over to The History Channel. You may just learn from the repeated emotional mistakes made by those of our past.

Wade W. Slome, CFA, CFP®  

Entry filed under: Themes - Trends. Tags: bubbles, CMCSA, cnbc, Comcast, emotions, GE, General Electric, NBC, pessimism porn.