3BI: Psychology of Economic Uncertainty, The Masters, Grey Fallacy
Welcome to my 3BI newsletter, where I share three insights from the world of behavioral science on psychology, decision-making, and behavioral change.
Did someone forward this newsletter to you? Sign up here to have every new edition delivered straight to your inbox.
Hello everyone. Back to our regularly scheduled programming after a short break for some work travel and, honestly, getting a little distracted by *gestures broadly at everything.*
The Psychology of Economic Volatility and Uncertainty
Once again, we seem to be in “unprecedented” times, as markets and economic forecasts swing wildly in response to the US’ erratic trade war.
If you’re getting queasy thinking about your 401k or job security, know that it’s a completely normal reaction. Our alert systems get triggered when we encounter surprising information or unexpected scenarios:
Intense uncertainty automatically triggers fear and stress in the human brain, infusing our bodies with the ancient fight-or-flight response that is essential to survival. Fear fixates our attention on the negative, makes us acutely sensitive to social signals, impedes our working memory and impairs our ability to think flexibly.
Shocks as unprecedented as this one are particularly tricky because we don’t have good experience to reference:
In a volatile situation our brains tend to overweight the most recent events, because the older evidence could be outdated and less useful,” says Alicia Izquierdo, a neuroscientist at the University of California, Los Angeles. “When conditions are volatile, we may be very quick to learn, but what we’re really learning from is the short term, which may not necessarily be representative of the longer-term future.
…
An event unprecedented in most investors’ lifetimes, like Trump’s barrage of tariffs, intensifies our fear and stress. “No one’s seen this before, so no one knows how to react to it,” says Elizabeth Phelps, a neuroscientist at Harvard University who studies emotion and decision-making.
First, we need to accept that unpredictability and our inability to know what will happen. “Be a risk manager, not a prognosticator,” says Rob Kaplan. That means protecting yourself regardless of the outcome, rather than attempting to accurately predict the future.
With that mindset, we can add structure to our decision-making process to avoid emotional reactions:
…imagine a simple pyramid, says Jonathan Treussard of Treussard Capital Management in Newport Beach, Calif. The pyramid has three layers, each representing a different likelihood of regret.
In the bottom layer are decisions you can take now that you are extremely unlikely to regret later.
The second layer consists of actions that you might later feel some regret over.
The third is made up of drastic decisions that are difficult if not impossible to reverse—making them prime candidates for intense regret down the road.
In the bottom layer are simple, more common sense actions like tightening your family’s budget by spending less and saving more to help weather the storm. The second are somewhat more aggressive moves like taking dividends as cash rather than reinvesting in more shares or moving some money into international stocks or into bonds. The third consists of more drastic decisions that are difficult, if not impossible, to reverse, like selling all of your stocks or betting big on a market rebound.
The specific actions are less important than the process for making decisions. When facing uncertainty, it’s more important than ever to avoid emotional reactions and make decisions in a systematic way. We can’t predict the future or influence events that are out of our control, but can protect our downside and be prepared for a range of outcomes.
Read more at the WSJ:
Trump Just Shredded the Economic Playbook. Here Are Your Next Investing Moves.
Four Questions You Should Ask to Combat the Market Chaos
The Masters' Phone Ban
The Masters wrapped up last weekend with an epic finish that resulted in Northern Ireland’s Rory McIlroy finally winning the green jacket after coming up short for years. Take a look at this instantly iconic photo after he clinched victory. Notice anything?
Photo via Ashley Landis of the Associated Press
No one in the crowd has a cell phone! Augusta National has a no-phones policy, so no one in attendance is texting or taking photos for their Instagram.
Brendan Quinn of The Athletic wrote about the now rare experience of attending an event without a phone:
This is what struck me the most walking the grounds of Augusta National during early-week practice rounds. I was one body among thousands of people, all out there together, in the moment. Undistracted, using all five senses. Present. No one had a phone in his or her possession. No one was looking at a screen or behind a screen. It was hard to shake a resounding realization: If the pandemic has taught us anything, maybe it’s that we’re truly meant to experience events and places and people and things. We are meant to be in the moment when at a live event, not watching it through a screen while recording an iPhone video.
Look at the faces in the crowd. Look at the reactions. Look at the attention. Look at the kids who are seeing that feeling every swing, instead of thumbing away on a screen.
Maybe let it be a reminder.
What’s the difference between seeing something in front of you and recording it on your phone? Kind of a lot.
Dr. Heather Berlin, a neuroscientist and clinical psychologist and a professor of psychiatry at the Icahn School of Medicine at Mount Sinai in New York, has studied how phones impact our experiences:
It’s one step removed. You’re taking yourself out of the situation. When there’s a connection and (a person or event) is in front of you, it’s almost like a one-to-one relationship. Viewing it through a screen, now you’re taking yourself out of that situation. You’re putting distance between the two of you because now you’re seeing this person through a screen, through technology. If you’re recording it, you’re thinking, ‘Oh, is this angle OK, is that person’s head in the way?’ So now you’re even further removed from it. So instead of first person, you’re changing to third person. You’re now the narrator of this video and you’re not in the story anymore.
Phones are such an extension of ourselves at this point that it’s hard to remember life without them, which is why it’s valuable to occasionally take breaks or seek experiences that remove them.
Read more at The Athletic.
The Grey Fallacy
It’s harder than ever to know what’s true or not in the modern information ecosystem. We can’t possibly understand every topic in depth or evaluate the merits of every debate, so we rely on heuristics and mental shortcuts to take positions.
A common method of doing this is the grey fallacy, also known as argument to moderation or the middle ground fallacy. It's a logical fallacy that occurs when someone assumes that the truth must lie somewhere between two opposing arguments, simply because they are opposites. It falsely suggests that compromise or a middle position is always the most rational or correct answer, even when one side may be entirely correct and the other completely wrong.
In some ways, this isn’t the worst logical fallacy to use. “The truth lies somewhere in the middle” is folk wisdom for a reason: the world is often too complicated to be settled by one side of a debate.
It oversimplifies things, though. For one, both sides of an argument may have some merits, but that doesn’t mean they stack up equally. Someone can be 80% wrong and 20% right, but the grey fallacy defaults to 50-50. Second, it’s an opportunity for bad faith actors to effectively launder lies and conspiracy theories, knowing that they just have to be convincing enough to trigger the heuristic.
We can’t deeply research everything to determine exactly what the ratio of right and wrong is for an argument, but we can be aware of this tendency and avoid falling into the trap of 50/50 thinking.
It’s also good to take the approach of not immediately dismissing an argument that sounds fishy, but not being afraid to call out BS after deeper consideration. Here’s a great example of this from journalist and author Derek Thompson from a couple weeks ago:
There’s a lot of uncertainty and confusion in the world right now, so I think it’s more important than ever to call out people muddying the waters in areas we understand well. We don’t need to politely entertain bad arguments like “recessions are good” or “vaccines are dangerous” even if they come from people with power or influence. The world is complicated, but there are still many areas where there’s little to no grey area for the truth.
Other Stuff
This video of director Ryan Coogler explaining different types of film is really cool and informative: