Many of you, I suspect, have responded to the fall in share prices by paying less attention to the market and checking the value of your portfolio less often.
This is a common reaction to bad news: we close our eyes to it. I’ve responded to the terrible untidiness of my garage by not going into it so much. If we feel unwell, we put off going to the doctor. And there is a type of boss who doesn’t want to see evidence that challenges his decisions.
A new paper by Edika Quispe-Torreblanca at Oxford’s Said Business School describes what’s going on here, and how it affects our investment behaviour. Information, she says, isn’t merely a neutral input into our decisions: we are not merely calculating machines. Instead, we get pleasure or displeasure directly from it, and so choose to heed good news more than bad. She calls this attention utility.
She and her colleagues show that investors are more likely to pay attention to their portfolios when the overall market or their recent share purchases have risen: they measured this by looking at how often 87,000 clients logged onto Barclays online broking service. Such log-ins don’t happen merely because people want to check their portfolio’s value. If this were the case, they would log in just as often when shares fell. But in fact they logged on significantly less.
This confirms that we do indeed pay more attention to good news than to bad. This affects how we trade. After they have made profits, investors are more likely to trade even in other stocks, whereas after losses they are less likely to do so.
Which poses the question: how damaging is this behaviour?
It certainly can be dangerous outside investing. If we put off going to the doctor when we have mild symptoms we might become more seriously ill. Putting off small repairs to our house can lead to the need for bigger jobs later. And the boss or government minister who ignores bad news will plough ahead with terrible strategies.
The same can be true in investing. Closing your eyes to losses encourages you to hold onto falling shares. This costs us money to the extent that shares are prone to momentum, with falls leading to further falls. And if we pay more attention to our profits than to our losses we’ll convince ourselves that we are smarter traders than we really are and so we’ll become overconfident; it’s easy to believe what we want. And as Brad Barber and Terrance Odean showed, overconfidence and trading too much are effective ways of losing money.
But, but, but. Paying less attention to the market might in other ways be a good thing, and not just because it could stop us selling at the bottom when shares are cheap. There’s a well-established case for ignoring day-to-day price moves. It’s because, as Shlomo Benartzi and Richard Thaler showed in a classic paper, equities look less attractive for some investors if you look at them every day.
To see this, let’s assume that prices rise 5 per cent per year on average, with a standard deviation of 20 percentage points – close to some long-run measures which show them to be a good investment. If you look at prices every day, such numbers mean that you’ll see a fall 49 per cent of the time. But if you look every 12 months, there’s only a 40 per cent chance of a fall. And over three years there’s a less than one-in-three chance. For some sorts of investor – those who put a lot of store on avoiding the chance of a loss – shares are therefore less attractive the more you look at them. Professors Benartzi and Thaler think this is one reason why shares did so well in the twentieth century; it was because some investors were put off by the high chance of short-term losses, causing the market to be cheap for other investors.
What we have here might be another example of how apparently irrational behaviour can sometimes help us because it offsets other irrationalities; closing our eyes to bad news might stop us trading on what is only random noise. There are countless ways of being irrational, but sometimes these cancel out. This might be our best chance of making good decisions.
