What does GDP growth really mean for us?
People ask this question because they are either surprised things are going so well OR they expected things to be going better. Many of us have an inherent ability to focus on what is negative in our lives. I know that I am guilty of this from time to time.
Most of this perpetual negativity comes from a lack of control, or at the very least, a perceived lack of control. My Christian roots are nudging me to discuss my truth regarding God’s ultimate control in our lives; however, I will keep this post focused on behavioral finance and bias.
As a guy who deals with a very diverse group of clients, I am in a unique position to unpack the different biases that shape the way people not only view the world around them, but how they view their own life. I will give you a few examples of the kinds of comments I receive every time a new and improved GDP print is released.
For reference, have a look at this nifty chart:
I could write a few thousand words on what this chart means and why things are the way they are, but there is a 0% chance you would read the whole thing. Instead, I would like to direct your attention to 2008 and 2009 on the GDP chart above.
My conservative friends and clients told me we were slowing down because of the Clinton administration’s goals of providing housing to everyone under the sun, regardless of creditworthiness. My liberal friends and clients were telling me the W Bush administration only cared about making the rich people richer; thus, removing regulations that kept everyone safe.
The bottom line is that people want to blame other people for their problems. Interestingly enough, the people “at fault” almost exclusively held beliefs that differed from their own.
This behavior stems from what we call in the industry, “Confirmation Bias.” Google it, and it will make sense.
Basically, people only absorb information that confirms what they want to believe or what they already believe. This is very closely related to the “Bandwagon Effect,” in which people only relate to and side with others that share identical viewpoints.
Now, check out this chart:
This chart shows the last few months of the Obama administration and the entirety of the Trump administration.
Over the last year, I have had numerous liberal clients disclose that they are terrified of the economy and the ubiquitous geopolitical risks. On the flip side, most of my conservative clients are ecstatic and are getting greedy in their investments. Neither side is remotely interested in looking at one another’s viewpoints, and they probably wouldn’t come up with actionable ideas even if they did.
This is called “Status-Quo” bias. Effectively, people hate change and don’t absorb new ideas that conflict with their predetermined beliefs. This is dangerous for investors because they think they are geniuses when the market happens to fall in line with whatever their cognitive biases have been telling them to do. When the market is running in the opposite direction, it is all a bunch of malarkey driven by people who are scamming the system or cheating in some way.
Trying to get people to identify and challenge their biases is like banging my head against the wall, but that doesn’t mean it is impossible. If you want to break down those walls you have around your own Incredible Thoughts, you need to do a few things.
At your next meal, look at your reflection in a spoon, and ask yourself, “Who am I?” Seriously. If you allow yourself some time to be introspective, you will identify where you fall on almost every issue.
Next, take a brief inventory of where your friends fall on the same issues. If I were a betting man, (which I am) I would bet the house that the VAST majority of your inner circle view things the same way you do. This makes for nonstressful interactions, but it certainly doesn’t help you grow as a person or as an investor.
Once you identify the beliefs that anchor you to your decision making and preferences, ask your token friend with differing beliefs what he or she thinks about a few economic or political themes that you hold onto like a baby clutching a blankey.
Finally, DON'T TALK. Let the person explain where they are coming from. Your preapproved responses to their points are: “I see” or “I understand.” Don’t get stressed out as they tear up everything you hold dear; rather, take notes and suppress the urge to argue.
When you have had sufficient time to calm down, write down what you believe next to what they believe and do some research on it. Do not, I repeat, DO NOT call your like-minded friends to see what they think. You already know what they think. Do some actual research. If you went to college, you probably know how to accomplish this.
At this point, you will probably still lean toward your original belief, or maybe you won’t. It really doesn’t matter. You spent some time figuring out both sides so you can be less negative and ultimately win more arguments.
Final Thought: Being able to “toe the line” and view the world from a less biased perspective will provide you with the tools to make smarter decisions in both investing and in life.
Any opinions are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.